Ladies and gentlemen, greetings, and welcome to Lumen Technologies Second Quarter 2025 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded, Thursday, July 31, 2025. 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 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'll be referring to certain non-GAAP financial measures reconciled to the most comparable GAAP measures, which could 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 website. With that, I'll turn the call over to Kate.

Thanks, Jim, and thanks to everybody for joining the call. I'm happy to share that Lumen had a very productive quarter. We announced the sale of our consumer fiber-to-the-home business to AT&T for $5.75 billion, providing us strategic clarity and a path to financial freedom. We signed nearly $500 million of new PCF contracts since our last deal update. We strengthened our balance sheet with a successful $2 billion bond offering that extends maturities and reduced the coupon rate by over 3.5%, saving another $50 million or so in annual interest expense. And we reported strong revenue and EBITDA despite a onetime RDOF giveback. We're focused and executing extremely well. So now I want to give some context as to where I think we are in Lumen's transformation story. We see 3 critical financial milestones. The first is to clear a path to a healthy balance sheet and free cash flow to support our transformation. To that end, we're raising 2025 free cash flow guidance by $500 million. The second milestone is to return to EBITDA growth. And to that end, we're raising our 2025 run rate cost-out target from $250 million to $350 million. This will put us near the high end of our EBITDA guide and gives us confidence that we have a path to EBITDA growth. With free cash flow and EBITDA milestones on track, I'll focus my comments on the third milestone, our pivot back to revenue growth. And I'll start with an update on building the backbone for the AI economy. The global AI race is a matter of economic development and national security for the United States. We are pleased with the administration's AI action plan and recent tax legislation, which not only reduces regulatory barriers and helps accelerate our current network build-out, it…

Thanks, Kate. As Kate highlighted, we had an eventful and constructive quarter on many fronts. We reported solid 2Q financials, announced the transformative sale of our consumer fiber-to-the-home business to AT&T and successfully refinanced $2 billion in debt. Financially, revenue and adjusted EBITDA came in better than expected despite a $46 million onetime impact to both from the Rural Digital Opportunity Fund, or RDOF givebacks. Our total business Grow revenue was up 6% year-over-year, and our total business revenue was down only 3.4% year-over-year, well ahead of our competition. A highlight from the quarter was total IP sales up nearly 38% and IP revenue up in the mid-single digits. In May, we announced the sale of our consumer fiber-to-the-home business to AT&T for $5.75 billion. This transaction allows us to invest and focus on our core enterprise capabilities while also significantly improving our balance sheet. With plans to pay down approximately $4.8 billion in super priority debt at close, this would reduce our annual interest expense by approximately $300 million, reduce CapEx by roughly $1 billion and reduce leverage on the business by a full turn. This deal goes a long way to strengthening our balance sheet and providing incremental cash to invest in the enterprise customer capabilities that will power our return to revenue growth. Following an agreement to sell our consumer fiber assets to AT&T, Lumen withdrew from the RDOF program. This decision reflects a strategic shift toward building the next-generation digital networking infrastructure that powers the AI economy and serves enterprise, public sector and wholesale customers. Accordingly, we reported a $46 million onetime revenue and adjusted EBITDA giveback that Kate referenced at the start of the call. Now as we turn to debt, we continue to strengthen our balance sheet with a successful $2 billion bond offering,…

Thanks, Chris. I just want to recap real quick. The headline is we're making material progress in our core transformation. Lumen is financially healthy with a strengthened balance sheet and free cash flow to fuel our transformation. We're confident in our return to EBITDA growth, thanks to great execution by the team. And we've got a plan to deliver revenue growth that leverages the combination of our physical assets and the digital platform that we've built, and creates a scalable commercial ecosystem that will make it easy for our customers to thrive in an AI-powered multi-cloud world. It's a new day for Lumen, and we're playing to win. And with that, we'll take questions.

[Operator Instructions] And our first question comes from the line of Michael Rollins with Citi.

I was curious to focus a bit on your Slide 13, where you walk us through the Grow, Harvest buckets within North American enterprise. And when you look at that segment performance during the quarter, down 2.4% year-over-year, how much of that would you attribute coming from the forward operational progress that you described earlier on the call versus things that might be anomalous, whether they're helpful or hurtful? And then given the comments that you made about the Public Sector and maybe having some tougher comps in the back half, can you give us a sense of how revenue in this bucket might evolve in terms of that rate over -- the year-over- year rate of change?

Yes. So I'll try to attack that a couple of ways, Mike. First of all, we're really, really pleased with the rate of the Grow bucket at 8.5%. That's strategic revenue. It's the most valuable revenue that we have from a margin standpoint and it's really focused on where we're going. So the fact that, that's growing and is now almost half of what we sell has material implications for the slowdown of the revenue declines in our ultimate inflection. If we look at Nurture and really the VPN and Ethernet declines, we're going to be in the double-digit decline territory, I think, for the foreseeable future, just as the technology shifts to some of those newer Grow items where we're well positioned. The Harvest piece is probably the most surprising this quarter, and it really does relate to some of the Public Sector work that we're doing in the interim, which we don't expect will continue. It's going to -- it has helped us for a few quarters. But over time, we would expect that the Harvest bucket will continue to decline. As it relates to Public Sector, quarter-to-quarter, we are going to see that jump around. That said, I can tell you that Public Sector is exceeding our internal expectations for the year. We're doing very well in that space. And we're super pleased with the work that team is doing, and I think we're well positioned as we go forward. So over time, again, continued growth in Grow. And by the way, almost no material impact of the PCF deals yet on revenue. And so that's, I'd say, really organic. But again, overall, super pleased. I think the 2.4% is probably a little suppressed because of what we're seeing in Harvest this quarter, but the reality is we're going to be declining at rates that, like we said, are similar to last year for the full year.

And has this progress pulled forward when you think you'll get to that revenue breakeven or Grow point? Or is your expectation similar to what it has been?

Yes. So if you look at our current and historical trends and you look at Grow revenue as a percentage of the total, I mean, first, Grow will be more than half sometime next year. And as we said, that's materially better revenue for us. We believe that our investments in the physical network, the digital platform and the emerging technology ecosystem are all differentiators that expand our commercial reach and help us really drive scale revenue. So with all that, we believe that total company revenue will grow in 2029, is consistent with what we said. But the business segment could pivot to growth even sooner. The key variable there is we are aggressively shifting our resources towards these growth areas that Kate really touched on today. And that's what will determine our ability to go faster. So more to come as we learn more about our success in those areas in the coming quarters.

And our next question comes from the line of Sebastiano Petti with JPMorgan.

So I guess, Chris, you kind of addressed it in your prepared remarks, but I just want to make sure I understand. So with the cost savings pull forward up to $350 million this year, it sounds like you're just kind of running ahead of schedule against that $1 billion program. And so while maybe EBITDA is now anticipated to come in at the high end of the range, could you comment about maybe expectations for 2026, if that has kind of changed at all? And then within the second -- I guess, sticking with 2025 for a second, just again, another clarification question. Was the RDOF giveback, was that anticipated in the guidance at the beginning of the year because it seems to be a nice momentum you might be having except for that. And then one last one as we kind of think about I guess within your prepared remarks, again, Chris, you talked about the benefits of the reconciliation bill perhaps declining over time or being not necessarily as impactful over time. Makes sense. But could you perhaps unpack for us some of the different pieces around maybe free cash flow as you think about the -- or just tailwinds there as you think about the separation of the Mass Markets business and just the resulting impact on free cash?

Yes. So let me do them in reverse order. As it relates to the commentary around how those benefits will decline, they're really declining for good reasons, right? So we're -- our guidance for CapEx this year is a little over $4 billion, $1 billion of that is the fiber- to-the-home builds, right? So as you go forward and that is no longer being invested in and our CapEx spend comes down, the ability to use bonus depreciation to reduce taxes goes away. That's a good thing. If you look at the substantial deleveraging of the company and even in a leverage-neutral scenario, our ability to dramatically reduce our cost of capital and borrowing as credit markets have great confidence in the future of the company. I mean, our bonds are trading effectively at par, who would have thunk, right? And so that's giving us the opportunity to borrow at much cheaper rates. Interest expense between what we've done this year-to-date, and paying down the super priority at the deal close is reducing our interest expense by over $400 million a year. And so as the deductibility levels go up, that's a great benefit to us this year. But as we spend less on interest, there's less deductibility. Again, a net good thing. In terms of RDOF, that was not contemplated in guidance at the beginning of the year. And it really was a decision around whether with the sale of the fiber-to-the-home business, those builds would continue. And the decision was made as we work through that process to not continue that, hence, the giveback. And so that had a negative impact on the quarter. But again, it's not something that's impactful to the enterprise business, which is our focus. And then as it relates to '26, I would say, at this point, no change. I mean we said that we expect EBITDA to inflect next year. I think that's still in the cars. We were thinking that we were going to be able to call that point of quarterly inflection soon. I think the over- delivery this year is creating the good problem of making that harder to call. And so -- but as we look at our performance into next year, I would say no changes at this point in terms of what we said. And obviously, as we move through the year and towards Investor Day, we'll be able to share more.

And our next question comes from the line of Batya Levi with UBS.

A couple of questions. You had guided to about $200 million of incremental costs that we'll see this year that's included in EBITDA. Any update on where we are? How should we think about it going forward? And does that maybe bleed into '26 as well? And just to go back to the EBITDA guide, given the performance in the first half, I know there will be some seasonality in expenses in 3Q. It sounds like you do have more upside. Is there anything else that you would call out that would just cap you at towards the high end of the EBITDA range? And maybe just one more on the PCF sales. Can you provide a bit more color on the drivers of where they came from? And would the structure be similar to the initial ones that we saw in terms of CapEx requirements, margins, timing, et cetera?

Batya, it's Kate. I'll start with the PCF deal. So the $500 million is a similar economics to the first $8.5 billion that we did. And the lion's share of that is on overpull work. That's why I mentioned that it was lower risk and higher margin. The composition of the new routes remains in the pipe, though we're doing some pretty creative things with our partners. The buyers on the other side are a combination of data center and hyperscaler companies that are connecting data centers to support the expansion of their AI training models and the proliferation of bringing those capabilities to customers. So it's really very much in the same vein as we described over the past couple of quarters.

Yes. And as it relates to the EBITDA question, I know OpEx is in there, some of this is in OpEx, some of it is. The headwinds on EBITDA that the underlying business is really overcoming is we've got about $100 million impact from forced disconnects. So we've been pretty vocal about that over the first half of the year. I think in the long run, it's better for us because there's a lot of bad behavior in that, but that has a near-term implication. There's about $50 million as we move more of our workloads to the cloud. And there's about $50 million in PCF OpEx costs in the second half. So those impacts are really all second half. But again, guiding to the high end, I think the strength of the underlying business is what's allowing us to do that. I understand your question as it relates to '26. And the point is we've got to wait and see because -- we've had some really great work by the team on modernization and simplification. The question is, can we increase the exit run rate for '26? We don't know yet. And so we're looking at all of those things, and that will be contemplated, obviously, when we give guidance. But it's a great question, and it's a nice problem to have the business performing the way it is right now.

And our next question comes from the line of Nick Del Deo with MoffettNathanson.

First, Chris, returning to the public sector performance. The 10-Q mentioned temporary rate increases that benefited the Harvest revenue. So I assume that's the driver. I guess, have there been EBITDA implications from these rate increases? Or are they sort of offsetting higher off-net costs?

It's a bit of both. So in some cases, there's charges that are impacting revenue that are offsetting cost increases on the EBITDA side. In other cases, we're being paid to help keep services running. And that's more temporary in nature, and it's why our prepared remarks said that we expect this to moderate over time.

Okay. And any chance you can kind of quantify that at all or just leave it at a bit of both?

I want to keep it at a higher level just because of the customers involved and the types of things that we're doing. I don't think we want to get into a lot of detail on that.

Okay. Fair enough. And then, Kate, maybe returning to the PCF deals, you think about the cadence of those since you closed on the initial $8.5 billion. Is that mostly a function of the dynamics that you described in your prepared remarks related to new construction and the complexities around that? Or are there kind of other gating factors that you're working through that are kind of determining the cadence there?

I think the cadence is really determined by this -- the complexity of building new routes. They're riskier, they're lower margin and both counterparties want to manage the risk, manage the cost, et cetera. And so -- and just kind of imagine building from one city to another, from one side of the U.S. to the other, how many municipalities you're going through, how many different types of material on the ground you're going through, et cetera. So having more and more intelligence around what the true cost is going to be with engineering, design and inspection processes is a long pole in the tent. I do want to just sort of reiterate that I think in the old days, maybe the idea was build the route and figure out how to get traffic on the route eventually. And we're just not going to do that. We're going to drive utilization on our existing network because every dollar from that kind of revenue is higher quality. And so we're orienting everything we're doing around driving net new services, which is why I talked about the connected ecosystem that we're building on top of the physical network.

And our next question comes from the line of Greg Williams with TD Cowen.

Maybe just dovetailing off that last statement about complexity of building. The CapEx guidance that's coming down towards the low end, I would have thought that the hyperscalers would want to build as soon as possible, but I guess you're hearing it's also complexity. Is that the reason for the CapEx coming down? Or is the CapEx coming down for deals that are unrelated to PCS? Second question is just around the tech solutions that you noted in the scripted remarks, the sale with and sell-through channel partners. Can you help us with the rev share model, what that would look like and size it and the timing of that opportunity?

Sure. I'll start with the connected ecosystem business model, and then I'll pass to Chris for the commentary around CapEx. So the platform that we've built, the digital layer on top of the physical network enables a technology partner to connect with us through APIs and make solutions integrated and available in a marketplace. So picture a backup and recovery company selling a cloud solution with bundled I-OD or VPN-OD or E-OD, any of the Ethernet, Internet or VPN On Demand. And in a couple of clicks and you're able to get the thing deployed and you have total management control and provisioning through a control center. So that's the first thing, just to explain what we're actually building, and we're pretty far down the path with several partners on this. How the economics actually work? If nothing other than just having a sell with sell-through partner, it's the sales force of those technology partners that are actually selling to their customers, but they're attaching Lumen capabilities. So our cost of sale goes down, and they're just selling basically NAS attached to whatever product they have. So I just met with the CEO of one of the companies that we're working with, and we've done some beta customer testing. And his comment to me was integrating these network capabilities has basically improved everything about the offering that I'm bringing to my customers. It's easier to deploy. It's more reliable. It's a better customer experience. But more importantly, it's providing more resilience for our customers because attached to the cloud solution, they have all the things that you're building and offering to customers like direct on-ramps into the hyperscalers. So it's a very promising model in terms of expanding velocity and commercial reach. Chris, do you want to talk about the CapEx?

Yes. So on the CapEx, I mean, I would say the primary thing is really just a shift in our -- what's happening versus our estimates, although we don't expect it impacts the timing of revenue. There are some equipment backlogs around some components that we're navigating. I would say that, that's been material to date. The biggest thing is just the timing of the big PCF builds and where we are in the construction process. So given the size of the CapEx, the difference of kind of midpoint to lower end in the greater scheme of things is not really that material given the complexity of what we're managing.

And our next question comes from the line of Frank Louthan with Raymond James.

Looking at -- you touched on this, but maybe just a little more color. When can we expect to see Grow and Nurture maybe show some more consistent growth going forward? And then I apologize if I missed this, but over time, lots of times contracts can expand from the original scope. Has any of that happened with some of these -- with the AI fiber builds, the original $8.5 billion? Have those customers come in and expanded those original projects to any meaningful extent?

Frank, thanks for the question. So regarding the PCF deals, there are repeat customers and the contract vehicles are complex. So sometimes we're using existing vehicles and expanding. But I think the key point you're hitting on is, yes, these are repeat customers that are coming back to Lumen. They're happy with our on-time, on-budget delivery of what we've given them so far. And so they're asking for more.

Yes. Sorry, Frank, what was the second? Oh, the Grow. I would say Grow has consistently been in that kind of high single-digit territory. Will it move around a bit? Yes, it will. So we're really pleased about that. It's probably the most important number as it relates to our ability to inflect revenue going forward. As it relates to Nurture, I expect that to continue to decline. We expect Harvest to continue to decline. But the point is that they're quickly becoming a smaller and smaller piece of the portfolio. And so those variables combined with what Kate talked about around the digital layer and the ecosystem, that's ultimately what pivots us to growth.

[Operator Instructions] And our next question comes from the line of Eric Luebchow with Wells Fargo.

Just one for me, touching on the PCF contracts again. The hyperscalers reported earnings recently, and we saw CapEx expectations rise across the board. So with the $9 billion booked, I mean, does the addressable market or opportunity that you see that's attractive out there bigger today than it was when you first started announcing these deals? Or does it give you an incentive, especially coupled with tax reform to potentially ramp up CapEx in the next couple of years into these businesses beyond what you've already announced?

So I think we've been pretty clear that connecting data centers for the hyperscalers, that market is Phase 1 of what we see as a 3-phase evolution for AI. It's about the hyperscalers saying, gosh, we need so much more compute. It's about building net new data centers and connecting them. We're doing that in parallel. We're building the routes in parallel with the construction of the data centers. The second phase is when enterprises start actually consuming AI, and that's where you're seeing the proliferation of data centers across the United States, many hundreds of data centers being built over the next 3 or 4 years. And we're in conversations with those companies as well to connect them. That's a different nature and size of contract, obviously, than the hyperscaler. And then the third piece of this is we really feel like there'll be yet another expansion required in the physical network once AI is really talking to AI. And we're doing a substantial build-out in metros around the country to accommodate AI rings for that very purpose. But the first phase was always kind of finite. And what we're seeing is that we're winning this business. I don't think anybody else has near the amount of deals won and the construction is going well. But once we get them strong up, we're really focusing on the build-out for #2 and 3, which are where the advanced services really come into play and sort of accrue to that grow bucket that Chris just described. Chris, do you have anything to add on that?

No. I mean I think the only other piece that I would add is that I think the current administration has been very clear about the U.S.' need to continue its leadership in the AI space. And that's beyond enterprise. That's also in the public sector domain, and there could be opportunities there as well. So we'll see how that pans out.

And with no further questions, I'll turn the call back over to Kate Johnson for closing remarks.

Thanks so much, operator. Thanks, everybody, for a great call and insightful questions. I just want to close out with a shout out to all Lumenaries, the great men and women of Lumen for tirelessly working to turn this company around. As you heard today, your work is driving material results, and we're just so grateful to you. There's no one that we'd rather play to win with than you. See you all soon.

And ladies and gentlemen, this concludes today's call. We thank you for your participation. You may now disconnect.