Lumen Technologies, Inc. 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. Afterward, 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, and it started with the debt restructuring that gives us ample time to execute our transformation. We lowered our debt load by $1.6 billion in 2024 and recently sent redemption notices for another $200 million. And importantly, we drove material improvement in both our equity and debt trading values. Next, we established Lumen as the trusted network for AI, inking $8.5 billion in closed 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 be in deep discussions with several customers to build new routes and we're going to provide more detail on those deals as it makes sense to do so. Throughout 2024, we also made material progress in transforming our corporate functions. 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 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 in some cases, it reduces our average time to deliver by more than 12 days and reduces implementation costs by as much as 50%. What's more, 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 more than 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 2024 validated our mission, vision, strategy, culture, and especially, the strength of our team. It showed that we have great execution muscle and set a strong foundation for accelerating our transformation work. Okay, let's shift gears and 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 2025 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 takeout, 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 deliver improved employee, customer, and partner experiences. We've already identified more than $1 billion of OpEx and a big chunk of network expense that we plan to eliminate by year-end 2027 with this work. We expect to exit 2025 with over $250 million of run-rate cost benefit delivered. Before I dig into our big two 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 and they have to push 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 all over the place, 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 a new global player in AI announces a disruptive breakthrough, we see that as a great thing. Competition increases velocity and 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. That just means that our total available market for network fabric just got a lot bigger. That's why we're confident in our two big bets. Let's crack into them. Starting with the first one, building the backlog for the AI economy, we've begun construction on the backlog of work generated from the $8.5 billion in PCF sales and it's going really well. I want to share more on our thinking about how we leverage our network for maximum shareholder returns. We are increasing two variables at the same time, capacity and utilization. You should be able to 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. We're driving network expansion in several ways. We're building new routes funded by our customers, often multi-tenant with great 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, and 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 go from 12 million total inter-city fiber miles in 2022 to 47 million miles by 2028, giving us unmatched room for growth for network services. I'm not including our 22 million metro miles in that number. The second aspect of our plan to drive improved shareholder return is all about utilization of our assets. On the right side of the chart, you'll see that from 2022 to 2028, we simultaneously increased overall network capacity. As I just described, we’re also going to increase the overall utilization of our network from 57% to 70%. This is because hyperscalers are leasing once-empty conduits and funding new builds while enterprises are upgrading their networks dramatically. We saw a nearly 50% increase in 100- and 400-gig wave sales across large enterprise and mid-markets in 2024 alone. We're closely monitoring customer demand signals and will continue to make important capital investments in key major metros to capture this traffic growth. Additionally, we'll continue to examine 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 huge accretive opportunity for this company. We're not only driving the strongest utilization of our network assets in the history of the company, we have unmatched 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 building 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 be successful in a multi-cloud, AI-first world. As I shared earlier, 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 it's not. 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 building a platform for dynamic frictionless customer experiences. Lumen is fixing all of that using ourselves as customer one. I'll share a specific example with a supporting graphic on the webcast that you should see right now. To enable our Quantum Fiber's quote-to-cash process, 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 processed, that data required for business operations and financial reporting is transferred to our corporate data warehouse, which is hosted in a completely different public cloud using our own Lumen network fabric, which is now directly connected to three big public clouds in a virtual networking ecosystem. Our Quantum Fiber quote-to-cash network architecture bypasses carrier-neutral facilities and eliminates physical cross-connects and their fees, reducing overall port usage. The outcome is a modern, multi-cloud network architecture at lower cost than traditional architectures, with improved network 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 is informing how we innovate and commercialize our product and services portfolio for our customers. We're creating an innovative networking ecosystem that will bring 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, and the right team at exactly the right time, and that's why we're bullish on our pivot to growth. 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 place 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 2029 maturities to 2032, and reduced overall debt by $1.6 billion in 2024 and recently sent redemption notices for another $200 million. Given our confidence in free cash flow generation, we contributed $170 million to our pension plans. We continue to make progress in our selling motion, with 2024 North American enterprise sales up over 15%. 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 reach our future goals. As Kate discussed, the PCF sales we signed in 2024 provide flexibility and liquidity to reduce our debt further, enhance our growth products, and invest in our simplification and modernization efforts. Additionally, with the progress we've made to date, we estimate our run rate cost savings exiting 2025 to be approximately $250 million, a strong start towards our $1 billion goal exiting 2027. With our 2025 investments and further execution on our modernization and simplification goals, we have confidence in margin expansion and total EBITDA returning to full year growth in 2026 and growing thereafter. 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 to drive operational excellence, build the backbone for AI, and cloudify 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. 25% of the decline was due to the impact of 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 those mentioned factors. 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, which is 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 with continued pressure in Nurture and Harvest product revenue. Overall, the North American business declined 2.8%. Large enterprise revenue declined 5.5% in the fourth quarter, 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. Public sector revenue grew 11.5% year-over-year. For the full year 2024, public sector revenue grew 3.4%. As we've said in the past, public sector revenue can be lumpy quarter-to-quarter, but we continue to see traction with large bookings in this space, which take time to ramp to revenue. With respect to 2025, and as a result of significant re-rating in the wholesale TDM space from select smaller off-net connectivity providers, we are working with our customers to either migrate or disconnect some services. While these actions will be a drag on public sector revenue in the first half of the year, we believe they are healthy for the overall business as we're making decisions that are margin accretive. Wholesale revenue declined approximately 4.5% year-over-year. The Harvest portion of the wholesale portfolio, which is comprised of products like TDM, voice, and private line, saw revenue contraction by 5.2% year-over-year in the fourth quarter. This is primarily driven by telco partners that are selling legacy services. Our Harvest product revenue will likely continue to decline over time and is an area we will manage for cash. Nurture revenue was down 11% in the fourth quarter on VPN and Ethernet declines, while wholesale Grow revenue was positive 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. Moving to our business product lifecycle reporting, I'll reference the results based on our North America 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 on 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 approximately 26% of our North America enterprise revenue, and for our total business segment, 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 and for our total business segment, it carried an approximate 77% direct margin this quarter. Other product revenue declined 16.7% 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 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. For the fourth quarter of 2024, 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, with the majority 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 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. Moving on 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 the 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 CapEx associated with utilizing our data center assets. Excluded from the guidance above is roughly $300 million in transformation costs to begin the multi-year task of reducing expenses by $1 billion. As we've stated on prior calls, we'd also like to give some preliminary thoughts on 2026 EBITDA. Given anticipated improvements in sales performance, lower absolute declines in legacy products, and the 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 CapEx from 2024 to 2025 is associated with the costs to execute against our signed PCF contracts. We continue to see maintenance CapEx between $400 million and $600 million, and Quantum Fiber CapEx at approximately $1 billion, similar to 2024 as our homes passed target for 2025 is also 500,000. The majority of the remaining CapEx is 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. In terms of other special items 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. Additionally, special items include costs associated with Lumen's $1 billion in cost takeout by year-end 2027. Before we move to Q&A, just a couple of housekeeping items. First, please remember that the first quarter typically has seasonally higher expenses related to timing of bonus payments and other prepaid expenses. Additionally, as noted in our financial trending schedule, fourth quarter 2024 was positively impacted by 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. We'll now take your questions.

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, if you look just in total in terms of what's happening with sales that you mentioned in the business, I think, in North America, up 15%, how is that translating to progress in the verticals like large enterprise and mid-markets? And then secondly, just looking at the schedule that you provide, it was like the customer verticals and product verticals. As you mentioned, Grow was up sequentially, and it looks like maybe that $82 million sequentially, and wholesale, I think it was wholesale Harvest was also a significant number in the quarter. How much of that might have been recurring, and what's a bouncing-off point for Q1 2025 versus 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, and I'll get into that in a little more detail. The quarter was positively impacted by our State of California initiative around PCF that was announced, I guess, about a year ago. A lot was delivered in the quarters. Revenue started to get turned up. But I think what's really interesting when you look at the impact overall in the portfolio, as I touched on in my prepared remarks, the Grow bucket is now almost half of what we sell. When you look at our overall growth rates vis-a-vis our major competitors who had very different performance than us, it relates to the customer experience that we're driving and the focus on those Grow products as we go forward. You can actually see that in our wholesale results, right, where legacy declines were significant, but the Grow product sales were actually pretty low. The competition is just not focused on it. We are. That's without the cloudification of telecom. Ultimately, sales obviously perceive revenue. 2024 was challenged with disconnects. We talked about some forced disconnects we're going to do in the first half of this year, but as it relates to things like renewals and what's manageable and margin-accretive, we've got motions in place to drive improvements as we move into '25.

Next question, please?

Hi. Thank you for the 2025 EBITDA outlook. I wanted to understand the top-line dynamics, particularly regarding the public sector comments. As AI fabric revenue rolls out in the next few years, what factors will contribute to top-line growth in the Business? Also, while the public sector did experience growth in 2024, there seem to be some one-time issues that might affect it in the first half of the year. Should we expect public sector growth to continue from this point? Thank you.

Yeah. A couple of things. On the overall revenue trends, we obviously don't guide revenue, but I'll provide some color. When we said that our revenue trends will look largely similar to what we saw in 2024, there's a lot of activity in there like the disconnects that I talked about impact that. Underlying improvements in things like sales and other disconnects that are more manageable kind of net out. When we move into '26, we should see continued improvement there because we'll be lapping things like the forced disconnects. We're going to start to turn on some of that PCF revenue. There's going to be very little this year. That's really more '26, '27, ramping fully in '28. We also have new product announcements that will benefit as we go forward. The way we can get there, really big picture, if you just forecast market declines against our Nurture and Harvest buckets and expect us to grow at market rates on things like IP and waves, quite frankly, I think we do better than the market. We get to growth in the '28-'29 window on revenue. There's not heroic assumptions being made here. Importantly, the platform layer that's critical to differentiating Lumen isn't included in that math.

Next question, please?

Great. Thank you. A couple of questions. First, on your network utilization chart, what kind of enterprise needs growth are you assuming that drives your assumption for lower utilization for the enterprise segment by 2028? Is that just a function of revenue mix, meaning much higher growth from the hyperscaler side versus the enterprise, or is there anything else that's in there? And then, the second question, if you don't mind helping out with 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. And within free cash flow, are you assuming any incremental deferred revenue? Thank you.

I'll let Chris hit the last part of your question first, and then I'll hit the utilization capacity chart.

We're not assuming any new PCF deals in either the EBITDA or the free cash flow. So, that was your last question, I think.

However, we continue to be deep in those conversations. As those deals are confirmed, we will obviously be updating guidance, consistent with what we've done to date. The first part of your question about utilization is really important to note that it is about fiber miles. It's the total fiber in our entire network and how each of these major segments, enterprise, consisting of commercial, public sector and wholesale customers, as well as our own use of the network through services, and then the hyperscalers in a different category. We're increasing both capacity with innovation, putting net new fiber solutions in there, which allows for up to four times the capacity, better photonics, etc., greater density, greater efficiency in the same stretch of conduit. We're adding new routes, and we've had a lot of unused conduit that was empty for 25 years. We were able to lease it to the hyperscalers to connect to their data centers. That’s why the chart looks so dramatic in terms of the increase of the hyperscaler utilization. It's not taking away from enterprise. In fact, we have more enterprise growth capacity that we've ever had with these innovations.

Next question, please?

Hey, guys. Thanks so much for taking the questions. Appreciate it. So, I guess just maybe for Chris, two questions. The first would be, with respect to the free cash flow guidance this year and maybe as it translates into 2026, it would be how much money is coming in from the construction contract customers versus how much is going out? If we excluded that, what would the cash flow actually look like? That's question one. And then, the second question would be, I think, Chris, you also kind of alluded to this, is that, as we look at 2026 and even more in '27 and beyond, the accounting of how we put the cash flow we're getting today into the income statement down the road when we've built it and then we can start accounting for it, what kind of contribution is that making to the 2026 better than $3.5 billion EBITDA expectation? Thank you so much.

A couple of things. On the 2026, while PCF will start to roll in, it's actually going to be pretty small. We're still at the very early stages of it. The $3.5 billion increase you see is largely driven by the modernization/simplification efforts. That's more than offsetting legacy declines. Don’t forget to model every quarter mixed improvements, legacy becoming a smaller and smaller piece of what we do. And sorry, remind me, what was the first question?

Just on the free cash flow...

Yeah, I want to be really clear before I tell you, I'm not going to give you that detail. We said, and I'm going to be transparent about this, we had a funding gap before we had the PCF deals. That remains true. The PCF deals fill that funding gap. They've allowed us to lean more heavily into our transformation efforts. We're not going to give '26 guidance on that yet because meaningful things can be done over time as it relates to more PCF contracts, debt refinancings, a number of levers that we can pull that drive improved free cash flow as we move through the year.

And Jim, before you cut me off, if it's possible, I would love to ask Chris one more question. We've seen some pretty successful fiber securitization deals from Unity and Zayo. You guys, obviously, have revamped your entire balance sheet, and I'm not smart enough to determine how much opportunity there is for you to take advantage of the current market conditions for fiber financing.

It's a good question. It is an opportunity, but that is on the B list of priorities versus the A list. There's a number of things that we can and will be doing around the debt structure that will put the company in a normal capital structure. At that point, we can start to look at those things that are on the B list.

Next question, please?

Good afternoon. Thanks for taking my question. First of all, I was wondering if you could maybe contextualize your view on the recent DeepSeek announcement. I realize it's still very early days, but directionally, how do you think this changes the connectivity market going forward? Do you think this is likely to result in, because of the lower cost, more inference or more training? Or could we actually get less training and more inference? What do you think that means, if anything, for the connectivity demand needs you're seeing from hyperscalers? Do you think there's a chance that we could actually see less, or is it more likely that we actually see the market stimulated by lower cost?

It's a great question. I think, as I noted in my prepared remarks, this is going to accelerate the democratization of AI. DeepSeek is putting pressure on everybody to go faster, to innovate, to take costs down, and to make technology more accessible. More companies have to navigate in the multi-cloud AI-first world, which means more total available market for us to sell our connectivity fabric into. We see this as an increase in the total available market and a huge opportunity for us. We're investing heavily in a platform to differentiate and we think that will allow us to capture share.

Thanks. As a follow-up, can I maybe just sort of ask about the sort of competitive dynamics you're expecting to see in the PCF market going forward? I mean, clearly, there are reasons why you believe you have a privileged position today. One of those is because of the empty or available conduits you have to fill right now. But do you see more competition for these kinds of deals coming in over the next few years? Or do you think your lead is going to continue to grow?

We're grateful for the lead. It was nice to get $8.5 billion in there before anybody else realized this was a market, but we're paranoid and going to maintain focus on building out the competitive moat. Our network has unmatched coverage. It has unique routes. We've invested heavily in fiber solutions that our competition hasn’t. We are in the right places with the capacity and the performance expected, but that’s just the infrastructure. What's differentiating is the platform on top, which is becoming more interesting to all customer segments as we can present them with a network fabric that gives them access to all capabilities no matter where they are. We're pumped about our position. We think we're going to continue to execute well, and the future is pretty bright.

No, I think that’s it.

Next question, please?

Thanks, guys. I'm wondering if you could give us an update on how things are progressing with the fiber assets. In the context of the fiber assets, the ultimate owners of these assets are probably one of the three big national wireless carriers. I would have thought they would value copper assets in addition to fiber assets. I am wondering if there's a way you can structure the sale of fiber that gives the buyer of that asset the ability to use your copper infrastructure to build more fiber. Additionally, looking at the progress that AT&T has made with copper decommissioning, I'm wondering if there's an opportunity for you guys in pursuing that or whether that's an opportunity you might hand off to somebody else.

It's interesting because there are two schools of thought. One could be to sell the whole thing, but there's been a lot of work done that says, 'Yeah, but you give up a lot of EBITDA on that, and is it really a deleveraging transaction?' The comment we've made is to think about it as two businesses. We have a fiber business that is building out tremendously but isn't yet generating much EBITDA. There's a lot of OpEx that goes into customer penetration. Meanwhile, it's consuming $1 billion a year in CapEx. The bulk of the EBITDA sits on copper today, which doesn't have a huge CapEx burden, basically some maintenance. So, could somebody be interested in all of that? Yes. Could somebody be interested in pieces? Yes. We're open to all those discussions and we'll see where it takes us. Ultimately, it comes down to valuation. At the right time, we'll make that decision, and when the moment comes, we'll share it. As it relates to copper decommissioning, it’s largely market-driven, not consumer-driven. We have been very aggressive in the consumer space, converting copper to fiber where we have fiber passing because it's better for the customer and us.

It's a major tenet of driving operational excellence. It's wire center by wire center across the country. We have a P&L view so we can see it all now, and it makes for great decision-making, and it's a huge vector, as Chris said, of our cost takeout.

Next question, please?

Is that part of the $1 billion?

Yes.

Next question?

Hi. Thanks for taking my questions. First, I guess what happened in the public sector in the quarter, it's not still entirely clear to me. Chris, you said it was driven by a lot of sales or turn-up services to the State of California. Is that revenue largely recurring, or were there one-time delivery or performance fees linked in there? I'm just trying to get a sense as to the right baseline. Secondly, looking at your fiber deployment utilization table, if my math is right, the fiber miles used by enterprise channels was roughly flat from 2022 to 2025, but then you're expecting it to double from 2025 to 2028. I'm wondering what products are driving that doubling.

The pieces of the PCF for the State of California that got turned on are one-time in nature as they got lit up. There are other things that happen in the public sector, which are more ongoing. We haven't split that out. We don't intend on doing that, and I think the color we gave around some of the headwinds that channel faces in 2025 with the disconnect is really what we want to say about that at this point. The fiber miles utilization is primarily driven by 100-gig and 400-gig waves growing at 50% in 2024. We're at the beginnings of that, and we can see it in IP and waves, but you'll see more consumption of large enterprise connectivity due to the platform layer that Kate talked about. It’s not just about providing cheap access; it's about delivering newer, faster, and more efficient ways for enterprises to reach their data.

Next question?

Great. Thanks for my questions. Chris, your last answer is a good segue into my question. In your deep conversations you're having above and beyond the $8.5 billion pipeline, are you seeing any of the inference phase starting to materialize, or are we still too early there? Secondly, is there a near-term risk with massive scalable AI that would drive a temporary pause of the hyperscalers to rethink some of their plans? Thanks.

We haven't seen a pause. In fact, we are still in deep conversations. We've talked about the pipeline that we're pursuing, which is predominantly comprised of new routes connecting data centers, and we're deep in those conversations. It’s complex to design these networks, so it takes a bit more time, but they're progressing with no sign of slowdown. Every major cloud company we've done a deal with has asked if we can accelerate the implementation of what they've purchased so far. In regard to the second phase in inference, it’s early to start calling the trends of exactly what's going to happen here. We're seeing major industries like financial services, retail, and healthcare asking for network upgrades and starting to use inference to transform their companies.

Great. Thank you.

Next question?

Great. Thanks. Can you give us a little bit more color, I think, on the public sector for next year? I think you said it was going to pull back a bit. Is any of that related to federal government cost cutting? Does that add any additional risk? Can you give us an update on the billing system collapse and other system changes you're working on? Where are you as far as completing those projects? Thanks.

Sure. As it relates to public sector, our sales rates aren't declining. What's impacting revenue in 2025 is egregious rerate activity from a select few. We're talking thousands of percents so customers, largely in the federal space, are being forced to migrate or turn off those switches. The big headwind there is that. The IT work is making good progress. Our first phase of our ERP should be complete by early in the second quarter, and we're expecting the second phase later in the year. We're not doing a consolidation of order entry or billing systems. We are consolidating networks, and when we turn on the ERP, we will, over time, roll off old systems that support existing revenue as that revenue retires, and all of the new revenue will be put into a new modernized system.

Next question?

Thanks, guys. On your intercity fiber mile vision, I think the 2028, 47 million miles, is that based on the announced PCF deals, or would that require additional PCF deals and CapEx to get to that vision, part one? And then secondly, on the investment in new fiber routes, does that change your view on how many fiber homes in the Mass Market business you might reach? Is that helping you in discussions with partners on providing more backhaul for their own fiber ventures? Thank you.

The 47 million miles is based on the business we have already inked. It doesn't include any new deals. For fiber-to-home, we think about them separately.

Operator, we have time for one more question.

At this time, there are no further questions in the queue. That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a great day, everyone.