Good morning, everyone. I'm Sebastiano Petti, and I cover the telecom cable and satellite space for JP Morgan. I want to welcome Chris Stansbury, President and CFO of Lumen. Chris, thanks for joining us this morning.
Oh, great to be here.
I think you have a safe harbor, perhaps?
We do have a safe harbor. It's on our website. I'm not going to try to recite it from memory. Take a look. Obviously, you know, we'll have a good conversation today. I'm not making any comments on, you know, forward-looking stuff.
Good. I don't want Jim to get mad, so I just want to make sure.
Exactly. Thank you for that reminder.
Yes.
'Cause I always forget, and he does get angry at me. Yeah.
Lumen has had a busy start to the year. You closed on the fiber to the home sale to AT&T, just a couple weeks ago announced the acquisition of Alkira. Let's start at the top. As you look at the rest of the year, what are your biggest priorities? How do you see those priorities fitting together to set up Lumen for success long term?
Yeah. As we gave our annual guidance, we said this is the year that we're gonna inflect EBITDA, and we are going to do that. We remain committed to that. It's a big step forward for us, ultimately that leads to revenue inflection in the next couple of years and growth thereafter. We feel very good about that. The sale of the fiber to the home business to AT&T was very strategic for us. I mean, it's a space where convergence is real, and it's a space where others are much better suited to grow that business. When you look at, you know, the Alkira announcement, I think that really speaks to where we have a right to win and where we have an advantage.
Alkira, once we close that deal, marrying that with the physical network we have really opens up enterprise networking in a way that has never existed before. We're seeing a lot of interest and traction from customers because it allows us to deliver what is a fully programmable enterprise network. It's not about just the fiber anymore. It's not about point to point. It's about the ability to program movement from anywhere to anywhere, and we're gonna be able to do that in short order.
Great. I guess just thinking about the digital transformation and, you know, NaaS adoption. At the Investor Day, you talked about expecting linear digital revenue growth, but also, you know, again, leaving the door open or to a potential J-curve. With port growth running around 35%, what are the real world signals that you're watching that tell you the J-curve is actually starting? I guess what do you need to have in place operationally so that the growth doesn't outpace?
Yeah. Good questions. Again, what we said at Investor Day is we're gonna plan linear.
Yeah
Because we don't know any better. We did expect there to be a J-curve moment. We're not calling that now, but I would say that certainly the quarter-on-quarter growth we're seeing in customers' ports and services per port in that 30% range is very encouraging. To your question on operationalizing that, there's an enormous amount of effort going on inside the company to shift resources from the old to the new. The ops team is all over it. We continue to ask them to plan for more so that we are ready, and we don't delay the adoption of those NaaS ports any longer than we have to. We're very encouraged by that. That again, if you think about networking in network language, right?
A lot of that is north-south, right? Think of that as premise to a location, right? It could be another on-prem location, it could be to a DC, it could be to a cloud. What Alkira brings is the east-west traffic. That's where the vast majority of the TAM is. The north-south traffic is very commoditized, and it's important, but it's not where the growth is in dollars. The growth in dollars is the east-west, the ability to move data between clouds, between DCs, never have it touch a premise, and do that in a fully programmatic way in the power of your own hands.
When you bring our strength in north-south and those NaaS ports to the east-west, with Alkira, and the connection point really is our Multi-Cloud Gateway that we've announced, that's where we really unlock this.
Great. I think you described Alkira as accelerating the consumption flywheel.
Yeah
Which you kind of alluded to, and meaningfully completing the architecture for, you know, where you want to take the platform. How should we think about maybe the integration timeline? What gets integrated first? Are there investments required? I guess when should we see these benefits showing up in revenue in a material way?
Obviously we gotta close the deal first. We think that'll be sometime in the third quarter. You know, as you just said, the reality is the bulk of what has to be built to enable this is already built. It's gonna be integration light. We're actually very focused on making sure that the innovation engine that exists at Alkira is preserved. You know, that makes the upfront a lot easier. It's really about integrating with the sales force and how we approach customers. Part of what we're dealing with here is we're building something that hasn't been done in networking before.
As we spend more time in the C-suite, and they realize the capabilities that we have, or will have, and our ability to execute against that quickly, there's enormous excitement. The shift that is going on, I mean, I think if you look at enterprise networking historically, it's gotten a bad rap because it's been very kind of telco-centric, declining price per bit. You're selling to the procurement department. Those days are quickly coming to an end, and the reason it's shifting is AI will not work with latency, and it's not about the cost of the wave. It's about the total cost of ownership, and when you're running GPU clusters that cost $2,000 an hour to operate, that's what matters.
Your ability to move data from anywhere to anywhere to keep those GPUs spinning, to allow your AI agents to communicate with a customer in real time by sourcing information that is getting more and more dispersed, that's the math that matters. The big piece is really gonna be the education at the C-suite that's already underway, and I think that's probably the toughest leg of the journey, but we feel good about the plans that we've got around that.
Great. Then one of the other things I think you brought up was about, you know, $100 million-$200 million of CapEx savings.
Yeah.
I guess just I mean, where does that come from, I guess, in practice? I guess maybe just help us think about timeline there.
When we did our Investor Day, inherent in the CapEx estimate that we had was development work to build the software platform that Alkira frankly has already built. In acquiring Alkira, we estimate that we'll save $150 million-$200 million in total over the next few years. What Alkira does is accelerates that software delivery, the ability to truly have single pane of glass that you can control all of your network flows from anywhere to anywhere, literally every cloud, one network. It's carrier-agnostic globally, it'll allow us to do that day one. This is an acceleration of a couple years.
All right. Just sticking with east-west for a minute here. Zooming out, I guess, to the market, you previously sized the east-west opportunity, I think, at about $11 billion, right?
Yeah.
After Alkira, you see that TAM grow as, you know, maybe I think $58 billion.
58.
Growing at about 20% compound annually. I guess, who do you view as the real competitors in that market? I guess what gives you confidence in your ability to kinda take, you know, take share and, you know, participating in the growth there?
There are competitors at different points in, you know, in that total cycle of data movement. There's no one pure play competitor. I won't name them, but there are companies that provide network access overlays. It's a screen of glass. What they don't have the ability to do is provide a level of service as deep into the network as a company that owns the network, right? When you take Alkira's capabilities, you take our Multi-Cloud Gateway, which is what? It's the ability to literally connect. We have direct cloud on-ramps, others have them too, into all the major clouds. Multi-Cloud Gateway, though, allows you to move data between those cloud environments and between DCs. It's extraordinarily powerful. There is no pure play competitor.
I think the beauty of where we are is you've got this really unparalleled physical network in North America. We can partner with people globally who can provide that kind of service in other areas of the world. If somebody wanted to be a pure play competitor in North America, it would take a long, long time because, one, they'd need to build a physical network that has the depth that ours has. I think what we've seen over the last couple of years in terms of the differentiation of Lumen's network, that's really exemplified by the PCF deals. No one's been able to keep pace. Yes, there are other people building now, but no one has been able to keep pace with what we've done because we have capacity that no one else has.
You take that footprint, you digitize it, and Alkira is a big piece of that, and you've got something, frankly, that doesn't exist anywhere else.
Sticking with PCF for a minute here. I think you've said you've signed $13 billion or nearly $13 billion in deals so far.
Yeah.
You've noted that your hyperscale partners aren't talking about a bubble. They're talking about, you know, they're asking for more capacity faster. In many cases, the contracts include incentives, I think, tied to speed, right?
Yeah.
Speed to market. From where you sit, how much incremental opportunity is there beyond what's already been signed?
There's definitely more opportunity there. I don't wanna size it. I would say that it's actually, it's something that as time goes on, we're going to be really thoughtful about, right? Because the conduit that's in the ground has a lot of value because it's, it provides customers with the ability to deploy faster than constructing from new. We can sell a resource that the one resource they don't have, which is time. That obviously doesn't last forever, so we wanna be really thoughtful about that. I think what's interesting is when you think about the strategic growth opportunities here. We actually don't have to lay one more mile of fiber to grow in a really explosive way because Alkira unlocks all of that. Will we build fiber?
Yes, of course, we will, but we're gonna do it in a way that makes economic sense for our investors, because the objective isn't fiber anymore. That's old telco. The objective is single pane of glass, complete control, the ability to move data from anywhere to anywhere, and we will have that with the closure of Alkira.
An interesting topic, and I spoke with, you know, your Chief Technology & Product Officer, Jim Fowler, recently. I think he made a comment to the effect of in some of your deal conversations around PCF, you guys say no more than you say yes.
Yeah
To deals, which I thought was interesting. Are you seeing deal structures evolve or conversations around economics evolve at all? 'Cause one of the points you've always made, and Jim also made, was economics is what drives a lot of the PCF considerations, right? Maybe help us think about, you know, how those conversations have evolved recently.
I would say structurally, the deals haven't changed. you know, I think the value of a specific route can change depending on what capacity looks like. The underlying conversations haven't changed. If anything, that makes it easier, frankly, because there's a lot of time, you know, in legal, if you will, getting the contracts right on both sides of those agreements. Now they've become more regular course. I think today the conversations that I'm involved in are really focused on execution and how quickly can we go. I mean, this is, you said it really well. This isn't about an AI bubble when you talk to these customers. It's about what's coming. The demand is real.
Again, they're building to a demand signal that's two and three years from now. Today they're asking us to go faster. I think that speaks to where the demand will be as we go forward.
Got it. Any update, as we think about from a proprietary route perspective, you know, still again, a lot of the same considerations, I guess? It's nothing new to kind of call out there.
No, nothing new. I mean, we obviously announced a new, a new route, from Minneapolis, to Seattle. That's a corridor that, as you can imagine, has a lot of demand. That's something that, we've been working on for a while now. It's been part of our capital plans. There are others that we're working on as well. We keep that close to the vest.
Okay.
That gives us the opportunity to sell into those as well. Again, those are good examples of high density, meaningful routes that we can monetize in a very favorable way for our investors. We'll build those routes. We're not gonna build routes so that we can try to drive the price of Waves to the bottom. We'll leave that for others. The other thing that's interesting is as we focus more on the east-west traffic flows, because that really is where all the value is, because customers are gonna be able to consume that through one pane of glass, our belief is that we will very likely take share in the north-south, that more commoditized space, because we're gonna be really easy to do business with.
It'll truly be point, click, I need connectivity from here to here. Okay, I have it. It'll be up and running in a very short period of time. We'll see how that plays out, but that's certainly our hypothesis.
I guess just sticking with Waves, for a sec here. There was a clear call out that strategic Waves, I think you know, what you defined as 100 Gb or greater.
Yeah
Were a standout driver in the quarter. There was also a mention of material uptick in RapidRoutes adoption.
Yeah. Yeah.
I mean, what's changed in terms of customer demand or in your product that's driving that, you know, momentum?
Two things. I think on the, on the supply side, we've now been talking about it for over a year. As we've been deploying these large fiber networks for hyperscalers, we're also pulling fiber for ourselves. In two specific areas that we've highlighted are RapidRoutes. These are clusters of 16 markets at a time, and it's basically on-demand 400 Gb connectivity so that customers can be up and running really quickly. We've got the first two clusters done. The third one, I think is close to being done. We've also done a metro expansion so that in the dense metros, there's more capability there. That's the supply side.
The demand side is that, again, I think we're starting to see the early stages of inference where enterprises is starting to consume AI in a more meaningful way. Again, latency matters. The example that I share is just think about it. All of us have, in one way or another, already had some kind of an interaction with a customer care agent. What would that experience be like if it took 30 seconds for that agent to respond, right? either through chat or voice. It would be horrendous. Remember, that agent is answering questions by going and looking for data, and that data could be anywhere. It could be in Texas, it could be in Virginia, it could be in North Dakota. It could be in all of those places.
It's putting together its response in real time so that that customer experience is a good experience. We have that today where customers can get information on inventory or on an outage. Outage is a really good example, right? Outage just happened. That agent is trying to answer that question with real-time data, and we don't know where that data is. We know it sits in a cloud, but I couldn't tell you physically where it is. The latency is what matters and that's why I think we're starting to see an uptick in the demand for these in these kinds of connectivity.
All right. Maybe, you know, touching on some other areas here. I think one of the more interesting points from 1Q was, you know, was the call-out on, you know, cannibalization. Yeah, I think you said that NaaS adoption is not cannibalizing the legacy-
Yeah
revenue as much as expected. I think over 60% of existing customers, existing customer NaaS customers are choosing to expand rather than simply just migrate. I guess what's driving that behavior from either a product packaging, sales motion, you know, customer economics perspective?
Yeah
Do you think it's durable?
It's a really good question. I think there's more hypothesis there than fact 'cause we're at early stages. I think our running hypothesis is customers wanna make sure that they're comfortable with the new before they let go of the old. Do we think that it's permanent? No. I think that's foolish, and frankly, we don't want it to be. We want people to adopt the new as fast as possible. We'll take the fact that they're gonna run the old with the new for a while. That's a great problem to have. I don't think it is durable over time. I think you'll start to see customers as they experience NaaS wanna run with it more permanently.
The flip side of that is that in consuming NaaS, they will be consuming more services. We're seeing that service growth. Again, remember, what is a NaaS port? It is a port that allows us to deliver all future services digitally. No more truck rolls, right? No more fixed infrastructure. It's delivered as software. The faster that they start to consume those ports as their daily motion, the more likely it is that they'll start to consume more and more services on top of that's the scalability that we've been looking for.
Got it. Then just closing the loop on Alkira. As you think about, does it help you sell more into the same customers? Does it help you expand into new segments? Is it about improving retention, wallet share, all of the above?
It's all of the above. I mean, look, Alkira, as we said earlier, it really, once we close, is the fast path to where we ultimately want it to be. There's more innovation, though, that can come behind that. Again, we can use fancy words like programmable network, but let's just talk about what that means for a second and why it's important. Networking has always been just the necessary evil, right? The reality is, in today's world, it starts to become a vehicle by which you can unlock additional value. Think about energy, right? There's a lot of conversation around energy.
Well, if you've got a bunch of data that's headed to Virginia to be processed, and again, GPU cluster, $2,000 an hour, and you reach an energy limitation in Virginia, and that data is just sitting in a parking lot waiting to be processed, that's huge cost. What happens in a world where you've got GPU capacity and energy capacity in North Dakota or Texas or somewhere yet to be determined because people continue to build data centers? What happen if the network could automatically repair itself and reroute those workloads to where there is energy and GPU capacity? That's an enormous unlock for enterprise. That's the network that we're building. That's the network that Alkira will help us deliver faster, and that's the network nobody else has today. That is huge, huge unlock, that's why we're so jazzed about this.
Great. Shifting gears to 2026 guidance expectations and EBITDA. I wanna get a little bit more color, I guess, on some of the puts and takes around the, you know, EBITDA guidance for the year, which you reaffirmed.
Yeah.
The first quarter was stronger than anticipated, which implies a, you know, pretty big step back or step down in the back half of the year. Just help us think about the puts and takes that we should be considering, you know, to help understand the EBITDA trajectory for the balance of the year.
Yeah. It's, we've had this question a lot since earnings. Remember, in first quarter, a few things that you need to adjust for. We sold the fiber to the home business halfway through the quarter. We also had one-time revenue, high EBITDA for publicly disclosed state of California that doesn't repeat itself. Those two things combined are about $60 million. You've got this legacy thing that we just talked about, where legacy ran a little hotter. It's certainly not something we're gonna plan for.
I really think you've got to adjust down Q1 for those kind of items, and I think you get to a number that's a lot more reasonable in terms of run rate, you know, the 770, 780 kind of run rate. I think that's what we'd see as baseline as we go forward. Now, what we don't know yet, and we haven't changed our annual guidance as a result, is when will Alkira close and how quickly can we start to monetize that? That's what we're working on right now.
I think there's also some seasonality we need to kind of keep in mind, right, in the third quarter.
Absolutely.
Right? Okay.
Yeah, yeah. There's a lot of construction work and whatnot that's done in the third quarter because of weather and whatnot.
Got it. You know, underlying a lot of this is your cost transformation program, right? You hit $400 million run rate in 2025, exiting 2025 rather, and you're targeting, I think it's $700 million exiting 2026, and then ultimately getting to the $1 billion level in 2027. Maybe help us think about what are the next major cost takeout, you know, cost work streams that are coming out, I guess, and where do you see the biggest incremental savings coming from within the program?
It's really, it's across the whole company. I would say that, you know, again, we have, as a lot of folks in the space have a lot of old IT systems. We actually just launched the final phase of our ERP, which is huge to have behind us. Team did a tremendous job with that. Ultimately that allowed us to turn off, I think, what was in the neighborhood of 30 - 35 different GLs. The second phase now, that was first phase. The second phase is procure-to-pay, which will unlock more value, right, as we go forward. We still have work to do around, you know, CRM and whatnot, so there'll be savings in that. Operationally, we continue to drive savings.
With the sale of the fiber-to-the-home business, the remaining consumer business that we're managing for cash is being absorbed into our enterprise ops team. One management structure there. More savings there. You'll continue to see efficiency across the network itself as really being the core driver, and that's everything from, you know, real estate and utilities and whatnot. It's also gonna be labor efficiencies as we get better at what we do.
Got it. You know, is there a credible path to exceed the billion-dollar target? Is the focus more on execution certainty rather than trying to stretch that headline number?
We, we are very confident in the $1 billion. We'll see if we can go further. The answer is go faster, go bigger if we can. There's a lot of focus on that.
Okay. That's great. On free cash flow, you raised the 2026 guidance to $1.9 billion-$2.1 billion. There's about $729 million of, you know, fiber to the home proceeds that float.
Yeah
Into OCF. If we strip that out though, how should we think about the organic free cash flow growth in 2026? I guess, what's the shape of that trajectory, you know, as we maybe look out?
It's.
Yeah.
It's still gonna be spiky because of the PCF flows that move around quarter- to- quarter. I mean, again, the headline messages are that all in we're generating, to your point, organically some great cash flow this year. Over the next five years, the financials we laid out at Investor Day, which were pre-Alkira, were fully funded. We should see leverage over the next five years come down into the, you know, low to mid threes. A lot of that at this point is gonna be driven by, frankly, EBITDA growth versus absolute debt reduction. The capital stack is in great shape. We're just finalizing a few things now, the reality is that should largely be behind us by the time we close this quarter.
Okay. That's great transition. As we at the Analyst Day, you also talked about, you know, organic growth first, then inorganic, then debt reduction, and then finally buybacks.
Yeah
As your capital allocation priorities. as you just said, you know, now that you're, quote, "fully funded," I guess, what are the milestones you wanna hit or what we should be thinking about from a outside looking in perspective, what should we be thinking about before capital returns begin? I guess how should shareholders think about potential timing ?
Yeah. I think back to those priorities, I think we actually just did that with Alkira, right? We paid cash for that. Again, when you look at the CapEx that's avoided, we think that acquisition cost us on a net basis somewhere, call it, $275 million - $300 million all paid for with cash. The jobs number one, two, three, and four are get to revenue growth. Again, what you're seeing inside of Lumen today and what you're seeing in our results is a revenue performance that is still declining but dramatically better than our competitive set. Everything that we can do to accelerate that return to growth is what we're doing first.
To try to give an estimate on time in terms of when we would start to return capital because we, you know, we think we've exhausted those growth avenues, it's just too early to call that, especially with Alkira in the mix. I think if anything, our opportunity right now is to hopefully pull in that point of inflection on revenue sooner. You know, when that is, hard to say at this point. We had said that revenue would inflect on the enterprise business in 2028 and total Lumen in 2029. You know, once we close, we'll try to give a perspective on what we think that is. All of our energy right now is on how we can light that up as quickly as possible as soon as the deal closes.
Maybe on the other side of Alkira, we could get a revision or maybe updated viewpoint in how you're thinking about the revenue trajectory?
Yeah, and yes. The answer, yes, but we're also gonna learn as we go. I mean, again, we're creating something that hasn't been created before. The good news is I think we can look to some of the growth curves of things like cloud as a reference point. We'll continue to update the market as we move along this journey. I mean, it's super exciting. I think if anything, we are shielding some of our enthusiasm for this because, you know, we don't know how quick it'll go, but there's a lot of internal excitement about this being big for Lumen, and so we're gonna try to make that happen.
Do you have well, do you have a preference for the method of capital returns?
If we got to that point, it would be, I think share repurchases likely. Look, we've made the tough decisions around things like a dividend. I don't think you're gonna see us return to that, you know, at the first possible chance, because the reality is, this is an area, in terms of, you know, networking in an AI world that continues to evolve. Until we've exhausted the investment opportunities that we think drive a differentiated return for shareholders, it's way too early to make that call.
Yep.
Candidly, we don't even know what all those pathways are gonna be yet.
I guess from, you know, great segue, just thinking about Alkira opportunity, right, kind of availed itself. It could be interesting, but there could be multiple paths here. How are you thinking about potential M&A going forward? I mean, you've emphasized in the past, you know, discipline and reasonable valuations, Alkira, you know, fits that framework. As you look ahead, how should we think about your appetite for additional acquisitions? You know, what could be strategic? What could be compelling?
Yeah. I think it would be more things like Alkira, things that further the digitization of the network. Those would certainly be our priority. Again, with Alkira, we're not just buying software. The management team, and quite frankly, deep below the management team, on the Alkira side, are super excited about this transaction because it has the ability to bring their dreams to life. There's an innovation pipeline that exists. There are other ideas that exist inside of Alkira. I think it's highly likely you'll see more coming from that, and it just gives us more organic pathways to grow as well. Look, if there's something else that would further the strategic agenda, we'll look at it. And time will tell.
Nothing on the books right now.
All right. Well, nothing to announce here today, unfortunately.
Exactly. Nothing to announce here today.
Well-
Other than the fact that we're super excited, and we think this is gonna be big.
Well, Chris, thank you, as always for joining us, and thanks everybody. I think that's a great place to end it, and everybody enjoy the rest of your day.
Thank you.