Greetings, and welcome to Lumen Technologies' Third Quarter 2024 Earnings Call. After the speakers' remarks, there will be a question-and-answer session. 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 telecommunications, 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 that 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, makes 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 cut costs, de-leverage our balance sheet, and drive growth by utilizing 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. One, 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 lifetime value, and cost reductions. Two, how Lumen is building the backbone for the AI economy, adding more than $3 billion in incremental private connectivity fabric sales in partnership with the biggest names in technology. And three, 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, which are up 50% year-to-date through September. To complement these sales results, once again, we saw significant year-over-year improvement in customer satisfaction scores for every one of our enterprise customer channels, as measured by transactional net promoter scores: 17 points for large enterprise, 11 points for wholesale, 28 points for mid-market, and a whopping 98 points for the public sector. We continue to improve our efforts to secure the base by focusing on five key components: installs, renewals, migration, usage, and disconnects. While installs were down slightly in the quarter, we did see a 14% sequential improvement in disconnects, with total disconnects being at their lowest level in over five quarters. In NaaS markets, the team continues to execute well and drive increased value for our consumer segment, and once again, we had a record quarter for fiber net additions. Finally, last quarter, we announced a $1 billion cost reduction by the end of 2027 by unifying our network from four architectures to one, allowing dramatic simplification of our product portfolio and IP estate. While this work is incredibly complicated, given our long history of mergers and accumulation of technical debt, we are on track to developing the plan to execute. As we have said, these cost-cutting efforts will require upfront spending with a backloaded cost take-out curve. We'll provide further details on this important work as we progress. To summarize, we're 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. But I want to be clear here: we are not here to find revenue growth in legacy telecom. All of our transformation work is in service to customers who need and want to leverage technology like Generative AI to transform their business. The legacy networks of yesterday just won't serve tomorrow's enterprise. They're not big enough, they're not fast enough, and they're not secure enough. The customer experience in legacy telecom 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 targeting 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 the AI market means 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 buildups 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 deeply accretive to Lumen and well-timed for our transformation. We shared that we booked more than $5 billion in private connectivity fabric 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 private connectivity fabric sales, giving us the opportunity to use the extra cash to facilitate some de-leveraging. We remain in active discussions for more deals like this, and we'll update you on our progress when they materially affect guidance. We've established a dedicated operations team to build these next-generation AI networks, and they've already broken ground on this exciting work. If you're wondering why and how we're able to close more than $8 billion in private connectivity fabric 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 fabric, just awarded the Competitive Strategy Leadership Award by Frost & Sullivan, is a best-in-class architecture that gives customers the control, capacity, performance, and security they need. We believe the second phase of AI evolution is starting to emerge as enterprises are beginning to use those AI models at scale and recognize the need for major network upgrades. Enterprises are calling Lumen because they know we connect all three public clouds, and they also see that we are investing in their future networking needs unlike any other company in the networking marketplace. We believe Lumen has become the thought leader in the space, and it is showing up in our business results. We're seeing 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 Wave CapEx to further expand this footprint in 2025. In the third phase of AI evolution, we see AI talking to AI, driving 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 telecommunications is going to disrupt the industry and provide Lumen with another major growth sector. Expanding the Internet and building out 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 material 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 or NaaS offering. As of today, over 400 customers have adopted Lumen NaaS, a good start for sure. The NaaS overlay lets our customers get the network components they want, when they want them, how they want them, in true consumption form. Recent wins for our NaaS product include Agilisys, the Blackstar Group, the PAC-12, and C3Aero, among others. MEF, formerly known as the Metro Ethernet Forum, just named Lumen the best NaaS provider in North America. Our progress in a short period of time isn't just exciting or encouraging; it has fundamentally repositioned this company. NaaS is just the beginning. With our world-class fiber network, our PCF architecture, ExaSwitch, and an ecosystem of Big Tech companies, all three clouds, committed to our network for the long haul, we have all the pieces to redefine networking and drive massive value in a multi-cloud hybrid world, which is exactly what our customers want and need. For the finish up, 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. And 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, churning out over $800 million in maturities from 2026 through 2029 to 2032. Furthermore, given our confidence in free cash flow generation, we contributed $170 million to our pensions in the quarter, bringing us to nearly 90% funded. 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 been able to capture what we believe is a once-in-a-generation market opportunity. We have the right assets and the right people to build the trusted networks for AI. Second, given the incremental size of this over $3 billion, it will positively impact our 2024 guidance for free cash flow, which I will update you on shortly. Lastly, the PCF sales we're announcing today look similar in scope to 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, these discussions are ongoing and will take place over several quarters. In the future, we will provide updates to the extent PCF sales have a material impact on 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 the 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 new ramp, which brings long-term sticky revenue, offsetting higher churn from legacy product declines. We're now 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 first $5 billion in PCF sales provides free cash flow to fuel our business to the point where we expect to reach sustainable, positive free cash flow growth. The incremental cash provided by the over $3 billion in recently signed contracts provides increased flexibility to deliver our balance sheet and continue to address our capital structure in a meaningful way. With respect to the balance sheet, another highlight of the quarter was our successful execution of a debt exchange, converting over $800 million in maturities from 2026 through 2029 to 2032. We now have approximately $1.8 billion in maturities, excluding leases, due through 2028, down from approximately $2.6 billion at the end of the second quarter, and we're not finished yet. Transformations are messy, particularly in industries where it has never happened before. As we move through ours, we strive to bring you transparency regarding both the good and the less good. In Q1, we said demand for networking was heating up. In Q2, we delivered against that, substantially increased free cash flow guidance, and indicated there was an additional opportunity. This quarter, we announced progress against that opportunity and increased free cash flow guidance again. Importantly, in both Q2 and today, we're stating that our legacy business is declining, consistent with industry trends, and needs investment to both build our digital future and unlock a billion dollars of cost efficiency, which will result in lower 2025 EBITDA before improving in 2026. In short, we recognize that credibility is critical, and we're taking great care in ensuring our messaging is consistent with our delivery. We believe the value creation path for Lumen is clear, through additional sales, balance sheet improvements, and cost structure optimization, all as we continue to execute on our core strategic goals of driving operational efficiency, building the backbone for AI, and cloudifying the industry. We recognize we're in the early stages of a significant transformation at Lumen, and remain laser-focused on accomplishing the goals we set for ourselves. Now, let's move on to the discussion of financial results for the third quarter. Our sales growth engines within our large and mid-market enterprise channels and our business segments, along with our Mass Market segment, showed solid performance this quarter, with large enterprise and mid-market sales up nearly 14% year-over-year, and Quantum Fiber broadband net additions once again, setting an all-time record. While consolidated revenue and adjusted EBITDA still feel the impacts of legacy declines, we're encouraged by 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. 32% of the decline was due to the impact of divestitures, commercial agreements, and the sale of the CDN business. Business segment revenue declined 12.7% to $2.536 billion, and approximately 37% of that decline was due to the impact of divestitures, commercial agreements, and the sale of the CDN business. Mass market segment revenue declined 6.9% to $685 million. Adjusted EBITDA was $899 million, with a 27.9% margin, and free cash flow was positive $1.2 billion, benefiting from the cash contribution from recent TCF 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 is our business segment, excluding wholesale, international, and other, revenue declined 6.9%. Overall, North America business declined 7.5%. Large enterprise revenue declined 8.2% in the third quarter. Our grow revenue increased 1.6% year-over-year, with continued pressure in nurture and harvest product revenue. We expect continued variability in trends as we drive toward overall stabilization. Mid-market revenue declined approximately 6.9% year-over-year, with an improvement in growth revenue to 5% year-over-year, offset by nurture and harvest. Public sector revenue declined 4% year-over-year. Public sector revenue can be lumpy quarter-to-quarter. However, we continue to see traction with large bookings in this space, which take time to ramp to revenue. These wins give us continued confidence that public sector will grow year-over-year in 2024. Wholesale revenue declined approximately 9% year-over-year. The harvest portion of the wholesale portfolio, which comprises products like TDM, Voice, and Private Line, saw revenue contract by 16.3% year-over-year in the third quarter. This is primarily driven by telco partners 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 64.8%, 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 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. While results can vary in any quarter, we expect sustained growth in the growth product revenue as we execute on our core turnaround. Within North America enterprise channels, grow products revenue increased 4% year-over-year, up from 1.5% year-over-year last quarter. Grow represents approximately 45% of our North America enterprise revenue and for our total business segment, carried an approximate 80% direct margin this quarter. Nurture products revenue decreased 15.2% year-over-year, largely impacted by declines in VPN and Ethernet. Nurture represents 29% of our North America enterprise revenue, and for our total business segment, carried an approximate 67% direct margin this quarter. Harvest products revenue decreased 14.1% 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 second quarter. For our total business segment, it carried an approximate 73% direct margin this quarter. Other product revenue declined 11.1% 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 16.6% year-over-year, and represents approximately 40% of Mass Markets broadband revenue. During the quarter, fiber broadband-enabled location ads were 131,000, bringing our total to over 4 million as of September 30th, and pacing towards our targeted annual 500,000 build target this year. We also added 43,000 Quantum Fiber customers, which is our best fiber net ad quarter reported to date, bringing our total to over 1 million. Fiber ARPU was $62, flat sequentially and up slightly year-over-year. This is just outstanding work by a team. At the end of the third quarter, our penetration of legacy copper broadband was approximately 9%, and our Quantum Fiber penetration stood at approximately 26%. As we look ahead, we'll 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 third quarter of 2024, adjusted EBITDA was $899 million, compared to $1.049 billion in the year ago. Third quarter EBITDA was negatively impacted by legacy revenue declines, seasonally high operating expense, as well as some startup costs associated with our custom networks group. For the third quarter of 2024, our adjusted EBITDA margin was 27.9%. EBITDA margins declined 90 basis points year-over-year, compared to a 270 basis point year-over-year decline in the second quarter. Special items impacting adjusted EBITDA totaled $56 million. The majority of special items this quarter were related to transaction separation costs. Capital expenditures were $850 million, and free cash flow excluding special items was positive at $1.2 billion. As we previously stated, we're leaning into our network investments to support the rapid growth and demand our customers are facing while improving our overall cost structure. Now moving on to our financial outlook; we continue to estimate FY '24 EBITDA to be in the range of $3.9 billion to $4 billion. However, given the overall trends in the business and initial cost impacts from the incremental PCF sales, we see FY '24 EBITDA at the low end of that range. As we've said previously, we expect EBITDA to decline year-over-year in 2025 as a result of continued legacy declines, startup costs for PCF contracts, and incremental transformation costs with a longer-term goal of improving the broader cost structure. 2024 CapEx is expected to be in the range of $3.1 billion to $3.3 billion, and cash interest in the range of $1.15 billion to $1.25 billion. Lastly, we're raising our 2024 free cash flow guidance from $1 billion to $1.2 billion to $1.2 billion to $1.4 billion. This guidance includes some incremental operating expenses, CapEx, and cash flows associated with our PCF sales growth, as well as incremental spending to ultimately improve our cost structure and margins. And 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 show up in our financials, but we're confident that our plans will achieve exactly that. We appreciate you taking the time to understand our story. With that, operator, we're ready for questions.

Thank you. Your first question comes from Michael Rollins with Citi. Please go ahead.

Thanks, and good afternoon. I wanted to 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 pertain 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 curious where that's coming from. Can you give us an update on the marketing and the distribution? Are these PCF sales also providing you with a magnet to get additional wins from the hyperscale customers? Thanks.

Yes, for sure. So, thanks, Mike. Basically, the four customer stories that we told come from the $8.5 billion in total, and we are not going to differentiate between buckets. But they are a magnet, very much so. When you get all these clouds in the bag, you've established yourself in an ecosystem. You couple that with a digital platform to make it easy to consume the services that you're running on that infrastructure, and you've got something really special. It's different than what everybody else is doing. We've got the cash to do it, and we are super excited about that. Regarding the uptick in IP and Waves, particularly at the higher capacity levels, it's a clear indication that our customers are recognizing a need for expanded networks because of the workloads we are handling. We don't have specific data to say it's all AI. That is a conversation and the signals we are receiving from discussions with our customers. We believe it fits perfectly with the trajectory we discussed: first, Big Tech builds the networks and trains the AI models, and the second step is these customers begin using these models to transform their businesses, leading to a significant uptick in their own networking needs. We recognize that every AI strategy requires a network strategy, and customers are coming to Lumen because we've established ourselves as a thought leader.

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. Regarding the recent PCF announcements, should we consider that generally to have a timeline similar to what was mentioned last quarter in relation to the contributions in the IRU structures you discussed previously? I understand you indicated they are comparable to the last deal, but I am trying to clarify the timing as they unfold. It appears some of that cash might have been reflected in the upgraded free cash flow, so I wanted to check on that.

Yes. I'm sorry. Go ahead.

Oh, no, go ahead, Chris, and then I can follow-up.

Yes. You are exactly right. If you just look at the structure of those deals, the incremental deals that we signed this quarter, in terms of the margins, the cash flow, how well that will work, and the timing, it looks very similar to what we did on the $5 billion. So, I think that's a good way to model it.

Okay, that's helpful. And then, thinking about, I mean, you did guide to the lower end of the 2024 guidance range. Does it imply a pretty decent acceleration sequentially even to get to that point? Anything specifically that we should be thinking about there as it pertains to just maybe costs that are coming online, or yes, anything that we should be considering from a timing perspective? Thank you.

Yes, it's really more, I would say, the seasonality we see in the summer months. We obviously have more construction, maintenance, and higher energy costs, and that decreases somewhat in the fourth quarter. We also made some intentional investments during the quarter to help accelerate the work we need to do to capture the $1 billion. When you look at the timing of those fluctuations, that's what gives us confidence in delivering on the lower end of the guidance for the year.

Thank you.

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

Great, thank you. In terms of the incremental PCF sales that you signed, should we assume that they're mostly big tech, or are you starting to see a little bit of enterprise demand as well? And just to confirm, I think you mentioned that this new mix will be on the existing constructs that you're building for the original PCF deal. Does that mean the CapEx requirements would be pretty much included in the original deal? And how should we think about the prepaid revenue mix of the incremental sales? Thank you.

Well, I'll cover the first part. You cover the second part, Chris.

Yes.

So, the customer mix: we shared last quarter that more than 15 customers were in these tranches. We had some repeat business, and we had some new business. So, it's a mix. Predominantly, those customers are building AI models. If you look at some of the logos we shared that are standing side by side with us in our strategy, it's all three clouds and a large social platform. These companies are making significant infrastructure investments to build out their AI infrastructure and they're coming to Lumen. That's the story. The second piece of the next wave is really enterprises. They're not buying at the same size because they're not planning on commercializing their AI models for the most part; they're using it to transform their own business and possibly some of their own products and services offered to customers. So, it's not the same size and build-out as the hyperscalers and social platforms.

And on the second part of the question, Batya, I would say, of the total kind of $12 billion opportunity set, the $8.5 billion that we've talked about today that we secured to-date really does look the same. I would maintain the same ratio of CapEx to sales value, the amount that’s recurring versus the amount that’s upfront, and I would use those same parameters that we shared last quarter. What you see in terms of the impact for this year is just the timing of cash flows, where given the time of year those were signed, we do have some inflows coming this year. But we'll incorporate a lot of that CapEx, obviously, in the next year's guidance when we provide 2025 guidance. I think the important thing is that as we move forward from here, as we've said at a number of investor conferences, the second half of that $7 billion opportunity will include new networks just like we built, which will be on new routes rather than existing routes. Those economics will look different. We're in the middle of multiple conversations with customers regarding that. As we get more clarity on cost estimation, we will update guidance and ensure that you have more information. However, that will likely take a few quarters until we have that locked down.

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 was wondering if you could clarify the incremental $3 billion of the $7 billion you discussed. Does that mean there's $4 billion of pipeline left, or is there an incremental pipeline above and beyond the first $7 billion to extend beyond the $12 billion total pipeline? And then, as a second question, could you comment on your mass market business? Given the amount of deal activity there, could you clarify whether you're seeing any firm indications of interest in acquiring that asset?

Sure, Jim. To clarify, in the $7 billion opportunity, we announced today that we had secured over $3 billion of that, so roughly half. Of the remainder, that's really new routes, as I mentioned in my previous answer, that’s going to take multiple quarters. Customer interest continues in new routes and existing routes as well. We're not going to keep updating the pipeline because it really is now normal business. We want to be actively moving through those opportunities. The intention of highlighting the $5 billion and the $7 billion was to validate the points we've been making earlier this year about the significant opportunity that lies ahead. We expect to update you as we progress, mainly when it materially affects guidance. Regarding the consumer side, I want to emphasize the great work by the team. The world is certainly noticing the execution on enablements and penetration. We are thrilled with the progress being made. We've also been clear for years that this was an area primed for consolidation, and we're beginning to see that happen. Additionally, we have two great businesses in our enterprise and consumer segments that require investment, but strategically, they don't belong together. At the right time, we will make the decision to separate them. We do not have any news to report today. However, we’ve been clear about the economics of the consumer business when comparing copper and fiber. I'll leave it to you to do the modeling for the potential impact on our financial trajectory.

Thank you.

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

Thanks, guys. A quick follow-up on the mass market sale discussion. One thing you had been considering was separating out the fiber business from the rest of the mass markets. Could you give us context on how you would accomplish that? What does the physical separation of those networks look like? Additionally, could you provide context for the network overall and how much has been consumed by these PCF contracts? From memory, Level 3 initially had 12 conduits into which fiber was installed. We've heard that some conduits may have been sold or rights were granted in these new PCF contracts. How many have gone, and how many do you have left? Thank you.

To address your second question first, as we clarified in the last earnings call, we have not sold any of our assets. These are long-term leases of conduit; sometimes just fibers, sometimes both. It's new networks along existing routes, or building new routes while putting new conduit in the ground. We strategically plan with our customers and our business modeling regarding when to install more or fewer conduits. I want to highlight a very strategic partnership with Corning, utilizing their new fiber solutions, which can quadruple the capacity of our existing network. We have all the right infrastructure in place and access to the best fiber available to continue growing with and for our clients. Moreover, with these long-term leases, our customers don't have the right to compete with us in those areas. This demystifies some misconceptions we've observed. These are excellent deals, providing substantial cash inflow, and we are extremely excited about them as they give us the fuel needed for our transformation.

Regarding the consumer business, I don't want to delve into extensive details, as there are still uncertainties. However, I want to reiterate our public stance. Consider the consumer business as two segments: one being our copper business that generates most of the EBITDA, and the other our fiber business that requires most of the CapEx. Hence, with that understanding, you can conduct your modeling. Finally, we can certainly achieve separation; it won't be easy, but I believe we've undertaken tougher challenges before, and we'll explore that possibility at the right time.

Chris, does the Zipty transaction change how you value that asset?

I think the transactions occurring in the broader market validate our thesis that consolidation is necessary and demonstrates tremendous value in these assets. We possess an extensive asset base that is significant within this consolidation scenario. I'll leave the evaluation to you.

Next question, please.

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

Hey guys, thank you so much for taking my questions. So, two, if I could. The first is on the $3 billion. Chris, you kind of elaborated that this is going to look a lot like the $5 billion deal you did before. You provided us with a lot of math related to that $5 billion. The net of it suggested that about 15% of it, or $800 million of the $5 billion, would come in over a three to four year construction period. An additional 5% would come over the following 20 years regarding IRU maintenance, etc. Is it correct to think that this $3 billion, which you indicated is similar, would translate to about a $500 million cash contribution over the build period, which would be 26, 78 or so, and then another amount that would come out over the next 20 years? You suggested that there’s wiggle room created with this new deal to address balance sheet issues. However, it doesn’t seem directly discernible in the numbers concerning whether they’re related to the $5 billion. Still, it’s clear you received a lot of upfront money before you have to spend it from your partners. Are you using some of this upfront payment to address the balance sheet before following through on the project builds?

I'm glad you asked, David. I've been in this role for two-and-a-half years. Kate has been here for a couple of years. I included it in my prepared remarks for a reason because there have been numerous reports raising concerns about our credibility and intentions with respect to these matters. I want to be very clear: we are not misleading the market about any figures that are not based on what we can deliver. I would change the characterization of my earlier comments. We are not spending our partners' money to shore up the balance sheet and then require additional debt to build these networks. I want to clarify that point. Regarding the $5 billion, when we map our transformation objectives and the investments needed, which includes investments to turn around our business and invest in our future, including pensions and debt at maturity, the $5 billion closes this funding gap. The $3 billion, with that gap closed, provides us greater flexibility to reduce debt as we had cash on hand before receiving the $5 billion and the $3 billion.

Got it, thank you. And then, I guess my second question is a housekeeping one. As we consider your comments regarding the necessity to improve EBITDA in Q4, it has to be at least roughly $1 billion as a starting point for 2025 to achieve that. You've mentioned that 2025 is expected to decline. I’m trying to ascertain how pronounced that decline will be, and as I look at 4Q 2023 EBITDA, I realize that much of what was contained within was extracted, right? Could you give us a reference point comparing 4Q 2023 to 4Q 2024 from a like-for-like standpoint to help visualize the trajectory of the expected decline for 2025? Thank you.

I don’t want to get into details about '25 guidance for obvious reasons, as we’re still assessing the investments for both the deals. Customers have been reaching out and asking us to expedite our work on these contracts. Thus, we're finalizing those details, coupled with investments required to handle the billion-dollar takeout. Currently, I observe that the street's expectations for next year may be high; however, I wish to provide '26 guidance alongside '25 guidance since '26 will be a significant inflection point considering our cost reduction abilities. For now, we will withhold more specific details until we make further progress.

Yes, I understand. I appreciate that. Thank you, guys.

Next question.

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

Hi, thanks for taking my questions. First, you shared metrics suggesting much better sales in North American Enterprise over the last several quarters. When should we start to see that flow through to the P&L in a more noticeable manner? Additionally, Kate, you also mentioned that you have over 400 NaaS customers signed up, which is good to hear. While it's still early, I would like to know how much NaaS is contributing to incremental revenue—whether these are new customers that discovered you because of NaaS or existing customers increasing their spending due to this product. Thank you.

I'll address the second question, and Chris can answer the first. Regarding the NaaS customers, we are building a new digital platform focused on driving adoption, driven by our commitment to customer needs. Our extensive network allows us to deliver differentiated capabilities and economic advantages compared to competitors without such infrastructure. Customers are exploring options, starting with one or two ports, and as they gain a positive experience, they tend to add more ports. This is an opportunity for us to innovate and enhance service innovation, such as with Lumen Defender on the horizon for every NaaS customer, etc. This is our approach, but we’re not ready to provide revenue specifics yet. We have models suggesting that growth will accelerate over time, but it will take time to achieve scale, typical of any cloud business.

Typically, we would expect to see sales convert to revenue within a three-month window. As we transition to offer more digital services, that timeframe narrows, which is advantageous. However, we’re not quite there yet. In our growth segment, as we noted last quarter, we grew 1.5% year-over-year; in the recent quarter, it has increased to 4%. While this trend is encouraging, we must monitor it closely. Worth mentioning is that we still have a significant legacy business generating substantial cash which contributes to our investments in future growth. Due to its scale, it continues to offset the growth observed in these new growth channels, so we don't expect in the near term, considering the industry dynamics. I've previously referred to some unfavorable re-rate behavior impacting customer disconnects, which may persist and continue affecting total revenue. However, we hope to see a gradual improvement in the decline rate as we progress through the upcoming quarters.

Next question please.

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

Great, thanks for taking my questions. Back to the potential Mass Market sale, I wanted to ask about dis-synergies should you decide to split the fiber from the copper. When you sold the assets to Brightspeed, you mentioned dis-synergies but noted limited enterprise overlap. In this scenario, you'll have six or so markets with substantial overlap with the enterprise, and I’m left wondering if that leads to heightened dis-synergies as a result. My second question is a separate one regarding North American enterprise. I noticed that nurture revenues were declining at a faster pace than harvest revenues. You indicated VPN and Ethernet impacts, but I found that dynamic intriguing and would appreciate your insights on that.

Regarding the first question, one of the benefits of CenturyLink and Level 3 merging is that there are routes from CenturyLink that Lumen wouldn’t sell because they are critical for our enterprise delivery going forward. Therefore, I don’t see greater dis-synergies being a concern at this point, but there will be more updates as we progress. Regarding the increase in Nurture segment revenue declines in Q3, the reality is it is primarily driven by VPN and Ethernet services, and there’s nothing significant behind that. We have migration strategies in place designed to transition many of those VPN and Ethernet customers to newer offerings, though those changes have not yet been reflected in our financials. This is an area we are committed to improving as well.

Got it, thank you.

Next question please.

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

Great, thank you. Can you provide an idea of the annual revenue on wavelengths and their margins relative to your other products? Contracts of this nature tend to see some expansion over time, and they are already prompting requests to speed things up. What’s the likelihood of upside to the $8 billion, and over what timeframe do you expect to see that creep in?

Regarding the $8 billion, I can't provide any insights yet because we are still discussing how much faster we can progress and what that means for us. They're reaching out to us because of their confidence in our ability to build these networks. Regarding your first question about wavelengths, we are not disclosing individual product revenues currently. It’s still too early. We typically discuss revenues in broader terms like grow, nurture, and harvest, but we aim to provide more transparency in the future.

Operator, we have time for one more question.

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

I appreciate you squeezing me in. Regarding the mass markets business, you've referenced recent announcements of deal activity from several private overbuilders. Looking at your current footprint, I believe you have roughly 18 million copper homes. How does recent competitive activity or announcements influence your perspective on future growth opportunities, whether through your own actions or in partnership? How do you think about the potential for fiber buildouts at attractive economics?

What we've publicly stated is that out of those 18 million, a significant portion is rural. However, there's also an 8 million home potential that seems reasonable. Right now we are at 4 million, so there’s a considerable opportunity for growth. The markets with fiber buildouts are attractive, and we are the largest asset remaining that hasn’t been consolidated. Those are the facts we are looking at as we explore our options moving forward.

Thank you. Just a follow-up: you noted that funding gaps have closed, and you now have more flexibility. Is that another way of saying that you expect Lumen will maintain consistent positive free cash flow going forward? I'm trying to understand the various influences next year. You've mentioned potential EBITDA pressure, and undoubtedly, there is a wild card concerning PCF contributions next year. Any directional insights into potential free cash flow would be helpful.

Yes. To clarify, when we mentioned this funding gap closure, it does imply that free cash flow will remain positive. I want to underscore that it's cumulative because of tax payments and CapEx timing; there may be a year where we are free cash flow negative, but we'll have received the cash before that. Proper planning will be done to ensure that we manage this appropriately. It's essential to understand that the size of tax obligations and the extent of CapEx spending will lead to variability in cash flows. Our longer-term view, especially considering the billion-dollar cost reduction, suggests that despite revenue pressures, we can confidently state that our approach will yield positive free cash flow.

Thank you.

Thanks, Eric.

This concludes the question-and-answer session. I'll turn the call to Kate for closing remarks.

Thanks everybody for digging in and taking the time to understand our unique story. I look forward to meeting you at the upcoming conferences and updating you on the significant progress we're making. See you soon.

This concludes today's conference call. We thank you for joining. You may now disconnect.