Greetings everyone, and welcome to Lumen Technologies' Fourth Quarter and Full Year 2024 Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] 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 '24 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 '24, we also made material progress transforming our corporate functions, and some quick highlights include: In service operations and assurance, we delivered materially better year-over-year customer sat 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…

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 $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 '29 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%. And finally, Mass Markets had a record year with over 0.5 million 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…

Thank you, sir. [Operator Instructions] 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 it's a bouncing-off point for 1Q '25 versus one-time in nature? Thanks.

Yeah. I'll start with the end of the question first. So, the -- 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, gosh, about a year ago, I guess. And a lot was delivered in the quarters. So, 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 it in my prepared remarks, that the Grow bucket is now almost half of what we sell. And I think when you look at our overall growth rates vis-a-vis our major competitors who had very different performance than us, it really relates to the customer experience that we're driving and the focus on those Grow products as we go forward. And 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. And so, that's without the cloudification of telecom. And ultimately, to your point, 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 the things that are, I would say, manageable and margin-accretive to us, we've got motions in place to drive improvements on those as we move into '25.

Next question, please?

Next up, we'll hear from Sebastiano Petti, JPMorgan.

Hi. Sorry about that. Thanks for taking the question. Thank you for the 2025 EBITDA outlook. But I wanted to see how you can maybe help us think about, Chris, the top-line dynamics there, particularly in light of the public sector comments. But as AI fabric revenue come online in the next several years, what's the inflection or the growth to -- what gets you to top-line growth, I guess, in the Business? Or what's the expectation around that? And public sector did grow in 2025 -- 2024, but it sounds like there's going to be some one-time items that weigh on it in the first half of the year. Is the expectation that public sector growth continues from here? Thank you.

Yeah. So, 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 that impact that. And then, you've got underlying improvements in things like sales and other disconnects that are more manageable that they kind of net out. I think 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. And we've also got new product announcements that we'll be making that ultimately benefit as we go forward. The way we can get there though, really big picture, if you just forecast market declines against our Nurture and Harvest buckets, and you put us at growing at market rates on things like IP and waves, and quite frankly, I think we do better than market, and Kate alluded to that. We get to growth in the '28-'29 window on revenue. That's really where we inflect. So, there's not heroic assumptions being made here. And importantly, the platform layer that is so critical to differentiating Lumen is not really included in that math. So, our ability to really disrupt the space is a tremendous opportunity for us. As it relates specifically to public sector, tough to call. I would say in itself, it's challenging because of the disconnects that were going to take place in the first half, but the team is very focused on -- aside from that trying to grow this year. So, more to come as we move through the year. It's a little early to call.

Next questions, please?

Batya Levi has the next question.

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 '28? 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 cost 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.

Yeah. 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...

But, we continue to be deep in those conversations. And as those deals are confirmed, we will obviously be updating guidance, which is very consistent with, obviously, what we've done to date. Yes, so within EBITDA, there's a $200 million headwind, which really relates to three things. It's the ramp-up that we've talked about last year and the team required to do these big PCF builds. It's a shift in our strategy to move from on-prem data centers to cloud, as Kate said, we're customer #1, but that's a shift from CapEx to OpEx. And we're basically avoiding quite frankly, about a $0.5 billion investment in data centers in the coming years by that shift. And then, it's the TDM disconnects from those smaller off-net providers that we're driving. So that's the $200 million in EBITDA. The $300 million in special items really relates to dedicated expenses associated with getting $1 billion of cost out and they're one-time in nature and they will go away.

Okay. And then, the first part of your question about utilization, it's really important to note that the utilization chart is really about fiber miles. And so, 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. And so, we're increasing both the capacity with innovation, putting net new fiber solutions in there, which allow for up to 4 times the capacity, better photonics, et cetera, greater density, greater efficiency in the same stretch of conduit. And then, of course, we're adding new routes. I think the big piece here is there was a lot of unused conduit. It was empty for 25 years, and we were able to lease it to the hyperscalers to connect to their data centers. And so, that's why the chart looks so dramatic in terms of the increase of the hyperscaler utilization. But it's not taking away from enterprise. And in fact, we have more enterprise growth capacity that we've ever had before with these innovations.

Next question, please?

David Barden, Bank of America, is next.

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? And so, 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 then 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.

Yeah. So, a couple of things. On the 2026, we -- while PCF will start to roll in, it's actually going to be pretty small. So, we're not -- because we're still at the very early stages of it. So, I would say that the $3.5 billion, the increase that you see is largely driven by the modernization/simplification efforts. And that is more than offsetting kind of legacy declines. And again, keep in mind, I mean, we have now been disclosing kind of the Grow/Nurture/Harvest buckets, and I think that will evolve to more disclosures in time, but we've been doing that now for almost three years, David, and the mix has substantially changed in our favor because of the focus that the company has had. So, don't forget to model every quarter mix improvements, as legacy continues to become a smaller and smaller piece of what we do. And sorry, remind me, what was the first question?

Just on the free cash flow...

Cash, yes. Yeah, so, I want to be really clear before I tell you, I'm not going to give you that detail. We said, and I want to be really transparent about this, we had a funding gap before we had the PCF deals. And that remains to be true. And the PCF deals, not only fill that funding gap, it's allowed us to lean in far more heavily into our transformation efforts, and that all remains to be true. We're not going to give '26 guidance on that yet because here's what I can tell you for certain. There's meaningful things that we can and will do over time as it relates to more PCF contracts, debt refinancings, a number of levers that we can pull that ultimately drive improved free cash flow as we move through the year. So, more to come as we go through the year. This guidance doesn't assume any of those refinancings. This guidance doesn't assume any PCF deals, that doesn't assume any major transactions. Any and all of those things could happen, and we'll continue to give you updates, but I think there's far more tailwinds to our cash flow story than there are headwinds.

And Jim, before you cut me off, if it's possible, I would love to -- Chris, one more question, which is, we've seen some pretty successful fiber securitization deals out of Unity, out of Zayo, you guys, obviously, have redone your whole balance sheet, and I'm not smart enough to figure out how much opportunity is there for you to kind of take advantage of what's happening in the market right now for fiber financing?

Yeah. It's a good question, David. It is an opportunity, but I think that is on the B list of priorities versus the A list of priorities. There's a number of things that we can and will be doing around the debt structure that I think really get to putting the company in more of what I would call a normal capital structure. And at that point, then we can start to look at those things that are on the B list, but more to come.

Many thanks, guys. Appreciate it.

Next question, please.

Jim Schneider from Goldman Sachs is next.

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? And what do you think that means, if anything, for the [connectivity] (ph) 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?

Yeah, it's a great question. So, I think, as I noted in my prepared remarks, this is going to accelerate the democratization of AI, okay? So, DeepSeek is putting pressure on everybody to go faster to innovate and to take cost down and to make the technology more accessible. And when you've got more companies that have to navigate in the multi-cloud AI-first world, as I described, that's more total available market for us to sell our connectivity fabric into. So, we see this as an increase in the total available market and a huge opportunity for us. And we have a pretty good head start in this space, and we're investing heavily in a platform to differentiate, and we think it's going to allow us to capture share.

Thanks. And then maybe 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, you've talked about all the reasons why you believe you have a privileged advantaged market position today. One of those, I believe, is because of the empty or available conduits you have to fill right now. But I'm sort of curious, as you go into the next couple of years, do you see more competition for these kinds of deals? And do you see your sort of your lead extending yourself, or do you think more incremental competition is likely to come in? Thank you.

Yeah, of course, Jim. So, first of all, we're grateful for the lead. It was nice to get $8.5 billion in there before anybody else realized that this was a market, but we're paranoid, and we're going to maintain focus on building out the competitive moat. Our network has unmatched coverage. It has unique routes. And we've invested heavily in the fiber solutions that, frankly, our competition hasn't. So, we're in the right places with the amount of capacity and the performance that everybody expects, but that's just the infrastructure talking. I think what's differentiating is the platform on top, and that's becoming more and more interesting to, frankly, all of our customer segments as we're able to present them with a network fabric that gives them access to all the capabilities no matter where they are. So, we're pretty pumped about our position. We think we're going to continue to be able to execute well and the future is pretty bright. Chris, do you have anything to add to that?

No. I think, that's it.

Next question, please?

Jonathan Chaplin from New Street Research is up next.

Thanks, guys. I'm wondering if you could give us an update on how things are progressing with the fiber [cell] (ph). And then, in the context of the fiber cell, it seems to me that the ultimate owners of these assets are probably one of the three big national wireless carriers. And I would have thought they would value copper assets in addition to fiber assets. And I'm 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. And then, 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 as well.

Yeah, it's a good question. And I'm going to stick to things that we said publicly. So, first of all, it's interesting because there are two schools of thought, right? One could be sell the whole thing, but there's been a lot of work done, good work, that has said, "Yeah, but you also give up a lot of EBITDA on that, and is it really a delevering transaction?" The comment that we've made is think about it as two businesses, right? You have a fiber business that today is doing just tremendously in terms of its build-outs, but isn't yet in a position where it's generating much EBITDA. There's a lot of OpEx that goes into driving customer penetration. And at the same time, 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 that? Yeah. Could somebody be interested in pieces? Yes. We're open to any and all of those discussions, and we'll see where it takes us. But ultimately, we've said this for years, it comes down to valuation. And at the right time, we'll make that decision. And as that decision and that moment comes, we'll obviously share it with you. So, that's how we think about it. As it relates to copper decom specifically, think about copper decom being largely market-driven, not consumer-driven. Because copper decom is really both an enterprise and a consumer motion. And so, I think like a lot of our competitors, that's how we think about it. We have been very aggressive about -- in the consumer space, converting copper to fiber where we do have fiber passing, because it's a better outcome for the customer and it's a better outcome for us, and that will continue. But the copper decom process, there's a playbook that we've developed. Frankly, it's part of our modernization and simplification. There's a lot of unlock there. And we think there's even more EBITDA to be generated in the coming years through those activities.

Yeah. 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.

It is part of $1 billion. Got it. Thanks.

And the next question comes from Nick Del Deo, MoffettNathanson.

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. And then, you're looking at your...

So...

Sorry, go ahead. Sorry.

Yeah, just I'll answer that real quick. So, the pieces of the PCF for the state of California that got turned on are one-time in nature as that got lit up. There are other things that happened 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. Sorry, what was your second question?

Okay. No, thanks for that, Chris. I guess, looking at the fiber deployment utilization table, if my math is right, the fiber miles used by enterprise channels was roughly flat from '22 to '25, but then you're expecting it to double from '25 to '28. So, I'm just wondering what products are driving that doubling?

Well, I think to start with in Kate's prepared remarks, we're seeing 100-gig and 400-gig waves growing at 50% in 2024. And we talked about that and gave color around that during the year because we shifted CapEx to support that. So, we're at the very -- again, think about it back to the phases of AI that we've talked about. And the first phase is inference, which is where -- sorry, training...

Training with hyperscalers.

...where the hyperscalers are building these networks for their own consumption to train the AI modes. The second phase is inference, which is where large enterprise starts to use those models to run workloads. And so, we're at the very beginnings of that, and we can see it in IP and waves, but I think you'll see more consumption of large enterprise connectivity because of the platform layer that Kate talked about because ultimately, the value that we can bring to enterprise in the form of cost reduction isn't us reducing prices for dumb pipes, it's us providing newer, cheaper, faster, more-efficient and flexible ways of reaching their data.

Next question?

We'll take the next question from Greg Williams, TD Cowen.

Great. Thanks for my questions. Actually, Chris, your last answer is a good segue into my question is, 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? Second question is on DeepSeek kick-in. I get the democratization of AI and you see a larger TAM, but 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, are still in deep conversations. We've talked about the pipeline that we're pursuing is predominantly comprised of new routes connecting data centers and we're deep in those conversations. And it's complex to design these kinds of networks, so it takes a bit more time, but they're still progressing with no sign of slowdown. In fact, we have been asked by every single one of the major cloud companies that we've done a deal with no exception, if there's a possibility to accelerate the implementation of what they've purchased so far. With respect to the second phase in inference, I would say that it's early to start calling the ball on trends of exactly what's going to happen here. If anybody tells you they know, they don't. What we are seeing is in some of the major industries, financial services, retail, healthcare, they're starting to -- they're the ones that are asking for the network upgrades. And they're starting to use inference to transform their companies and they are recognizing the fact that they need something fundamentally different. And so, that's kind of the trends that we can shine a light on so far. As we learn more, we'll bring it to you. I think it's really important, the discussion that I give you an overview on the multi-cloud AI-ready network architecture, every single one of these companies is moving data and workloads back and forth between clouds. And today, it's too complicated. It's too slow. It's too expensive, and it's not secure. And our fabric, now that we're connected to all three clouds, allows you to do that in a cost-effective, high-performance secure way. And this is a net new capability that we're bringing through our platform and our fabric that no other company is doing. So, we're really excited, and we think we'll continue to have a good view on what's happening during inference, and we'll keep you posted.

Great. Thank you.

Next question?

Next question comes from Frank Louthan, Raymond James.

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? And does that add any additional risk? And can you give us an update on the billing system collapse and the other system changes that you're working on? Where are you as far as completing those projects? Thanks.

Sure. So, as it relates to public sector, our sales rates aren't declining. What's impacting revenue in 2025 is, yeah, I'll use the word, egregious rerate activity a select few. I mean, we're talking thousands of percents really over the last few years, where customers, largely in the federal space, and unfortunately, some customers who rely critically on that technology for running their businesses are being forced to migrate or turn off those switches. And it's the right call for the customer, it's the right call for us. So, really, the big headwind there is that. As it relates to the IT work, we're making good progress. Our first phase of our ERP should be complete, I would say, probably early in the second quarter, and we're expecting the second phase, which first phase is really quote-to-cash, second phase is procure to pay is later in the year. Now remember, what we're not doing, I want to be really clear about this. We are not doing a big consolidation of order entry or billing systems. What we're doing is as we consolidate networks and we turn on the ERP, we will, over time, roll off of old systems that support existing revenue as that revenue kind of retires out, and all of the new revenue will be put into a new modernized system. So, as that Grow bucket continues to grow, more and more of the product is on the future state. We're not doing any kind of a conversion.

Okay, great. Thank you very much.

Next question?

Sam McHugh from BNP Paribas has the 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 kind of 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 be able to reach? And is that helping you in discussions with partners on basically being able to provide more backhaul for their own fiber ventures? Thank you.

So, the 47 million miles, just based on the business that we've already inked, it doesn't include any new deals. So, as we potentially do that, we might be updating the chart for you, hopefully sooner rather than later. And could you hit your fiber-to-home question again, please?

Yeah, sorry. I was just saying, as you build out more of the conduit and build new conduits, is that changing your view of kind of the terminal kind of build in mass market? I think you talked to 6 million to 8 million locations in the past. So, can you do more with fiber miles?

We think about them separately.

Okay. Thank you.

Operator, we have time for one more question.

And everyone, 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.