Greetings, and welcome to Lumen Technologies Third Quarter 2025 Earnings Call. As a reminder, this conference is being recorded on Thursday, October 30, 2025. I would now like to turn the conference over to Jim Breen, Senior Vice President of Investor Relations. Please go ahead.

Good afternoon, everyone, and thank you for joining Lumen Technologies on today's 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, 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 on the Investor Relations section of the Lumen website. With that, I'll turn the call over to Kate.

Thank you, Jim, and thank you all for joining the call. We had a very productive third quarter at Lumen. We reported strong financial results with revenue, EBITDA, and free cash flow all exceeding Street expectations. We are effectively executing on the key operational elements of our business transformation, such as successfully completing phase 1 of our new ERP system, achieving over $250 million in run rate cost savings by the end of Q3, and staying on track for $350 million this year. We are also continuing to clean up our balance sheet with an additional $2.4 billion in debt refinancing and term loan repricing, and we are making significant progress on our consumer fiber-to-the-home sale to AT&T, which we now expect to close in early 2026. However, the most significant highlight of this earnings call is our progress towards returning the company to growth, specifically revenue growth. We signed over $1 billion in additional private connectivity fabric deals since our last update, bringing the total value of these deals to over $10 billion. We are scaling the adoption of Network as a Service, reaching more than 1,500 enterprise customers since launching this platform. We introduced our latest NaaS innovation, Internet on-demand or IOD off-net, which significantly expands our market reach to enhance digital service sales and revenue growth. We are rapidly developing a connected ecosystem with numerous early adopter tech partners who recognize how Lumen's digital platform can expedite value for joint customers. While we still contend with declining legacy telecom revenue, our growing revenue base now accounts for 50% of North American enterprise revenue, up from 35.5% just three years ago. We are proud of our team's substantial progress this quarter, and we believe our investment strategy is yielding tangible results that are being acknowledged in both the credit and equity markets. The rise of AI has created a pressing need for significant changes in network architecture, and Lumen is well-positioned to leverage this opportunity. To provide context, AI workloads are projected to expand data center footprints tenfold by 2030, and public cloud spending is anticipated to surpass $1 trillion in the same timeframe. Meanwhile, CIOs must deliver insights swiftly while managing explosive data growth across complex hybrid and multi-cloud environments. Traditional network architectures, which were designed for simpler times, are now inadequate. They lack the necessary scale, speed, intelligence, and security. Traditional networks have resulted in substantial GPU investments remaining underutilized, and Lumen is addressing this challenge, as detailed by our Chief Technology and Product Officer, Dave Ward, in his recent white paper. He calls for a fundamental reshaping of networking to meet the demands of Cloud 2.0, identifying five key capabilities needed for success: extreme bandwidth and low latency, data center interconnect, expansion into AI corridors, distributed cloud on-ramps, and programmable API-first networks. These elements form the foundation of Lumen's three-part strategy, which includes the physical layer, the digital layer, and the connected ecosystem. Today, I will explain how this translates to Lumen's evolving business model, starting with our efforts to build the backbone for the AI economy. As mentioned, we secured another $1 billion in PCF deals, bringing our total to over $10 billion, with a robust pipeline of future deals. Based on our current construction schedule, we expect that the $10 billion of secured business and our existing operations and maintenance revenue from PCF will generate a recurring revenue stream of approximately $400 million to $500 million by the end of 2028. I would like to emphasize two important notes regarding this business. First, none of the prospective deals in the pipeline have been included in this revenue forecast; they offer pure upside potential. Second, we are maintaining strict discipline in our approach by pursuing only value-accretive deals for Lumen shareholders, even if that means passing on certain opportunities. The teams are excelling at building this backbone. As of the end of September, we completed over 3,200 miles of overpulls across 27 different routes, which is about 130% of our annual target for 2025, with a quarter of the year remaining. Building the backbone for the AI economy involves more than just overpulls for our hyperscaler and neocloud partners; it also requires substantial upgrades to our physical network to accommodate the Cloud 2.0 requirements of enterprise customers. To achieve this, we are investing in three significant fabric infrastructure projects, focusing on rapid routes, data center expansions, and metro expansions. Market by market, we are enhancing capacity, increasing data center interconnects, and improving service delivery experiences and timelines to help our customers meet the urgent demands of AI and multi-cloud architectures. These investments are key to Lumen creating a high-capacity networking fabric that enables our customers to connect quickly, securely, and effortlessly wherever it matters.

Thank you, Kate. Lumen had another quarter of strong performance. We reported solid financial results for the third quarter, rolled out phase 1 of our new ERP system, and continued to enhance our balance sheet. Our revenue, adjusted EBITDA, and free cash flow exceeded expectations. Total business growth revenue rose by 7.7% year-over-year, while total business revenue declined by only 3.2% year-over-year, outperforming competitors. The launch of phase 1 of the ERP system quote-to-cash marks a key milestone as we work to simplify our systems and support future growth. Once we complete phase 2 next year, we will operate on a unified ledger and phase out old systems, achieving greater efficiencies throughout the organization. We have strengthened our balance sheet with several capital market transactions this quarter. In August, we successfully priced $2 billion in 7% first lien notes due 2034 at Level 3, extending maturities by about four years and saving us $48 million in annual interest expenses. In September, we added a $425 million to the 7% notes to redeem all remaining 2030 Level 3 first lien maturities and repriced our $2.4 billion term loan, lowering the rate by 100 basis points. Lastly, in September, we used cash to redeem $238 million of 7.25% quest notes and $350 million of 10% Level 3 second lien notes. The debt refinancing and term loan repricing in the third quarter, along with debt reduction efforts, lowered our annual interest expenses by around $135 million. Year-to-date, we've cut annual interest expenses by about $235 million through proactive balance sheet management. Looking ahead, considering the anticipated early 2026 closing of the $5.75 billion sale of our fiber-to-the-home business, the proceeds will fund the paydown of approximately $4.8 billion in Lumen super priority debt, potentially increasing our annual interest expense savings to about $535 million. We will keep working to improve our debt profile leading up to the expected AT&T transaction closure in early '26 as we look for ways to further reduce debt, extend maturities, simplify our capital structure, and cut our capital costs. After closing the AT&T transaction, we expect to have roughly $13 billion in debt, lowering our overall leverage to below four times adjusted EBITDA. I am extremely proud of the team's dedication in delivering these impressive results and the opportunities created by our new financial profile for Lumen's future. I am pleased to report that debt is no longer a headwind for us. Our balance sheet is rapidly becoming a point of strength. Now let's move on to the financial results for the third quarter. Total reported revenue fell 4.2% to $3.087 billion. Business segment revenue decreased 3.2% to $2.456 billion. Mass Market segment revenue dropped 7.7% to $631 million. Adjusted EBITDA was $787 million with a 25.5% margin, and free cash flow amounted to $1.7 billion.

Two topics, if I could. So first, on the PCF deals. How does this new $1 billion of bookings compare to the last set of deals or tranches where I think previously, you guided to an unlevered free cash flow margin of like 30% to 31%. Just curious if the margins from these are different from that. And if you can give us an update on how much pipeline is still out there for Lumen to pursue for these types of deals? And then secondly, you mentioned a few times the Grow revenue being above 50% of the NAM business revenue. And the Grow revenue grew over 10% year-over-year in the quarter. So can you unpack a little bit more of what's driving that Grow revenue? And is double-digit growth in this Grow bucket a new sustainable level for Lumen to achieve?

Mike, it's Kate. I'll address the first question, and then Chris will take the second. Regarding the PCF deals, the $1 billion-plus figure represents multiple deals, and the margins of that booking portfolio are similar to previous tranches. We are approaching this business with a disciplined strategy, as mentioned in my earlier remarks. We will only engage in business that is significantly beneficial, and we will stay focused on this goal. In terms of the pipeline, it includes various hyperscalers and neocloud providers, and we won’t commit to a specific number anymore. However, we believe we will likely surpass our expectations from last year, as this won't happen overnight. We're entering a prolonged phase of what we see as a three-phase process: first, hyperscalers and neoclouds connecting their data centers for training and providing services to their customers; next, the enterprise phase, where businesses will begin utilizing those models and will need extensive upgrades to meet the demands of Cloud 2.0; and finally, a phase where AI systems interact with each other, leading to significant data traffic and requiring major expansion. We are still assessing what the demand curve will look like across these three phases, but this should give you a good understanding of our approach.

Yes. Regarding the overall growth rate, PCF has started to see significant increases, but I highlighted in my prepared remarks that it doesn't represent the majority of that growth. We continue to experience strong mid- to high single-digit growth in areas such as dark fiber, IP waves, and traditional connectivity solutions that will eventually transition to digital. In the short term, PCF is contributing, but it's not the main driver of total growth. I also want to remind everyone that over time, PCF isn't a growth engine because those deals are fixed. Once completed, they don’t increase annually. So when discussing a return to growth, we recognize that there will eventually be challenges as those builds finish and stabilize. While PCF is an effective way to monetize our existing infrastructure and extensive network, we don't view it as a significant factor in our long-term growth trajectory.

Chris, could you explain the run rate you've mentioned for both the PCF and the digital revenue segments, especially considering the transition and transformation costs expected in 2025? Can you help us analyze the different components as we examine the EBITDA bridge from 2025 to 2026? The mass markets are pretty well understood, but what about the other core elements?

Yes. So a few different things. As it relates to revenue, you will continue to see that, that Grow bucket becomes an increasing portion of our business over time. So business mix continues to improve, which means the rate of decline continues to improve. So that's obviously a tailwind. The big driver, I mean, let's be really straight about it. Kate called it out, is the modernization and simplification efforts as we navigate our way through the inflection point of EBITDA. So a lot of modernization and simplification as we close out the year. We've said that we're going to be above what we initially guided for this year and then more to come next year. So those are really the two key drivers, referred rate of decline on enterprise and the modernization and simplification benefits that impact EBITDA.

There were three announcements this week, and you mentioned some of them. There was the announcement about the 10 million business locations in the Palantir and the QTS network. Can you provide insight into the revenue impact from those items, as well as when we can expect them to begin affecting our numbers and the extent of that impact?

Yes. All of these were part of the connected ecosystem storyline, which has a few key elements. The first is ongoing connectivity with the hyperscalers. The second is interconnecting all the data centers, as seen in the QTS deal. The third involves technology partners recognizing the value of integrating networking into their customer offerings. We're initiating this process, emphasizing a collaborative go-to-market approach. Networking has traditionally been acquired separately; you purchase a cloud solution and then assess your network needs. Our approach is to design network solutions that specifically support the cloud offerings of these companies and make them accessible in digital marketplaces, simplifying the buying process and enhancing the speed at which customers can derive value. Over time, we expect to see improved results from the same offerings, leveraging the strengths of other sales forces to elevate networking's importance for the first time.

Yes, I'll take that. Frank, it really gets back to my closing comments, which is we see multiple pathways to getting to our revenue objectives for digital. And the only thing that we're getting really good certainty around at this very early stage is tremendous NaaS adoption. But as Kate laid out in the PxQ map, it comes down to number of ports, number of services per port, and price per service. And so as we move through that journey, we'll definitely give investors a lot more visibility to that. And we'll certainly share our prevailing point of view at Investor Day. But no matter what we share, I guarantee it's going to be different by the time we get to the other end. And so we'll constantly update the market, but the thing that gives me enormous confidence is when you got port services and price, you have multiple pathways to get to that outcome, and we feel really good about it.

Yes, to clarify, the connected ecosystem is part of our strategy for achieving $500 million to $600 million in incremental revenue by the end of '28. It's not a separate revenue stream; rather, it represents the acceleration of our existing digital capabilities.

Chris, the stock has been showing some outsized strength in the last call it, three weeks. I know it's been volatile recently. But if it sustains up here at these levels, I mean, does it make sense to equitize some of the company and sell some shares and further bolster the balance sheet? Does it change the capital allocation calculus at all? And then second question, Kate, you did mention the three phases of AI. Are we in a prolonged training phase 1 right now? And what I mean is a couple of the hyperscalers and AI companies are pushing now more towards AGI models, like bigger, larger models here. And I'm curious if that prolongs phase 1 of this journey.

It's a great question about whether phase 1 is prolonged. It's definitely intensifying, and the amount of capital being deployed is probably greater than we imagined last year. As for how long it will take, we are building critical infrastructure for a major technology shift that will span decades. I want to emphasize that this journey is not linear. Phase 1 will overlap with phase 2, which is happening now as enterprises begin to utilize these models. It's interesting to see the rise of neoclouds, which alleviates some pressure in acquiring GPUs and committing to purchases. The market is changing, and it's uncertain how long this will last. For now, our focus is on executing, and we are thrilled with the capital commitment from our partners and customers in this incredible technology.

Yes. The tech sector has performed well recently, which is important to note. If you analyze Lumen's stock price, you'll see a significant discount due to a couple of factors. Firstly, there are concerns regarding our balance sheet, particularly related to debt maturity. Secondly, some market participants doubt our ability to return to growth because of our legacy systems. However, the market, as well as the credit markets six to nine months ago, have started to realize that these concerns are unfounded. Our balance sheet is improving rapidly and is no longer perceived as a risk. Currently, half of our business portfolio is growing, even before tapping into the potential of digital transformation. If you normalize our stock price post-closing, as discussed today and by AT&T, you would arrive at a valuation comparable to, or even better than, other strong performers in our industry. We are finally being recognized for our efforts, and our valuation is fairer than it has been for some time. While we have much work ahead, we feel optimistic about the potential as we drive digital adoption. Regarding the equity side, we will keep all options on the table. Our equity holders have been supportive, and we have made significant progress with our debt. Our creditors are satisfied with their investment returns as bond trading values rise. Now, our focus is turning to our equity holders, and we are thrilled with the positive developments in the market.

Appreciate the kind of revenue color on the digital and NaaS ecosystems, $500 million, $600 million. Just curious if you could talk about some of the incremental work you have to do internally, investments you have to make to kind of be able to achieve that outcome, whether it's upgrading data centers, additional cross-connects, additional on or off-net locations. And whether that could show up in the OpEx or CapEx line to be able to reach that goal in a few years. And then my second question would just be around disconnects of legacy services. It seems like those have been coming in a little better than expected. Just wanted to check if there's any kind of timing-related things to call out there that we should expect to roll off in the next few quarters? Or maybe you're just performing better than you previously anticipated?

Yes, I'll take the first part, and I'll leave the disconnect timing question to Chris. So the investments required to build the digital platform are definitely significant. They're already contemplated in all of our plans. They're in the operating plan, and we've got a very strong pipeline of innovation. It's just beginning with IoD off-net. We've got Berkeley coming to market in the first quarter and more enhancements to the platform after that. I think it's important to remember that we talk about cloudifying telecom, which really means driving cloud economics for us and our customers. That's about scaled revenue growth with reducing marginal cost of hardware required to deliver these services, which is very exciting. Additionally, the old way for Lumen to grow was really sort of fixed to a level of capital intensity that I think is changing over time. That capital intensity required to deliver the digital portfolio over time, reduces. And I think that's an important part of our story over the next couple of years. Chris, do you want to take?

Yes, regarding disconnects. Last quarter was an unusual occurrence, particularly concerning the public sector, but things have returned to normal as we approach the fourth quarter. The more significant impact in the fourth quarter is what I mentioned earlier, specifically the large one-time revenue boost we experienced last year related to the state of California. That's the main factor to consider.

The first one, Kate, you touched on this in your prepared remarks, but I was hoping you could dig in a little bit more. Can you talk some about the specifics of how you're promoting NaaS to customers and educating out the product and how you're incenting the sales force to sell it versus other services? And kind of related to that, if the off-net opportunity is 100 times larger than the on-net opportunity, how are you prioritizing each? How are you resourcing each?

It's a great question and an important topic for Lumen right now because we're going to focus on our digital future. This involves allocating resources appropriately. When NaaS was just starting out, we treated it like a hobby. Now that it's becoming a core offering and showing strong adoption, which is expected to lead to significant revenue growth, we need to dedicate more resources to it. For any company undergoing transformation, you must manage both the existing services and develop new ones simultaneously. The challenge is deciding when to shift resources from the old to the new, and we're currently working on that. We have many examples to illustrate this, but broadly speaking, where NaaS is available to customers, we will phase out the traditional analog version of that service and prioritize it with our engineering, marketing, sales, and operational resources. Consequently, the sales team will increasingly be motivated to pursue it, with the entire company working to support them. Regarding your other question about the availability of 10 million buildings, we still need to target that aggressively by coordinating our sales efforts with the extensive metro upgrades we are implementing. This will allow our customers to benefit from our improvements alongside the on-ramps to network as a service, capital upgrades, and rapid routes, enhancing capacity, bandwidth, and performance in various markets. Additionally, it's important to recognize that large enterprises typically have a mix of buildings in any given area that are connected and disconnected. Therefore, we need to approach this carefully when presenting options to customers. We can instruct our entire sales force to discuss NaaS with all customers, highlighting its advantages over traditional services. The digital-native experience now offers a significantly better customer journey than was previously available. With the complete offering now in place, it will be easier for our sales force to engage customers since they won't need to differentiate between on-net and off-net options; they can offer a comprehensive network refresh. And Michael, I would strongly encourage you to look at some of the slides that we prepared for today's presentation, specifically the essential Cloud 2.0 networking requirements. I challenge you to come up with another company that is doing the five things that we outlined on the page. We are massively expanding bandwidth and reducing latency with our upgrades of rapid routes and data center interconnect and metro updates. We are connecting to everywhere that matters, especially with the data centers, which means we're bringing that higher level bandwidth and lower latency to all of those locations. We're expanding into AI corridors. We've connected with all of the hyperscalers for these on-ramps, and we're delivering everything with a vision that is got to be programmable and it's got to be interconnectable through APIs. This is a complete modernization of old telco. What's remarkable is that new architecture that we're building, not only gives better performance, more secure, higher bandwidth, higher performing, lower latency, all those things, intelligence. It also reduces cost because it takes the intermediaries out. And that's incredibly important when we're starting to talk about commoditization. Things get commoditized because there was a utility mindset, and there is no innovation. This company is completely innovating and delivering a fundamental reset in networking in support of AI and making massive capital investments in support of that, and we're already seeing the uptake. So it's very, very different.

At this time, there are no further questions. I will turn the call back over to your host, Kate, for closing remarks.

Thanks so much, operator, and thanks to everybody for the remarkable time and attention that you spent and the great questions. We're so excited to share our progress and our journey ahead, and we couldn't be happier with what's going on at Lumen. A special shout out to the thousands of Lumenaries working so hard every day to make this progress a reality. I'm so proud of you. And love working with all of you. See you in the field. All right. Thanks, guys.