Greetings, and welcome to the Lumen Technologies' First Quarter 2025 Earnings Call. During the presentation, all lines will be in a listen-only mode. Afterwards, we conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded Thursday, May 1st, 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.

Good afternoon everyone and thank you for joining Lumen Technologies' first quarter 2025 earnings call. On the call today are Kate Johnson, President and CEO; 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 first quarter 2025 presentation, which notes that this conference call may include forward-looking statements subject to certain risks and uncertainties. All forward-looking statements should be considered in conjunction with the cautionary statements and the risk factors in our SEC filings. We will be referring to certain non-GAAP financial measures reconciled to the most comparable GAAP measures, which can be found in our earnings press release. In addition, certain metrics discussed today exclude costs for special items as detailed in our earnings materials, which can be found on our Investor Relations' section of our website. Finally, new this quarter, we've posted some frequently asked questions along with the earnings materials for your reference. With that, I'll turn the call over to Kate.

Thanks, Jim and thanks everybody for joining the call. In the first quarter of 2025, we remain focused on our three company-wide priorities to drive operational excellence in our core businesses, build the backbone for the AI economy, and Cloudify Telecom. And I'm happy to share that we made material progress across all three areas, culminating in strong financial results and various external accolades, including being named one of Fortune's Most Innovative Companies and Frost & Sullivan's DIA Company of the Year. And today, I'm going to explain exactly why. I've talked about driving operational excellence in the past. We're upgrading our systems, simplifying our product portfolio, unifying our networks, upgrading our go-to-market teams and improving execution overall. And our financial results in the first quarter show the results of that rigor. We strengthened our balance sheet with the term loan refinancing. We beat consensus for revenue, EBITDA and free cash flow with our North American business Grow revenue up 7.9% year-over-year and total North American business revenue down only 2.2% year-over-year, approximately one quarter of the decline of our peers in the industry. And Wave's revenue grew on a year-over-year basis, a reflection of our strong wave sales with great companies like Activision, T-Mobile, and AARP. Thirdly, an important driver of revenue and EBITDA performance in the first quarter was the lowest level of absolute dollar disconnects in the past five quarters with an over 8% improvement from the first quarter of 2024. We continue to actively engage with our customers to migrate them to the newest technologies, showing how our installed base is becoming a material advantage in our digital revenue growth trajectory. Lastly, Lumen's modernization and simplification work is going very well, with continued progress implementing new digital enterprise applications, unifying our network architectures from four to…

Thanks Kate. Lumen is having a great start to 2025 as we focus on our core strategic goals to drive operational excellence, build the backbone for AI and qualify telecom. Financially, we're encouraged by the trends we're seeing despite uncertainty in the broader macro environment. Many of our initiatives are things we can control, like our modernization and simplification, qualification of our services, ordering and delivery platforms and continued execution on the build-out of the $8.5 billion in PCF contracts we've signed to-date. The work we're doing inside Lumen to improve our cost structure, product portfolio, and go-to-market need to happen regardless of external conditions and positions us to be more efficient and improve the overall customer experience. All of this provides us with confidence in our ability to reach our goals. During the quarter, we continued to improve our balance sheet with the March refinancing of $2.4 billion in term loans. This transaction reduces our annual interest expense by approximately $55 million and extends the loan maturity from 2029 and 2030 to 2032. This refinancing is a key milestone in fortifying women's balance sheet and free cash flow profile. The significant interest savings is the first step of many to improve our cost of capital, reduce our leverage, normalize our maturity profile and dramatically simplify our capital structure. We secured better long term, in part because of our recent credit rating upgrades by Moody's and S&P Global, who recognize the AI-driven demand for Lumen PCF and our stable outlook. Based on our great start to 2025 in both our core connectivity business and in our modernization and simplification program, we have confidence in our 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…

Thank you. [Operator Instructions] Our first question comes from the line of Michael Rollins with Citi. Please go ahead.

Thanks and good afternoon. Two topics, if I could, please. First on the business revenue. Just curious if you could provide some additional context on the reasons that the Grow revenue was up 10% year-over-year during the first quarter, including how much may be coming from existing versus new customers? And can this bucket continue to sustain double-digit growth as you look out over the next few quarters? And then just a second topic. You mentioned earlier some of the legacy PDM revenue that might need to come out. And just curious what happened to the -- what was anticipated to be front-end loaded during the first quarter in terms of some of this churn, including within the public sector? And how much is left that may come out during the second quarter or the rest of this year? Thanks.

It's Chris. So a couple of things. On the Grow revenue, we said that it was really driven by dark fiber deals that were not related to the $8.5 billion in PCF. So this is underlying demand from large enterprise, primarily also some in public sector as well as WAVE and IP. And in all of those areas, we do expect those trends to continue. Businesses are preparing themselves for the future of AI and our offering provides something that others are simply not providing. So, we feel very good about that. And I think importantly, the fact that, that Grow bucket is now roughly half of what we sell is, I think, a key leading indicator to the fact that the end of revenue declines will ultimately get to. We've been very focused on this for some time. And this is really before the digital innovation that Kate really leaned into today starts to impact our results. So, we feel very good about that. In terms of how much is new customers versus existing? I can't answer that off the top of my head. So, I think we'll need to circle back on that one. And then as it relates to the disconnects, there was some activity in the first quarter. We're still working through the final arrangements on the balance of that, and we'll certainly provide some color through the quarter. The reality is, in total, I'm not too concerned about it because from an EBITDA standpoint, it's at worst case neutral and very likely a positive, and we will see margin improvements from that.

Thanks.

Next question.

Our next question comes from the line of Batya Levi with UBS. Please proceed with your question.

Great. Thank you. Can you provide maybe a little bit more color on how cloud economics is different from telco? And if you could kind of like size the difference in margins for both worlds. I think that would be helpful to understand it. And could some of the strategies that you're implementing on the cloud communications side could also be implemented on less markets maybe to accelerate the profitability of that unit? And just a quick follow-up on the fiber side. As you continue the strategic review, can you just remind us on how you would think about incremental fiber builds and if you're seeing any change in cost to both? Thank you.

Hi Batya, it's Kate. So, the exciting part of the Lumen Digital platform is it enables what we're calling cloud economics because you get out of the linear revenue growth tied to the cost structure. So, if the soft lies in two places. The first is in the Lumen Digital platform and the second is in the Fabric Port. And the two go together to make it possible to sell thousands of services on one port. And in the old constructs, one port could only support one service and a service typically made an origination and a termination point, right? So, in the new construct, imagine you have a customer that's running Internet on Demand or Ethernet on demand has -- on a Fabric Port you can sell in voice cloud, you can sell in Lumen Defender and you start layering in these digital services on top of one port. So, revenue goes up and the marginal cost of delivering that revenue goes down. And that's the exciting part, and it really -- it's early to call what that's going to look like. We're building out a digital platform. It's a traditional J-curve. We're delighted by the adoption progress with how many customers are coming and how fast they're going from one to two and more ports but it's probably early to make a call on the margin. And the back part of your question, I'll--.

Yes. And on that, Batya, we will as we move through the year and approach an Investor Day in September. We'll give a lot more color on what that future looks like, including a new model at that point. But the early feedback from customers is incredibly positive. On the additional builds, progressing really nicely. We're confident that we'll continue to see expansion there and the economics continue to look similar to what we saw in the first round. And the team is doing a fantastic job, as Kate said, of building on schedule, if not a little bit ahead at this point and on budget. So, very pleased with that motion.

Thank you.

Our next question comes from the line of Jim Schneider with Goldman Sachs. Please proceed with your question.

Good afternoon. Thanks for taking my question. Two, if I may. One is relative to the PCF pipeline, just kind of curious how you would expect the conversion of the remaining sort of $3.5 billion of the pipeline to potentially roll in? And what do you expect additional hyperscaler deals to precede enterprise deals? Or you think it could be a little bit more enterprise loaded in the near-term? And then maybe secondly, with respect to the overall enterprise spending environment, I believe in the FAQ, you sort of referenced that you haven't seen any change to that yet relative to sort of those more advanced fiber deals. But could you maybe address the flip side of that, typically, when times of budget pressure enterprises consider sort of decommissioning legacy servers a little bit faster than they might have otherwise. So, I'm wondering if you see any potential for downside on that side of things? Thank you.

Hey, it's Kate. Just a couple of things. So, with respect to the pipeline, as I said, we are in active discussions with these customers. And the complication and the timing is around the notion that they're net new routes. They're -- it's complicated to design and we work side-by-side with customers to make sure that we get it exactly right. But they're still progressing. We feel good about it. I can't give you a specific time frame, but it's moving along. What we're seeing is an increase in demand and interest around our -- both private connectivity fabric as well as our Lumen connectivity fabric for services from enterprises because what they're seeing is this unprecedented increase in volume of data generated from AI. And a lot of times, they got to get it from on-prem into the cloud or from cloud to cloud or back to the edge and every combination they're in. And so they're looking for a networking partner that can provide them not just the coverage and reach of the physical network, but a digital platform to make it easy to navigate in that multi-cloud AI world and that's what we've built for them. So, we're super excited that it's progressing and bullish on what this means. And I'll kind of answer the third part of your question because it really speaks to fiber networking as critical infrastructure for us to build an AI economy in the United States and for us to be competitive on the innovation platform on a global level. And so while there could be uncertainty in the market, and nothing's recession-proof per se. These are long-term strategic investments that customers have to make in order to compete. And that's why we're continuing to progress because what we've got is what they need in order to live through that next phase of our technology diffusion lifecycle.

Thank you.

Next question.

Our next question comes from the line of Nick Del Deo with MoffettNathanson. Please go ahead.

Thanks for taking my questions. I had two. First, going back to public sector, Chris, last quarter, you had talked about some large payments you got from Middle Mile project in California that helped revenue there. I guess did something similar happen again this quarter. I'm just trying to get a bit of a better sense of the underlying trends there. And then second for Kate, how are you pricing some of the new services that you walked us through on the Digital platform I mean, are you thinking that you're going to price at a discount because they're more efficient and easier to deliver? Or are you thinking about pricing at a premium because you think they're better products?

Yes. So, first of all, no, there was no big step-up in the second quarter as it relates to the timing of delivery around, I think, in particular, what impacted us last quarter was the state of California delivery. That does get lumpy quarter-to-quarter. This quarter, it was a lot less than last quarter. The reality is there is strength in the public sector space. We have a killer team. They're doing great work, and we continue to be engaged on multiple large-scale opportunities. And so I think public sector is going to continue to be a point of strength for us. Kate?

Yes, sure. Regarding pricing of services on the Lumen digital platform, I'm so glad you asked because this is a really important point. So, I think in the old world of telecommunications, people refer to our physical network, though it was deeply insulting as dumb pipes. And those things are long gone. We have a digital platform that we can use to really make things easier to consume for customers in a really, really complex hybrid architecture that they're navigating through every day. And our orientation is around total value of ownership. And this is really important because if we can actually help customers build higher performing, lower latency, more secure, larger capacity networks, that helps them execute their business outcomes better. They have faster innovation, faster time to revenue, et cetera. If we can also, at the same time, lower cost like, for example, bypassing disconnects in the old constructs -- sorry, cross connect, sorry, bypassing cross-connects of third parties when trying to connect between clouds or from data center to cloud, this delivers more value. So, we can help them on the top line, and we can help them on the bottom-line. And that doesn't mean we drop the price of our service. That means our service is inherently more value and there's no more price their way to the bottom in competition with other providers. We feel like we've got real value here and our adoption metrics are showing it.

Next question.

Our next question comes from the line of Greg Williams with TD Cowen. Please proceed with your question.

Thank you. Good afternoon and thanks for taking my questions. Just two questions. One, I think you noted CapEx of $791 million. So it sounds like it's going to ramp up pretty fast. And I know, Chris, you mentioned free cash flow could be lumpy. But can you help us with a sense of the cadence of the CapEx spend through the balance of the year? And same question on the upfront hyperscale fees that you get, that would help. Second question just around the public sector. You noted it was a point of strength, which sounds encouraging because the question I have is, are you seeing any risk on the dog efficiency cuts in the sector? You noted public could be strong, but a few of your peers noted some pressure from government cuts. Thanks.

Yes. So, I'll answer the first part. I really don't want to get into kind of the timing of inflows and outflows quarter-by-quarter. And we're really confident in the annual guidance, which would obviously suggest that on the CapEx spend side, that you will see a ramp-up. It is really volatile quarter-to-quarter in terms of the timing of payments. We're dealing with major network components that can move by hundreds of millions of dollars quarter-to-quarter. So trying to predict effectively to get the quarters, you got to get to weeks and days and the reality is just not that predictable. But in total, we feel very good about the guidance for the year. And then--.

Yes. And regarding the impact of DOGE in the public sector market, Look, what we're seeing is that this administration is very committed to modernization and simplification. And they're trying to reduce costs and enable the United States to be more competitive in the various global theaters. And that presents a huge opportunity for our company given our network and the platform that we're building on it. And also, there's a pretty significant return to office trend that's delivering near-term opportunities as well. So, all-in-all, we are pretty bullish in the public sector space as well.

That’s helpful. Thank you.

Next question.

Our next question comes from the line of Frank Louthan with Raymond James. Please go ahead.

More color on your NAS product. And how are you differentiating yourself in the market with that and what sort of traction you're getting there? And then secondly, a little bit more -- one more clarification on the public sector. Can you give us some color on the weakness you referenced? Is it going to be weaker relative to what you reported this quarter or going forward from this level? Or how should we think about it? Thanks.

So, Frank, you cut out, and we didn't hear the first part of your question. I'll let Chris answer the second part. But what was the first part?

The first part of the question was around the connectivity fabric, the NAS product. How are you differentiating that in the industry? What -- who's buying that product? Where are you finding traction with that in the market?

So, interestingly enough, there's a couple of things. The NAS product in market doesn't have a like-for-like competitor. So there are digital companies that don't own the network, and so they can integrate the platform capabilities into the fiber. And then there are networking companies that aren't building a digital platform. And as you know, we've got a pretty big competitive or strategic moat with our physical network. It's got scale coverage, unique routes, huge capacity with room to grow. And the major CSPs are all now connected to it. And so we've got this ecosystem. And the digital platform itself is starting to bring customers who just want an easier experience. They want to sort of not have the old experience of static point-to-point and long ordering cycles and all that kind of stuff. They want to fire up any port, any service anytime anywhere because that's what they get with cloud, and that's their expectation, and they can get that on the Lumen Digital platform. And I think there's a third piece. You put all these together with some of the other announcements we've made, direct fiber access, into the cloud, direct fiber access between prem locations and add in data centers is very unique and it's something that we're excited about because it's going to continue to improve performance of our network and further separate us from any other company that tries to compete.

And on public sector, Frank, I think the reality is what we're seeing in terms of both opportunity and booking trends is very strong performance out of the public sector team. I don't want to try to predict what that means in terms of the performance this quarter versus where we end up next quarter. I think in the end, the impact of this off-net piece is one will obviously share what it is when we get there. But it's not going to have an impact on bottom-line, and we'll isolate what that impact is when we make the changes in the second quarter. But broadly speaking, a number of different opportunities from a number of different agencies that we're working on, and we feel really good about where we sit right now.

Okay, great. Thank you.

Next question.

Our next question comes from the line of Jonathan Chaplin with New Street Research. Please go ahead.

Thanks. Just one question for take. So the acceleration of how the Lumen connectivity platform is going to be disruptive to the industry was really helpful I was wondering if you could give us some context on who's disrupted? So on the revenue side, I understand how the platform sort of facilitates revenue growth for customers how much of the sort of the revenue that goes on to that platform is coming at expense of your Nurture and Harvest categories and then how much from outside of Lumen? And on the cost disruption side, who's getting disrupted there? Is it sort of the traditional data center companies or is it your sort of enterprise competitive AT&T and Verizon? Thank you.

Yes. Great question. So, the disruption is kind of for us the industry -- across the ecosystem, all the players. So what customers get is they're getting a digital experience, higher performance more value, and they can avoid the cost that they pay to these third-party intermediaries like the carrier-neutral facilities because they're eliminating the need for cross connects. So, there's a lot of value for customers, and it's different. And we're building it out, and it's still early days, but we have a huge amount of demand for this notion of direct fiber access and direct on-ramps from cloud to cloud because a lot of enterprises need to move data from one cloud company to another, safer measure into GCP and back and forth. And today, if they want to do that, they've got to do a lot hop, skip, and jumps across companies that charge them fees. And what we're offering is a direct connection where those cross-connect fees are no longer needed. And that's disruptive, obviously, to the data center companies. It's also disruptive, but in a very positive way to the cloud service providers. What we're seeing as an early trend and it's early days, but our NAS offering is driving higher bandwidth consumption through our Cloud Connect offering into cloud. And when I say higher, like it's an incredible rate, I don't want to give it right now, but over the past 90 days, very, very significant growth. And what that suggests is that there's a faster path to revenue for the cloud companies, partnering with Lumen to provide networking for their end customers. So -- and I think we want to spend more time on this at Investor Day because it's really disruptive in a lot of different ways. And the thesis is this. Telecom hasn't innovated in a long, long time. And we made some really tough choices two years ago to rethink how we spend our capital. And you're seeing the fruits of those investments now with this platform and with value that we're delivering to enterprises. And it's still early in our transformation life cycle, but the feedback from customers is really terrific. The feedback from the cloud service providers really terrific. So, we're very, very excited with our progress.

Got it. Thanks Kate.

There are no further questions at this time.

Great. Thanks, everyone, for joining the call today. We appreciate you reaching out with any questions. Thanks.

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.