Lumen Technologies, Inc. (LUMN) Q3 2025 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call highlighted strong financial metrics, a strategic focus on growth areas like AI and NaaS, and positive adjustments in guidance, particularly for free cash flow and EBITDA. While there were some uncertainties in the Q&A regarding growth sustainability and M&A plans, the overall sentiment was positive due to revenue growth projections, debt refinancing benefits, and a strengthened balance sheet. Given the small-cap nature of the stock, these factors are likely to result in a positive stock price movement over the next two weeks.
Key Financial Performance
Revenue Total reported revenue declined 4.2% to $3.087 billion. Business segment revenue declined 3.2% to $2.456 billion. Mass Market segment revenue declined 7.7% to $631 million. North American enterprise grow revenue increased 10.5% year-over-year, driven by continued strength in dark fiber and IP.
Adjusted EBITDA Adjusted EBITDA was $787 million with a 25.5% margin, compared to approximately $900 million in the year-ago quarter. Adjusted EBITDA margins were disproportionately impacted by anticipated declines in public sector Harvest revenue in the third quarter.
Free Cash Flow Free cash flow, excluding special items, was over $1.7 billion. This was influenced by large PCF builds and lower-than-anticipated CapEx spending.
Fiber Broadband Revenue Fiber broadband revenue increased 18.4% year-over-year and represents over 49% of mass markets broadband revenue. Lumen added approximately 122,000 fiber-enabled homes, bringing the total to approximately 4.5 million as of September 30.
Debt Refinancing and Interest Expense In August, $2 billion of 7% first lien notes due 2034 were priced, extending maturities by approximately 4 years and delivering $48 million in annual interest expense savings. Additional actions reduced annual interest expense by approximately $135 million in Q3 and $235 million year-to-date.
Capital Expenditures Capital expenditures were approximately $1 billion. The company expects to be at the low end of the $4.1 billion to $4.3 billion range for 2025 due to build timing and increased efficiency.
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Operating Highlights
NaaS (Network as a Service): Scaled adoption to over 1,500 enterprise customers since launch. Launched Internet on-demand (IOD) off-net, expanding market reach by nearly 100x.
Project Berkeley: Set to launch in early 2026, enabling intelligent and universal access with pre-provisioned cross-carrier fabric ports.
Private Connectivity Fabric (PCF): Signed over $1 billion in new deals, bringing total deal value to over $10 billion. Expected to generate $400-$500 million in recurring revenue by 2028.
Strategic Partnerships: Announced partnership with Palantir and collaborations with major tech companies like Microsoft, Google, AWS, and others to enhance AI and cloud services.
Cost Reduction: Achieved $250 million in run-rate cost takeout by Q3, on track for $350 million by year-end.
Debt Refinancing: Completed $2.4 billion debt refinancing and repricing, reducing annual interest expenses by $135 million.
ERP System Implementation: Successfully implemented phase 1 of a new ERP system, with phase 2 expected next year.
AI Economy Positioning: Investing in infrastructure to support AI workloads, including data center expansion and metro expansion.
Revenue Growth Strategy: Targeting $900 million to $1.1 billion in incremental revenue by 2028 through PCF and digital initiatives.
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Risk or Challenges
Declining Legacy Telecom Revenue: The company continues to face challenges from declining legacy telecom revenue, which still weighs on overall performance despite growth in other areas.
Public Sector Harvest Revenue Declines: Revenue from public sector Harvest is normalizing and declining, which negatively impacts adjusted EBITDA margins.
Debt and Interest Expense: Although progress has been made in reducing debt and interest expenses, the company still carries a significant debt load, which could limit financial flexibility.
Supply Chain and Build Timing: The company faces challenges related to build timing and supply chain efficiency, which could impact capital expenditure plans and project timelines.
Regulatory and Tax Refund Delays: The receipt of a $400 million tax refund could be delayed due to a potential prolonged U.S. government shutdown, impacting cash flow.
Market Adoption of New Products: The adoption of new digital products and services, such as NaaS and ecosystem partnerships, is still in early stages, creating uncertainty around revenue growth projections.
Economic and Competitive Pressures: The company operates in a highly competitive market and faces economic pressures that could impact its ability to achieve projected growth.
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Guidance & Outlook
Revenue Growth Projections: Lumen expects to achieve revenue growth by 2028, driven by $400-$500 million in incremental revenue from Private Connectivity Fabric (PCF) and $500-$600 million from digital capabilities, including NaaS, Edge Solutions, Security, and the Connected Ecosystem. This totals $900 million to $1.1 billion in incremental revenue exiting 2028.
AI Economy Infrastructure: Lumen is investing in building the backbone for the AI economy, including over $10 billion in PCF deals and three major fabric infrastructure projects: rapid routes, data center expansion, and metro expansion. These investments aim to create a high-capacity networking fabric to support AI and multi-cloud architectures.
Digital Platform Expansion: Lumen plans to expand its digital platform with the launch of Project Berkeley in early 2026, which will enable intelligent and universal access through pre-provisioned cross-carrier fabric ports. This initiative is expected to drive growth in digital revenue.
Market Trends and AI Impact: AI workloads are expected to push data center footprint growth by 10x by 2030, with public cloud spending surpassing $1 trillion. Lumen aims to capitalize on these trends by offering extreme bandwidth, low latency, and programmable API-first networks.
Capital Expenditures and Financial Guidance: Lumen maintains its 2025 CapEx guidance at $4.1-$4.3 billion, with expectations to be at the low end of the range. Adjusted EBITDA for 2025 is expected to be near the high end of the $3.2-$3.4 billion range, with free cash flow guidance of $1.2-$1.4 billion.
Debt Reduction and Financial Stability: Lumen plans to reduce its debt to approximately $13 billion by early 2026, achieving a leverage ratio below 4x adjusted EBITDA. This is expected to result in annual interest expense savings of up to $535 million.
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Shareholder Return Plan
The selected topic was not discussed during the call.
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Key Q&A
Q:How does the new $1 billion of PCF bookings compare to previous deals in terms of margins, and what is the pipeline for aluminum deals?
A:The $1 billion in PCF bookings is equivalent in margins to prior tranches. The pipeline includes hyperscalers and neocloud providers, and while no specific number is committed, the company expects to exceed expectations. The process is part of a three-phase journey involving hyperscalers, enterprises, and AI corridors.
Q:What is driving the Grow revenue, and is double-digit growth sustainable?
A:Grow revenue is driven by mid- to high single-digit growth in areas like dark fiber and IP waves, with PCF contributing but not being the primary driver. Double-digit growth in the Grow bucket is not expected to be sustainable long-term as PCF deals are static and not a growth engine.
Q:What are the key drivers for the EBITDA bridge from 2025 to 2026?
A:Key drivers include an improving business mix with a reduced rate of decline in enterprise revenue and benefits from modernization and simplification efforts.
Q:How does Lumen's balance sheet position it to compete in growth areas?
A:The balance sheet is no longer a constraint but a source of strength. The company has a playbook to further reduce leverage over time and is positioned to focus on growth areas.
Q:What is the revenue impact and timing of recent announcements like the QTS network deal?
A:These announcements are part of the connected ecosystem strategy and contribute to the $500-$600 million incremental revenue target by 2028. They are not separate revenue streams but accelerate existing digital capabilities.
Q:Does the recent stock price increase change the capital allocation strategy?
A:The company is focused on rewarding equity holders and will continue to evaluate all options, including equity issuance, but there is no immediate plan to change the capital allocation strategy.
Q:Are we in a prolonged phase 1 of AI development, and how does this impact Lumen?
A:Phase 1 of AI development is intensifying with significant capital deployment. The process is multi-decade and not linear, with overlaps between phases. Lumen is focused on executing and benefiting from the capital commitments of partners and customers.
Q:What investments are required to achieve the $500-$600 million digital revenue target?
A:Significant investments in innovation, such as IoD off-net and Project Berkeley, are required. These investments are already included in the operating plan and aim to reduce capital intensity over time.
Q:What is the outlook for legacy service disconnects?
A:Disconnects have returned to normal levels after an anomaly in the previous quarter. The biggest impact in Q4 will be a one-time revenue item from the state of California.
Q:How is Lumen promoting NaaS to customers and prioritizing on-net vs. off-net opportunities?
A:Lumen is reallocating resources to prioritize NaaS, demoting old analog services, and aligning sales efforts with metro upgrades. The focus is on providing a seamless experience for customers, whether on-net or off-net.
Q:What is the margin profile of the recent $1 billion PCF deals?
A:The recent $1 billion PCF deals have a similar margin profile to previous deals, primarily involving existing conduit and overpulls.
Q:How does Lumen differentiate itself from traditional telecom models?
A:Lumen is moving away from traditional telecom by offering a digital layer and ecosystem services, reducing capital intensity, and focusing on scalable, high-margin services. The company is leveraging its modern network and digital capabilities to stand out.
Q:What is the cash EBITDA growth outlook?
A:The company will provide detailed guidance at Investor Day but expects ample free cash flow over the next five years, enabling continued deleveraging and investment in growth.
Q:What are the capabilities and demand for off-net NaaS?
A:Off-net NaaS allows Lumen to offer services regardless of who owns the endpoint, using innovations like the Berkeley fabric port. This expands commercial capabilities and provides a seamless customer experience.
Q:Is M&A being considered to accelerate growth?
A:Lumen is evaluating all options, including M&A, to accelerate growth, but no specific plans were disclosed.
Q:Review of Unclear Management Responses
A:Management avoided providing specific details on the timing and magnitude of revenue impacts from recent announcements, as well as the exact cash EBITDA growth outlook. Additionally, they did not commit to a specific timeline for the phases of AI development or provide clarity on potential M&A activities.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
AI architecture
AI corridor
API network
Berkeley
Cloud
Connected Ecosystem
Demand
Digital
Internet
NaaS
PxQ
Street
advantage
cloud ramp
connectivity fabric
deal value
dozen
exiting
fabric port
feedback
job
launch
layer
market number
need
net market
party service
period
piece
port number
port party
port service
power
pull
run rate
selling price
service announcement
service company
service port
tech
thought
update
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