Before we begin, disclosures are available at the registration desk. For those of you I haven't met, I'm Mike Rollins, and I cover communication services and infrastructure for Citi. We're pleased to welcome Kate Johnson, CEO of Lumen. Kate, it's great to see you.
Thanks.
Thank you so much for being here.
Thanks. It's always great to be with you.
I think back, it was our January conference 2023, I think, where we first met. You had just come to Lumen.
I was there for a hot second.
Yes.
Yes.
Since then, it's been extremely busy for Lumen.
Over the more recent period, the team and you have discussed creating a new industry category.
Can you unpack that for us?
Sure. Coincidentally, I started in November of 2022, November 7th specifically, and ChatGPT was the first publicly available instance of AI that we could all download to our phones, and that launched on November 22nd of that same month. I think when we talked in January, we were just starting to hypothesize this notion of really pivoting the network in support of enterprise data consumption growth. I think we are there. We have created a platform for enterprise networking for AI. I think while none of us could see it so clearly in November of 2022, what we have now is people, data, and applications are dispersed geographically. They sit in buildings, they have applications and data sitting in clouds and data centers and at the edge.
Then you add billions of AI agents, billions of them, and each one of these agents is generating and consuming huge quantities of data, and that data resides everywhere and needs to be shipped everywhere. The new problem that we are solving for customers is they have the need to ship data from anywhere to anywhere in real time to fulfill their AI ambitions.
In order to do that, you need three things. You need a massive physical network, you need a programmable network, so a digital platform sitting on top of that. The cool thing about ours is it is agnostic to whose fiber is underneath, so we can leverage our great network, but also other people's. Then you need a connected ecosystem because what you are connected to really matters. It is not just the buildings, the edge points, the clouds, and the data centers, but also you need to be connected to other technology companies. We have got all three working together, and it has given us a growth engine.
I want to dig into this a lot deeper. Just to start off for background, when I think about Lumen's core competency in business and wholesale, I think a lot about Level 3 and what that brought to the table for your company. I think about it, as you mentioned, it is like some combination of business locations and data centers, and there is a variety of products used to connect all of this together. It used to be called Frame Relay, ATM, internet transit, then MPLS. Now it is lit fiber, Wavelength Services, dark fiber. The question is, as you look today, the Lumen of today, the Lumen of tomorrow, what you are selling-
to customers, is it a different menu? Is it different-
Yeah
pricing models? What should we take in terms of what you're actually selling to these customers?
Everything is changing. The classic way of connecting and transporting is becoming digital and on-demand. I want the ability to fire up the circuit and pick my bandwidth, and pick my security levels and things like that, but I also want to orchestrate it. It's all of connectivity and transport, just like the past couple of decades, but it's this new set of capabilities which is unique to us as a carrier-
which is the orchestration layer.
Which says, I need to be able to manage policy, I need to be able to control the data flow, I want to pick where it goes and when it goes there, and to set all of the attributes of how big it is, how secure it is, how fast it is along the way. What that enables us to do is go. We used to sell physical circuits. How many you want to buy? We worked with procurement. They set a price and a bandwidth limit, and said not to exceed X and Y. Now we are really selling outcomes. If you think about hospitals' need, for example, real-time diagnostics across their systems.
Banks need real-time fraud detection services across their branches. Retail companies need real-time inventory management across all of their warehouses to get the right product in the hands of the right customer at the right time. You cannot do any of that without AI, and you cannot support AI without a programmable network. We finally have a seat at the table with the CIO and the CTO to have a conversation about delivering business outcomes, which is very different than where we have been in the past.
When you mention the orchestration layer-
Yeah
is that what you really mean by a programmable network?
Sure. Programmable really is defined by a couple things. Number one, can I see it through a single pane of glass? Can I see it?
On your screen?
On your computer screen? Can I look at the network and see the whole thing? Where's the circuit? What are all the qualities of it? What bandwidth is it? How's it performing?
What security services do I have on it, et cetera. Can I see it on a computer screen, and can I manage, provision, and support it without actually having to physically go do intervention?
Okay. How disruptive is this in terms of a shift, and where do you see the marketplace relative to where you're going?
It's incredibly disruptive on a bunch of different fronts. The first thing is, it's disruptive from a business model perspective. Let's talk about old telco, point-to-point, static, bill every month.
Take a couple of months to deploy a circuit, set it up, and you're good to go for a long time. You're not going to get much innovation.
Right? But you're going to have this static route that's there for you if you need it. That's not where we are now. We're saying that AI requires data to be moved from anywhere to anywhere in real time, which is non-deterministic. You can't actually build a physical network with the legacy business model to support your AI ambitions today.
Because you wouldn't be able to afford it. You'd need to put a link into every single building and every single cloud and every single data center. What we're selling is on-demand and consumption-based. We're selling an option to consume these services on our platform, and that's incredibly disruptive from a business model perspective. We're also doing a lot of technical innovation that's disruptive to existing business models. I'll give you two examples. One is colos, or where meet-me-rooms were traditional enterprise connected through these colocation facilities and carrier neutral facilities into the cloud.
Yep.
Tens of billions of dollars of fees to get that connection. When we built out PCF for the hyperscalers, we also worked with them to start to conceive of a brand new architecture for cloud connectivity.
Our cloud on-ramps bypass these colocation facilities and go directly into the cloud. So it bypasses that fee, it's more secure, it's higher capacity, and it's more cost effective. That's one. How about another example of network innovation to disrupt the marketplace? As people, data, and applications geographically dispersed, you have this proliferation of these colos as well as firewalls, right? Every time you have a person that needs to access your network somewhere, you have to segment that part of the network and make sure that you have local policy to protect that person's data and also to protect the company from the motions of bad actors as well as whatever that person is consuming on the network. When people keep dispersing, you've got more and more proliferation or sprawl of these firewalls, and they all need to be managed locally from a policy perspective, right?
We now have a platform that allows us to manage policy centrally with a single cloud service rather than locally across hundreds or sometimes thousands of different firewalls. One service centrally cloud provisioned versus hundreds or thousands of physical interventions locally is a huge economic shift. We save tens of millions of dollars of hardware for our customers, and we can deploy things instantly, which is obviously the way of the world these days. So it's not just a business model disruption, but it's also technically we continue to innovate. I've got a bunch more examples, but I'll leave it there.
No, this is great. Just centralizing security essentially is what you're describing. Through software-
you're able to centralize the security for multiple business locations, customer access points, and so you're delivering the same quality, reliability, security-
I would argue better, but yes.
better, but from an easier point to manage.
It's more efficient, it's faster, and it's more secure. Mike, I never understood when I was working for Microsoft, leading their U.S. business, I could never understand why network wasn't cloudified. Compute and storage were cloudified. We could do all these things with compute and storage.
But never with networking. I couldn't understand it. Then when I got into the industry, really, telco had seeded innovation to all of the tech companies outside of the network, and Lumen is bringing all of that innovation back into the network.
As I think about what you're describing, it feels to me like the reason maybe network's been tougher is because there's such a physical aspect to it, right? Where cloud compute, you could locate it in different places and get similar outcomes.
I don't know. With digital twin technology, we can instantaneously create a digital network. That's why I never really got it because have you seen chips? They're physical too.
Yes.
Right? Storage, compute, physical. But in our minds, all digital.
You can actually go find that hardware somewhere. The fact that there's a physical network, yes, it's geographically dispersed, and it happens to be in the ground, which has its own set of challenges, et cetera. Sometimes it's aerial. But for the most part, digitizing the network was logical, and it's absolutely essential for AI. We cannot achieve our AI ambitions in this country at a global level without a digitized network.
When you think of the Lumen value proposition-
to customers and then ultimately to shareholders, how do you rank the importance of your physical network versus your software and the technology that you're using to now in the future deliver network. Maybe there's an element of this that's people and resource.
Yeah.
How do you think about what your greatest, most valuable assets are?
Back in the day, before we started disrupting the industry, it was just a physical game.
You always wanted to win the build. You always wanted to have the physical infrastructure. Since we've created a programmable network, we are now agnostic to the underlying fiber itself and to any cloud or provider. You can run our services across, which is great, across anybody's fiber, which is great because there's this notion of diversification. Customers want to have multiple routes to get to the same thing, and they tend to do that through separate carriers. We can do that for them quite easily. What's more is we can orchestrate and make AI work on anybody's network. Back to your question. It used to just be table stakes. I got to have the fiber to win the service business.
Yep.
That's no longer the case. Lumen can operate globally now, which expands our TAM massively. Probably more importantly, we do have the world's biggest and best network. That's my opinion. I think that it compounds our value in North America for sure, because I can build on-ramps, because I've partnered with the cloud companies to build Lumen Multi-Cloud Gateways so I can ship data from and to any cloud and in between clouds really, really well. That's how we think about it moving forward, is that sometimes I want to have the physical link. I want to have the physical link because I can embed incredible technical capabilities into it to do things that others can't.
Since I've been with the company, when I started, we were 12 million fiber miles strong. By the end of 2031, we will be 58 million fiber miles strong. So almost quintuple what it was. That's to serve the hyperscalers, but also we've reserved a very large percent of that network for our enterprise business
which is growing now that AI is helping companies transform.
I want to get back to that opportunity in a moment. But before we do, maybe just taking a step back and as you think about this transformation, if you could give us an update on the multi-year journey to return the company to positive financial growth, revenue
Yep
EBITDA, free cash flow.
We're right on schedule. We promised stabilizing free cash flow. Check. Got that under control. The second thing is we promised EBITDA growth in 2026. Check. On target for this year, which we're super excited about. Then third, the third step of that was returning to revenue growth. What we've committed to, and we see a path to do so, is to return to positive revenue growth in the business segment in 2028. On target.
Coming up to the PCF opportunity and the hyperscaler opportunity-
market's very focused on this. How important are future deals? I think you were at $13 billion?
Yep.
Contract value. How important are these future deals, and do you have an update on where you are or where that's going?
First things, how important are the deals to our future? We have zero PCF business based into our long-range plans. We don't forecast it. It's very lumpy.
What that speaks to is how strong our strategic revenue growth is. We don't need the PCF deals to transform our business anymore. We did at the time that we did it, that we did those deals, the first $13 billion. We really needed that cash injection.
It helped us transform financially. We were able to recapitalize. We completely transformed our cap structure. We simplified from three filers down to one in combination with selling fiber to the home to AT&T.
Yeah
Really turned the balance sheet in totality from a liability to a very strong asset. We're not there anymore. We don't need the PCF deals in order to fund future growth. The real opportunity for the company, the one that delivers higher margin, higher quality revenue, is the digital platform piece of it. When we think about doing more of these deals, they've got to meet certain criteria. It's basically builds are not really something that we're signing up to do. We will do over pulls of our existing conduit because we can hit margin metrics that are accretive, and we're pretty committed to delivering a mix shift to digital that delivers margin accretion to our shareholders in addition to revenue growth.
Is there an element of this, you mentioned earlier that one of the things that you are doing is you create these PCF or have created these PCF deals. You are creating this connectivity. You are reserving extra capacity, whether it is to sell to enterprises, whether it is to connect to these clouds directly so you have got control. Is there a magnetic effect that having more of these customers, so it is beyond just like a return on capital of this specific deal, but there is this evolution of you just want to have all the strategic customers that could be winners in the future because that is going to pull through all this enterprise and the ecosystem?
Once they plug into the Lumen Fabric, they are in the Lumen Fabric, and they have access to all of the capabilities. When I talked about the financial transformation that the PCF allowed us to do, that is also where the source of all of our innovation came from. We launched Network-as-a-Service. We co-developed on-ramps with all of the hyperscalers. We built Lumen Multi-Cloud Gateway. We garnered enough extra cash on hand to go buy an orchestration platform called Alkira. All those capabilities came from that initial tranche. Now that we have all of the biggest companies in the world plugged into the network, we are continuing to innovate with them and to work with them to say, "How can you take advantage of our network to grow your business?" That is the magic. I say I came from Microsoft.
Any company or customer that could help us accelerate cloud consumption was one that we wanted to be a part of the ecosystem. It is the same. As Lumen builds this platform, we know that the way to ingratiate ourselves with those cloud companies is to accelerate consumption of their platforms. We do that because we have bigger pipes. They are more intelligent, they are more secure, and they drive acceleration.
You mentioned with the enhanced financial flexibility.
you went out, you bought Alkira. We were talking about some of the orchestration cases earlier. What did this acquisition do to turbocharge what you're offering to customers, and what's the value that they're going to see now from having this added capability?
So think about it this way. We bought an orchestration platform that allows us to move data from anywhere to anywhere, cloud core, data centers, edge, buildings. It gave us access to two things, $47 billion of TAM.
Right? Because companies need the ability to move their data from anywhere to anywhere, and it gave us access internationally because it's carrier and cloud agnostic. There are so many different use cases, it's almost impossible to can you tell I'm excited, by the way? It's impossible to go through them all, but think about Extranet. A direct connection between technology companies happens all day long. We can do this with our private network and the orchestration capability. Moving data from cloud to cloud, we do that exceptionally well. And again, firewall and colos sprawl. It allows us to deliver centralized cloud services that eliminates the need for local policy setting and local intervention. So it's a brand new set of capabilities. It's capabilities that are sitting with the CIO, the business decision maker, the CTO. We are now out of procurement. We don't sell physical links anymore.
We sell business outcomes. Huge transformation for us, huge transformation for our customers, and something that's going to take time for us to build the muscle and for them to see us in that way.
So maybe just to double click on that just for another moment. So you're changing who you're engaging with in the organization. How far are customers along in this journey? So what percent of the customer interactions have now moved to that level versus that's where the puck is still going?
Yeah, it's a great question. So I would say that the majority of enterprises are still thinking about network from a procurement perspective. But what we're seeing in large enterprises, and I give you a hospital, a retail company, and a bank, where we see enough repeating pattern where those are industries that we're approaching as such.
They're no longer individual. This is a play that we're running. And we've graduated from procurement to really network buyers, where they're having to do a massive network upgrade in order to fulfill the ambition to the various business decision makers on their various AI use cases. The next step is one that we're doing in partnership with other technology companies. Take Commvault, for example, backup and recovery for a security breach. How fast you can reinstate your cloud depends on how quickly you can move your data from one place to another. And to do that, you don't just need big, fat, dumb pipes. You need really big digital pipes that are intelligent and secure to allow that restoration to happen instantaneously.
Companies like Commvault are starting to recognize the true differentiation that our platform provides to their customers, and they're bringing us with them, and that's the connected ecosystem at its best.
When you're describing that example, is the thought that a customer in a particular building gets wiped out?
They need to recover all their data. If they have a fiber pipe that's managed digitally, in that moment, it could scale up to a much higher bandwidth beyond what the customer would normally pay. The customer might only need, I'm going to make this up, like 100 mbs,
for that location. But to get the gigs and gigs of data, and quickly,
Yeah
what you're giving them is the ability to flex that up, get the recovery more quickly.
On demand.
On demand, and go back to their normal service. You pay for the normal service and the optionality of being able to have that.
Exactly right. On demand and consumption based. Not to get too crazy, but talk about data sovereignty, digital sovereignty, operational sovereignty. Once you start moving data-
you start putting sovereignty at risk. You have to have a platform that allows you to do that and a private interconnection underneath, and that's why the platform is so valuable.
You mentioned also that you're agnostic to where the pipes come from. You have, of course, this big network.
Yeah
You're leveraging. It's very common for many, many years for telecom companies to sell bandwidth of other companies. One of the companies that Lumen owns, tw telecom from years ago, the management team would coin this as co-opetition. How much of these access pipes that you don't have
you're procuring, paying another telecom or cable or someone else for, versus how much of that is bring your own bandwidth and then you just manage it for the customer?
I think in our traditional business it's not quite half and half, but we expect the same composition because who owns the endpoint, the access point? Now we can just run anything on them with our digital capabilities. For example, we've talked about a very large financial institution that just standardized on Lumen Fabric. The whole thing runs on AT&T's fiber. They're using our platform on somebody else's fiber.
Because the services that we provide are where the value is.
The services that you're providing is this flexibility, security-
Orchestration
orchestration.
Control, right?
The ability to see everything in one-
Single pane of glass to manage the whole thing remotely.
There's another concept that I think the team's been discussing, which is this digital discoverability of DIA ports. What does that mean and why or how is that a strategic unlock for Lumen and your customers?
It's a massive strategic unlock, one that I'm, again, super excited about because DIA, analog or traditional connectivity services, right? It's an internet product and it's a very popular one, and it's one that's still growing, right?
It's access, for those less familiar, access to the public internet.
That's correct. You can also use it to get to private as well.
Right.
Right.
Right. That's how these SD-WANs and these VPNs, right? You use the internet to create private connections.
Okay.
Right?
Think about our install base of DIA circuits. We've got more than $1 billion of revenue and tens of thousands, maybe more than 100,000 ports that are in customer locations operating those live capabilities today. These are in-production circuits.
The exciting thing is, through our platform right now, we can see those ports. And what is the breakthrough here strategically, and a growth unlock, this is all about growth, is that we are now able to allow a customer to use a single pane of glass to manage that port. And you say, well, why is that interesting? Because the platform can take a traditional port and make it digitizable, which means that that customer can remotely see it, manage it, provision it, put it in life, put it out of life, change the bandwidth on it, change the security settings on it. They can manage it digitally. So it's good for them. They get more capability out of what they already have.
What's more, is we can now sell into that customer remotely without rolling a truck. And what we can say to them is, "I see you have a 1 gig or a 10 gig." And now this is not the case for every single one of these customers because it does depend on the port that they have. But we can convert that port into a Lumen Fabric port, which means instead of carrying one service like it traditionally did, it can carry thousands of services. And instead of being fixed at some bandwidth of a gig or 10 gig, whatever, we can increase their bandwidth dramatically, and we can give them all of these orchestration services and make it available through that once analog circuit that's now digitized. And any time we sell a service on top of what's already there, it's at 80% margin.
So it's great for our shareholders. It's great for customers, and it basically takes a giant install base and says, "Let us help you get ready for AI in a really, really efficient way," unlike any other telco sales motion.
What's the experience of when you're upselling these services? What have been the most popular upsells so far, and do you see that evolving where you've got some new services coming out or they're out and they're just starting-
Yeah
to sell that could be big?
If you think about the motion you start with
Yeah
basic connectivity and transport. Then you are like, okay, well, we have this on-demand thing, and they are like, "Oh, let me try that." In that basic connectivity space where it is people in buildings connecting to cloud, that market grew at about 1% annually. If you annualize our last quarter's growth rate, we were up over 200% growth. There is a high demand for digitization of that basic capability. Then they are adding things on it and saying, "Hey, can you give me a security service like Lumen Defender?" Or some DDoS. Now, can you help me connect to multiple clouds? Can I put in Lumen Multi-Cloud Gateway? Because I have some data in Azure that needs to get over to Google Cloud Platform and back. Then they say, "Hang on a second. I need help with direct connects to technology companies.
I need help with firewall sprawl, and I want to manage everything centrally," and the whole set of Alkira services on top of that. We have an incredibly rich set of services that take everything from basic connectivity all the way through to control and orchestration of your data from anywhere to anywhere.
Is it fair to say that Lumen doesn't have, because of the history of the company, its fair share of the business and wholesale market, and that this transformation gives you the opportunity maybe not just to get your fair share, but to go beyond that?
In the wholesale market specifically?
The broad business and wholesale market broadly.
In the business segment, I think it was endpoint driven for a long time, and we were really heavy on the transport side and the long haul, and that was the composition. I think you're going to see us basically becoming, I think, the provider of choice for large enterprise at the multinational level.
That's also something that I think is incredibly important to our growth plan, is this ability to elegantly support multinational corporations with their AI ambitions on the global stage, which is something we just didn't have access to before.
So if we come back to the multi-year financial targets that you have, what are the next hurdles, obstacles to clear, or what's keeping you up at night?
What's keeping me up at night? What's keeping me up at night is maybe this lack of awareness of everything we just talked about on the digital side. It's the lack of understanding of how high the quality is of our strategic revenue. It is extremely high-quality revenue, and it's more than half of the revenue at Lumen. It's 53% of the total revenue, and last quarter it grew 14% year-over-year.
It's got some PCF in there, but it's also digital, and it's also Wavelength Services and DIA and things like that. There is an awakening at the enterprise level of the need to upgrade networks for AI, and we are incredibly well-positioned. That business is so healthy that it's giving us the opportunity to use legacy as an unlock. While it used to be that we harvest legacy revenue for cash, we are now thinking about that very differently. We're saying, "Okay, let's start to harvest the cost side of it for cash. Let's decommission applications. Let's decommission networks. Let's mine our copper. Let's reduce the CapEx that we invest in that business because it's low-quality revenue.
It's just not as sexy as the strategic revenue that we have and the opportunity that we have. That's what keeps me up. It's like, how do we get the market to metabolize our position?
In our last minute, what is the market getting wrong about Lumen? What's underappreciated?
I think it's exactly that. It's the growth opportunity that we have in this digital market in the orchestration platform and what's on the horizon for us to grow. I think the more time we spend double-clicking on that strategic high-quality revenue side, the better off we'll be.
Finally, how do you define winning in the future?
Look, winning's all about, for Lumen, delivering growth to shareholders, and we're very committed to doing that. We've got a plan to do it. I'm excited about it. But we only do that if we deliver huge value to customers, and we've got the portfolio to do that. I think we become the enterprise networking for AI powerhouse with our platform, and we get others building on it, and that's what great looks like.
Kate, it's great to see you. Thanks so much for joining us.
Yeah. Likewise, always. Thank you.