As a reminder, this conference is being recorded on Tuesday, November 4th, 2026. Your speakers for today are Kate Johnson, CEO, and Chris Stansbury, CFO. I would now like to turn the conference over to Michael Reinke, Senior Vice President, Investor Relations and Lumen Transformation. Please go ahead.
Good afternoon, everyone, and thank you for joining Lumen Technologies' third quarter 2026 earnings call. Before we begin, I would like to remind everyone that today's presentation will include forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements reflect our current expectations, assumptions, and projections about future events and financial performance. Actual results may differ materially from these expressed or implied in these forward-looking statements due to a number of risks and uncertainties.
A detailed discussion of these factors can be found in our most recent filings with the Securities and Exchange Commission, including our most recent annual report on Form 10-K, our quarterly report on Form 10-Q for this quarter, and any subsequent filings. We undertake no obligation to update or revise any forward-looking statements made today, whether as a result of new information, future events, or otherwise. Today's presentation may also include non-GAAP financial measures. Reconciliations are provided in our posted materials. With that, I'll turn the call over to Kate.
Thanks, Michael, and thank you all for joining us. I'm pleased to report that Lumen once again delivered a strong operating quarter. Our progress reflects growing demand from customers for a network that can change as fast as their business does. For decades, network planning was a forecasting exercise, and simply put, AI has broken that model. Now customers need to move data from anywhere to anywhere instantly, securely, and without knowing in advance where it will need to go. As a result, demand for network capacity continues to accelerate. Obviously, PCF, or the hyperscalers' private network interconnect for AI model training, carries the majority of AI traffic on our network. But what's really interesting is what we see on our global public internet backbone. Since the beginning of this year, overall traffic on this part of our network has grown 20%.
While AI is still a small percentage of this overall traffic, it has grown more than 1,000% since April, an indication that enterprises are really beginning to dig into AI inferencing. That demand is translating directly into sales growth at Lumen. Total strategic sales in the third quarter surged 30% year-over-year. Strategic wave sales grew 22% sequentially, and we have signed an incremental $700 million of PCF, pushing our total cumulative PCF business to over $13.5 billion. This strong performance helped us deliver 10% year-over-year growth in strategic revenue, which now comprises 55% of our total business revenue, up from 53% last quarter. The industry continues to take note. In addition to winning four Mplify 2026 NaaS Excellence Awards, Frost & Sullivan named Lumen its 2026 Global NaaS Company of the Year and gave us a Frost Radar Visionary Leader Award.
This commercial momentum and industry recognition are because of our three built-in advantages: a massive physical network with direct on-ramps into clouds and data centers, a digital platform that delivers programmable network control, and a connected ecosystem of technology partners that really matter. Our platform puts the customer in control and makes complex networking feel simple, starting with a NaaS port and adding services from there. More bandwidth? Click. More security? Click. The value is a single screen where you can see your entire network, choose what you need, and turn it on right there. Our acquisition of Alkira takes that experience to the next level. Need direct on-ramps to the cloud? Want to move data between clouds? Need a new firewall? Click, click.
Instead of managing each connection and security service separately, customers can tell the platform what they want to accomplish and let it execute on their behalf. Our execution rigor and active investment in all three layers of the Lumen platform are generating measurable results. At the physical layer, we have outpaced our 2026 annual target to deploy 5 million new fiber miles funded by signed PCF deals, more than two months ahead of schedule. We are seeing momentum with neoclouds, including demand for our 400 gig RapidRoutes, deploying with speed that traditional telcos simply cannot match. In fact, new wavelength installs from AI companies in the last 12 months grew more than fivefold compared to the prior 12-month period and drove more than one-third of our new 400 gig wave installs. At the programmable network layer, great brands like Nasdaq and Volvo continue to choose Lumen.
Now with Alkira, they can expand connectivity and control across cloud and data center environments where AI and digital workloads are driving the fastest growth in network demand. An interesting customer that we landed since closing the Alkira acquisition is VUMI Group, a global private medical insurer that is leveraging the platform to deliver a global network upgrade. VUMI turned to Lumen to replace its legacy VPN with zero-trust cloud networking while maintaining secure, always-on access worldwide. The platform strengthened security without adding headcount and enabled a data center exit, simplifying a complex global network so VUMI's team could focus on growing the business, not managing the complexity. Like VUMI, many more customers are choosing Lumen to simplify their networks, which is showing up in our NaaS adoption results. Today, the total number of NaaS customers exceeds 4,000. Active customers are up 24% quarter-over-quarter.
Active ports are up 38% quarter-over-quarter, and active services are up 35% quarter-over-quarter. One final adoption metric: 20% of NaaS Internet On-Demand ports carry more than one service. These adoption results are exciting because they show that customers want to buy connectivity as they do with cloud, in minutes through a platform, with the flexibility to scale as their needs change. But the results also demonstrate a breakthrough that telecom has long sought: operating leverage. Each digital service added to an installed port grows revenue at a much lower incremental cost. That is why earlier this fall, we converged dedicated internet access, or DIA, and NaaS Internet On-Demand, or IOD, into Lumen Intelligent Internet so that we could establish a digital connection with every single DIA customer and port and upsell more services.
Customers now get connectivity that moves at the speed of business, available at more than 10 million U.S. locations. Through Lumen Connect, they can add security, cloud connectivity, and orchestration remotely in minutes without a truck roll, generating revenue at nearly 100% direct margin. Lumen Intelligent Internet brings together a fast-growing IOD customer set with an established DIA base, which combined is more than $1 billion of revenue with over 100,000 installed ports and more than 25,000 customers. That scale puts this combined digital business well beyond the launch phase and makes our growth opportunity very clear. Land as many new ports as possible and sell additional services to all ports, existing and new. Going forward, we will shift away from sharing NaaS adoption metrics to sharing financial performance, reporting this business within Lumen's digital revenue and growth metrics.
Before I continue to the next slide, I want to share some color on our copper decommissioning plan. Higher quality strategic revenue and portfolio simplification are funding our transformation. We made big moves in 2026, selling Fiber-to-the-Home, continuing to simplify our product portfolio from hundreds of products toward a core set of 25, announcing the exit of our voice business, and converging our internet products into a single digital business. Winding down copper is the next meaningful step. The old legacy playbook was to harvest revenue for cash and manage the decline. Now, with a strong, growing strategic revenue base, we can actively and systematically harvest cash from legacy by decommissioning it, redirecting that capital towards higher-return digital growth and debt paydown. In addition to the modernization work already underway across several states, we plan to accelerate copper decommissioning in Iowa, Florida, Nevada, and Utah.
Across our copper footprint, we will continue to work with regulators and meet our obligations to serve customers while stepping back from actively marketing, promoting, and incentivizing new sales of legacy copper services. Chris will share more on the economics of this important work, but here is a spoiler alert. Copper is worth more to us mined than operated. Okay. Turning to our connected ecosystem, we are forging partnerships that accelerate innovation and expand our commercial reach. Together with our partners, we are building towards a clear vision. Intelligent networks have to do more than just move data. They should adapt in real time to energy availability, data residency requirements, physical disruptions, and emerging security threats. That is what we are building at Lumen: a risk-aware network that anticipates change and gives customers visibility and control. Our work with Emerald AI is just one example of that vision in action.
We plan to help customers move AI workloads based on available power, network performance, latency, security, and cost. By combining their power-aware technology with our programmable network, our goal is to automate those decisions and workload moves. That vision extends beyond adapting to today's demands. Future quantum computers could break today's encryption and put important customer data at risk. As we prepare for a quantum future, we're deploying quantum-resistant security through our Fortinet SASE solution while exploring long-distance quantum connectivity with The Ohio State University.
Finally, we announced an expanded partnership with Microsoft that puts the Lumen platform into their enterprise selling motion. Microsoft and Lumen will jointly pursue opportunities where AI, cloud, and network modernization come together. Importantly, the co-sell model aligns our field organizations, allowing Microsoft sellers to retire Azure sales quota when customers adopt the Lumen platform. To wrap up, we're growing strategic services, deliberately reducing our legacy exposure, and strengthening the economics of our business. At the same time, we're innovating to solve increasingly complex customer needs. The transformation is going very well, and we're building a stronger, more valuable Lumen. Chris, over to you.
Thanks, Kate. I'll build on Kate's remarks by walking through how the third quarter results reflect the progress we're making against our financial goals. We're improving the mix and quality of revenue, we're delivering the Adjusted EBITDA inflection we committed to, and we're maintaining discipline around cash and capital allocation while continuing to strengthen the balance sheet. This focus gives us the flexibility to continue investing in strategic and digital growth. Before getting into some of the financial details from the quarter, I want to be crystal clear about our growth plan. Lumen's growth is built on a strategic portfolio already in the market, including digital network, AI-enabling connectivity, and the programmable network and orchestration capabilities that bring it all together. Strategic growth is where we are laser-focused; that's how we run the business, and that's where we spend our time.
We are not focused on preserving legacy economics, and the market shouldn't be either. Put simply, we don't need to sign another large infrastructure build or hang onto legacy economics to execute our growth ambitions. That gives us tremendous confidence in our path forward and continuing to deliver what we promised. The third quarter provided another proof point that the transformation is moving from strategy into financial results. Strategic revenue had another strong quarter, up 10% year-over-year to $1.28 billion, and now represents 55% of total business revenue compared to 48% a year ago. Within strategic, digital revenue grew 86.7% year-over-year to $56 million, driven by strength in NaaS and Alkira. To follow up on Kate's overview of Lumen Intelligent Internet, we will be shifting to the Lumen Intelligent Internet revenue base into digital starting in 2027.
We'll provide a pro forma of the digital revenue at that time. The mix of our business continues to shift towards higher-growth strategic and digital services, and as I'll discuss in a moment, that shift is also improving the economics of our business. Total revenue was $2.72 billion, ahead of our expectations and in line with consensus, including a positive impact to revenue of $27 million related to support payments received under the Federal Communications Commission's Connect America Fund in the Phase II program. This $27 million does not impact Adjusted EBITDA. Total business revenue was $2.35 billion, down 4.5% year-over-year. North American enterprise revenue was $1.67 billion, down 3.1% year-over-year. Within North American enterprise, large enterprise continued to show strength, growing 3.6% year-over-year and 2% sequentially to $810 million.
Adjusted EBITDA, excluding special items, was $715 million, putting us on track for the full-year inflection we previously outlined. Third quarter Adjusted EBITDA was higher than originally anticipated, primarily due to lower-than-expected operating expenses. Capital expenditures, excluding special items, were $796 million. PCF cash received was $117 million in the quarter, and free cash flow, excluding special items, was negative $76 million for the quarter and $1 billion year to date, including the impact of $75 million and $321 million in cash tax payments related to our Mass Markets Fiber-to-the-Home divestiture, which were excluded from our guidance. This was in line with our internal expectations, driven by the timing of PCF, and we continue to expect that full-year free cash flow will be within our existing guidance range.
Our return to business revenue growth is built on higher-growth strategic and digital services. The current macro environment reinforces our value proposition. Customers increasingly need to reduce cost and complexity while improving resilience, speed, and control. Our platform helps customers simplify their technology stack, provision and scale services more efficiently, and reduce the cost and operational burden of managing fragmented networks. That can only be accomplished on a truly digital programmable network. The mix shift matters because the economics of the future portfolio are compelling. As Kate shared earlier, so far, 20% of our IOD ports have more than one service on them, which means there's a significant scaling opportunity by adding services to installed ports with nearly 100% direct margin and creates operating leverage for Lumen. Many incorrectly believe that legacy revenue carries higher margin than strategic.
Year to date, the average direct margin across our strategic portfolio is over 80%, compared to approximately 65% for legacy. Strategic portfolio margins are meaningfully higher than legacy. I'll say that again. Strategic portfolio margins are meaningfully higher than legacy. Now, let's touch on PCF quickly. As we said before, PCF is a disciplined way to monetize underutilized assets by leveraging conduit already in the ground, allowing us to deploy fiber efficiently and with attractive economics. We've now signed over $13.5 billion of PCF deals, including an additional $700 million. These contract structures also provide meaningful inflation protection. The customer is billed upfront. We actively manage procurement and supply chain exposure, and ongoing operations and maintenance payments include inflation escalators. The agreements already signed support our current plan, and our approach to incremental deals remains disciplined.
They need to create attractive returns by leveraging assets we already own and preserving capital for higher-return strategic growth. For the third quarter, PCF revenue and CapEx were $66 million and $269 million, respectively. Before turning to the outlook, I want to highlight the strength of our balance sheet and the actions we've taken to get there. More than 80% of our debt is fixed rate, and only approximately $2.4 billion is tied to SOFR. A 25 basis point change in rates affects annual interest expense by approximately $6 million. Put simply, our exposure to changes in interest rates is limited and immaterial to our ability to deliver against our objectives. We've also significantly extended our maturity profile, with only approximately $1.2 billion of debt coming due over the next five years, providing meaningful financial flexibility.
That profile reflects the proactive steps we've taken to refinance debt, simplify the capital structure, and reduce annual interest expense by nearly half a billion dollars. Our balance sheet is more resilient, our near-term maturities are manageable, and we intend to continue using proceeds and cash generation to reduce debt. As Kate discussed, we're accelerating the decommissioning of our copper network. I'll say it again, copper is worth more mined than it is operated. For this business, revenue is the wrong metric. We estimate that the initial four states represent approximately 25% of our copper network. This is a methodical market-by-market transition focused on moving customers to modern services, working through regulatory requirements, and removing the stranded cost of infrastructure that no longer fits the future portfolio. The economics extend well beyond the value of the recovered copper.
Decommissioning reduces the operating and capital costs required to maintain legacy infrastructure, simplifies systems and facilities, and allows us to redirect capital towards higher-return strategic opportunities. At current copper prices, we expect to generate between $1 billion and $1.5 billion in pre-tax net copper proceeds across our footprint over the next five years. This will build over time and depend on customer migration, regulatory approvals, recovery costs, and market conditions. Put simply, legacy can generate cash in two ways, through the services that remain in operation and, over time, through the decommissioning and monetization of the underlying assets. That cash can support debt reduction and investment in our strategic portfolio. Now moving to guidance, we're reaffirming our full-year outlook.
For the full year, we expect Adjusted EBITDA of $3.1 billion-$3.3 billion, capital expenditures of $3.2 billion-$3.4 billion, and free cash flow, excluding special items and cash tax payments related to our Mass Markets Fiber-to-the-Home divestiture, of $1.9 billion-$2.1 billion. Each quarter, we continue to show significant progress against our strategic and financial objectives of driving operating leverage, delivering higher margins and lower capital intensity through digitally delivered services. The future of Lumen is being built on strategic growth, not on preserving the past. We have a stronger, more resilient balance sheet, limited exposure to changes in interest rates, and a disciplined capital model.
PCF allows us to leverage assets we already own, while copper decommissioning provides another opportunity to remove legacy costs, generate cash, and reduce debt. Together, that puts us in a stronger position to invest in the strategic opportunities ahead while continuing to strengthen the financial foundation of the company. The story of Lumen is building what comes next. Kate, back to you.
Thanks, Chris. Look, before we open it up for questions, I want to thank our Lumen team. The progress we're talking about today is all because of their hard work and relentless focus on our customers. Let me leave you with three things. Number one, we are executing really well. We're delivering on what we said we would deliver. Adjusted EBITDA is reflecting, strategic revenue is growing, and our balance sheet gives us the flexibility to finish what we started. Number two, we're starting to see the operating leverage. We're landing customers on the platform, and they're coming back and buying more services. That one plus N motion is really important because it strengthens the economics of every single connection.
And thirdly and finally, we're innovating again. Lumen Intelligent Internet, Alkira, and the work we're doing around risk-aware networking- we're solving increasingly complex problems for our customers and expanding what the Lumen platform can do. We're executing, the economics are getting better, and we're innovating for what comes next. Operators, let's take some questions.
Thank you. If you would like to register a question, please press star followed by the one on your telephone keypad. If your question has been answered and you would like to withdraw your question, please press star one again. One moment, please, for the first question. Your first question comes from the line of Michael Rollins with Citi. Please proceed with your question.
Hi, good afternoon, and thanks for taking the question. Two topics, if I could. First, curious: as you look at the growth of strategic sales that you're achieving, how much of that is coming from new customers, new relationships, and opportunities relative to the existing customers and just expanding the wallet for those that you have? Then secondly, curious as it relates to the PCF deals, are you seeing from those hyperscalers any change in timing for when those data centers are coming online? If there is a delay in those data centers, does that detract from the ability to get paid on the schedule that you anticipate? Thanks.
I'll start with PCF. There's no change in timing other than continued pressure to go faster on everything we're doing. We're pretty pleased with our performance at delivering all 5 million miles two-plus months earlier. That's going extremely well, and we're not seeing any slowdown. Regarding strategic sales and the increase, there is that sort of new entrant, the neoclouds. I talked about the 5x number with consumption of waves. But remember, we have business with the lion's share of companies in North America already. When we talk about what's new, it's really a conversion to digital.
First, they tried a little bit of NaaS, then they expanded, and they do more ports, and now they're doing more services. The expansion is really in this recognition that we're seeing that there's a requirement to modernize networks. It's not just about a new connection or higher capacity. It's about new capability and wanting to buy , as they do with cloud on the compute and the storage side. Next question.
Your next question comes from the line of Frank Louthan with Raymond James. Your line is open. Please proceed with your question.
Great. Thank you. Just wanted to touch base on the long-term guide. Are you still on track to hit the positive top-line growth inflection, and how is that cadence progressing? Then, I apologize if I missed this, but maybe walk us through a little bit of your wavelength growth. Are you seeing any issues getting customers connected or getting hardware the customers need, and how is that business progressing? Thanks.
Hey, Frank. It's Chris. I'll take that. Look, I think even before we jump into the results, I want to highlight something that we're seeing clearly with each passing day, and that is the demand for our network is really growing in a significant way. That's really what's underlying the results. As it relates to waves growth, it goes back to enterprises preparing themselves for the inferencing phase. The investments that we've made in the network- RapidRoutes, a lot of our metro rings, expansions- those are the things that allow us to light up 100 and 400 gig connectivity really rapidly. No, I mean, yes, there are obviously issues in the market in terms of equipment supply and whatnot, but we've been prepared for that, and that has not slowed us down. As it relates to the total business revenue inflection, it is still 2028.
That's what we're modeling, even with kind of accelerating the exit from copper. The offset in there is largely driven by Alkira. If there's one thing that I'd like to leave investors with, it's that while we're committed to that and we'll still continue to talk to it, don't get too wrapped up in the total revenue growth. This is about a business internally that is 55% of our portfolio growing every quarter and growing double digits. There's a tremendous growth company inside of Lumen, and the decisions that we make on legacy have been and will continue to be focused on one thing: cash generation.
As I said in my prepared remarks, we are not focused on legacy revenue declines. Those are obviously in the total. We are not going to shift our focus to be focused on legacy revenue declines. All of our revenue focus is on driving strategic, and legacy is about harvesting cash. As soon as the market understands that and really starts to model our business that way, I think the inherent value that's inside of this company will get unlocked.
All right. Great. Thank you.
Next question. Yep.
Your next question comes from the line of Greg Williams with TD Cowen. Your line is open. Please proceed with your question.
Great. Thanks for taking my questions. First one's just on the digital revenue. You hit $56 million. That's up, I think, $17 million quarter-over-quarter. Chris, you mentioned eventually hitting a J-curve. Are we starting to ramp that up, or is it too early, where there's some one-time benefits in there? As we think about that long-term goal of $500 million plus in digital revenue. Second question, just on the copper decommissioning, you mentioned $1 billion-$1.5 billion. Is that the sale of the copper plus the OpEx savings over the next five years? Can you help us with the cadence? You said you'd go market by market. Is it going to be sort of linear, front-end loaded, back-end loaded? Thanks.
Yeah. I will answer the copper first. The $1 billion-$1.5 billion is really the impact, the net impact pre-tax of the mined copper. That excludes kind of the OpEx savings. The CapEx that we spend today is probably in the neighborhood of $200 million-$300 million a year to keep those networks alive. Over time, we will see those CapEx efficiencies as well. That is why we can generate the cash that we are generating. As it relates to the first four states, think of those first four states as being roughly a quarter of our footprint, and therefore a quarter of that cash generation opportunity. On the digital J-curve, I would say it is a little early, but we are seeing signs of encouragement. When we look at individual customer data, we are starting to see, as Kate mentioned, the adoption of more services.
If you think about this in kind of a land-and-expand mindset, it is really two things. It is continuing to sign customers and drive port adoption, but beyond that, it is about driving services. The growth, I would say, is really more organic than that, but all the signs are super positive that we are seeing the adoption that we would love to see. Kate, I do not know if you want to add anything to that.
Yeah, I mean, we are having trouble modeling it. We beat our internal targets for the year much earlier than we expected, and we will keep putting that back into the model. I think the fact that we combined DIA with IOD for that one Lumen Intelligent Internet business is going to basically allow us to show how digital is growing at scale, which I think is a nice step in the maturity curve for us.
Got it. Thank you.
Your next question comes from the line of Sebastiano Petti with JPMorgan. Your line is open. Please proceed with your question.
Hi. Thank you for taking the question. Just, I guess, sticking with Greg's question there on digital. Up 86% in the quarter. What's the ex-Alkira growth? Just a little bit helpful. You're talking about beating your internal metrics, just so we can have a baseline there. Then, sticking with the copper theme as well, the OpEx savings are not necessarily included within that $1 billion-$1.5 billion. You obviously have the cost transformation program that's going to be accelerating, or the run rate cost savings should be accelerating, extending into 2027.
Any way to contextualize or frame how much incremental OpEx savings could come out of this as you decommission the copper? You talked about it being a quarter of your network; maybe it's a quarter of the savings. Obviously, it's not going to hit in 2027, but just maybe help us think about the glide path to those OpEx savings timing. Is it back-end loaded over the next five years? Thank you.
Yeah. As it relates to digital, look, I want to answer your question, but I also want to be careful here about setting expectations. What we're really focused on is driving total digital sales and revenue growth, and that's what we're going to pivot to next quarter, because that's frankly the only thing that really matters in driving our transformation. I don't want to get in the habit of trying to break out every single piece of what's in there. What I will tell you is that if you exclude Alkira from the results for the quarter, which got included, we saw very healthy double-digit growth in our digital business, excluding that acquisition. So, we're very pleased with that. As it relates to copper, here's how I would think about it. Yes, there's OpEx that will come out.
There is obviously revenue that will come out too. You have EBITDA being negatively impacted by that loss of revenue. That is offset by the EBITDA that is generated from the copper sale. Again, I would think about it as an EBITDA modeling exercise, and I do not think you need to change your models for EBITDA on legacy, versus what we have already shared with you for that reason. Think about it in that regard. The revenue and OpEx impacts are offset by that copper mining.
In terms of timing, the four states, it is not going to happen overnight at the beginning of the year. There is a lot of work that has to be done. We have to work with regulators. We have to work with our customers on transferring service. We are committed to that, and making this as good an experience for everyone as possible. We would expect that a lot of this will start to impact the back part of next year.
Just to quickly follow up.
Last question.
Chris, I mean, one.
Oh, yeah.
Sorry. Yeah. Just to-
Go ahead.
Follow up there. I mean, just thinking about, I mean, one of your larger peers says there's a mismatch between when the revenue comes out and when the OpEx comes out. Do we think about it in that same fashion as well? Because you can take all the revenue out and shut off customers and no longer sell services in X, Y, and Z market, but then before you get approval to shut down the wire center
Yeah, it
There's a little bit of a timing mismatch. Is that still
Yeah, it's
How should we think about it as well?
I think that's , yeah. No, I think that's a very fair characterization. I mean, obviously, we don't guide those metrics every quarter, and we're not going to start to. When we give guidance for next year, we'll let you know what we think those impacts are for the year. But again, in total, in terms of where we deliver EBITDA and cash to the market, we really don't think there's any material change to what we showed at Investor Day.
Thank you.
Your next question comes from the line of Eric Luebchow with Wells Fargo. Your line is open. Please proceed with your question.
Hi. Two questions, if I could. First, I think in your Adjusted EBITDA guide, Chris, it implies a pretty big step up in the fourth quarter, so maybe you could kind of help bridge Q3 to Q4 for us; that would be helpful. Secondly, kind of a higher-level question given the results of the midterms yesterday and some questions around the potential for data center builds to potentially slow, particularly in markets like Texas. Maybe you could talk about whether that has any impact, if at all, on your PCF builds, any associated services like waves that you might sell into those data center markets. That would be helpful. Thank you.
Okay. I'll take your second question first. It's exactly why we pivoted away from being a Legacy telco. We're no longer dependent on selling the next physical link in order to grow, right? We make money by moving data from anywhere to anywhere. We're agnostic to cloud. We're agnostic to carrier. We're monetizing network intelligence. And it's helping us grow at higher margins. So if anything, if there's a slowdown in data center builds, it forces enterprises to make more out of the assets that they already have, which means moving the workloads where there are available GPUs, and that's what we do. We're the platform that enables exactly that. So, there's no dependency for growth on the number of data centers being built out this year or not. And in terms of our PCF deals, I've reiterated this several times: the only edict that we get from the hyperscalers is, "Please go faster.
Yeah, and as it relates to your first question on fourth quarter, if you look at our historical fourth quarter versus third quarter seasonality, that'll take you right to where we need to be to deliver guidance for the year. So it's really seasonality, and I'd say the only overt delay to that is, as I said in my prepared remarks, we're well on our way to delivering our modernization and simplification savings for the year, and ultimately the billion for next year, and that obviously is impacting things as well as margins start to improve.
Next question.
Your next question comes from the line of Sam McHugh with BNP Paribas. Your line is open. Please proceed with your question.
Yeah, thanks for the question. Chris, I think you talked about the medium-term guidance maybe not changing as Alkira offsets that quicker exit from copper. You also said that copper sales might offset the copper decline happening faster. I just wonder if you could clarify what you were trying to explain on the medium-term guidance, maybe. Then, just on the PCF deals, I think revenue this quarter was down about 30% versus last quarter. I assume it's just lumpiness, but is there anything happening with revenue recognition for the PCF deals? Because I think you'd guided to $200 million-$250 million of revenue this year, but you're already at $240 million-ish, I think. So any update there would be helpful. Thanks.
Yeah, on the PCF, that was really driven by the state of California that got recognized last quarter, so that was chunkiness. As it relates to just the underlying trend on PCF, as Kate said, we're actually ahead of schedule, and revenue gets recognized, as we've discussed in the past, based on when segments are delivered. As it relates to the copper piece in terms of how the declining revenue associated with sales is offset by the timing of the copper sales, again, for any given year, we view that as relatively a wash in EBITDA because, again, there's cost to mine the copper.
So you're replacing a P&L that is revenue-driven by sales and OpEx driven by sales to generate EBITDA with a P&L that is driven by copper-based mining sales, which has costs associated to mine and delivers a net EBITDA number. Again, in total, broadly, we do not think that has a material impact on your modeling based on what we showed at Investor Day. To Sebastiano's question, yes, we obviously will incur some expense before we incur that revenue. Again, when we give guidance for next year, we will give you all those details. We do not expect a major impact.
Awesome. Thanks, Chris.
As a reminder, to register for a question, press the star followed by the one on your telephone. Your next question comes from the line of Batya Levi with UBS. Your line is open. Please proceed with your question.
Great. Thank you. Can you provide a bit more color on the pricing environment of these new services that you are ramping and customer willingness to pay for extra security, risk-aware network, I think you mentioned? As you sell these next-gen services, how does the pricing of the existing connectivity ramp? Then maybe a quick follow-up on the PCFs. The CapEx required to build the PCF deals seems to be coming in a little bit lighter than expected. How do they compare to your expectations? Are you seeing some efficiencies as you leverage your strategic assets? Thank you.
I will start and pass to Chris. On the pricing question, Batya, basically, the only way to provide value when you are just selling the physical link, like the legacy telco value proposition, was discounts. The way that is changing with our model is we are able to deliver more advanced services that you cannot get anywhere else, and they are tied to business outcomes that really matter, real-time inventory management for retail or real-time fraud detection services for financial services companies, et cetera. That puts us in a fundamentally different spot with a different buyer and a different conversation around value. The other thing that the cloud platform does is it drives massive simplicity and a centralization of how you operate your network. Instead of managing firewall policy locally across hundreds of different geographic points, you can do it centrally. There is inherent value in that. There is cost savings.
They need to buy less equipment. They need to have fewer people do it. So what we are finding is that we are able to sell these higher-margin services, which is what we were describing earlier. Not only are we not rolling trucks and managing things separately, but we are able to get customers to buy more of these services because it is having a dramatic effect on their business. Long gone is the race to the bottom on commoditized fiber only. The intelligence layer that we put in there is giving us pricing power again. Chris?
Yeah, and I think that is really the critical point, Batya. I cannot tell you how many conversations I have had with CFO peers where the requirements to manage the network and the cost associated with managing the network in an AI world are becoming untenable. There are security risks, there are data sovereignty issues, and there is massive complexity. What that means is we are not talking about the cost of the waves anymore. That is long over. We are talking about the total cost of ownership and running the network in an AI world. What Lumen has can reduce the total cost of ownership for our enterprise customers in a way that no one else can deliver. That is the conversation that we are having today.
As it relates to PCF, look, there are ebbs and flows. I would say two things. Super, super pleased with the work that our teams are doing to deliver the network ahead of schedule for our customers. I would say that we are definitely within budget on the cost side. There are puts and takes obviously along the way, but super pleased with where that is all netting out.
All right. Thank you.
Your last question comes from the line of Nick Del Deo with MoffettNathanson. Your line is open. Please proceed with your question.
All right. Thanks for fitting me in. First question, maybe on the margins. Chris, you highlighted the Strategic versus Legacy direct margins, and it is 80% Strategic versus 65% Legacy. How much of that 15-point differential is a function of the underlying, like, on-net versus off-net mix difference, and how much is a function of lower cost to serve more generally?
I would say that it is more driven by the lower cost to serve and the scalability. I mean, I think you are touching on a very important point, and I want to be super transparent. Clearly, when we have an on-net customer taking that NaaS port and lighting up the first service, the margins are going to be better than they are if that endpoint is an off-net location. After that, every single service gets delivered at the same margin because it is delivered digitally. As we have leveled the playing field in terms of our ability to provide customers solutions everywhere, whether it is on-net or off-net, as we drive that scalability, we really drive the operating leverage that Kate talks about. Over time, that difference in margin becomes relatively inconsequential. So it truly is about land and expand.
And what I mean by that more clearly is, I think there would be CFOs who have historically sat in telecom saying, "Oh, don't do off-net. Don't do off-net because it's going to hurt our margins." Given the opportunity that lies ahead, we are going as fast as we can to provide a unified networking environment for our customers across all of their locations, and we're going to drive the margin expansion through expansion of digital services.
Okay. Great. That's helpful color, Chris. Thank you. Can I ask one about the sales you noted as well, the strategic sales? What sort of book-to-bill cycle should we be thinking about, so we can kind of get a sense as to when this hits the P&L? And just to be clear, do the strategic sales figures you cited include or exclude PCF?
Strategic does include PCF. And again, we've given you those numbers, and frankly, one of the reasons why I've given you those numbers is that it actually doesn't have a dramatic impact on strategic growth. And because those sales, as they get booked, are paid for upfront, over time, it'll actually hurt growth because there's no kind of inflation adjustment on the pricing. They paid upfront, and therefore there are no adjustments. So, I think that's the big overall impact there. What was the beginning of your question? I'm sorry, I lost it.
Oh, sorry. The book-to-bill. So the things you-
Oh, book-to-bill. Thank you. Yes.
Obviously , bookings increased this quarter. When should we start to see that flowing through the revenue line?
Well, I think we are actually starting to see it flow through the revenue line now. Sales really started to strengthen in the second quarter, and as we've moved through the year, have been at or above our expectations. I think what you're really starting to see in the results of the third quarter is that coming to fruition. In the near term, I think we still are looking at roughly one quarter on that initial NaaS port install, because it's a mix of things. In some cases, as we're reporting these NaaS adoption metrics, we're able to provide that connectivity right away.
In other cases, customers aren't ready yet. They've committed to the sale; they signed the contract, but they need to do work internally before we can deliver those circuits. I'd say on average, that quarter-ish delay is about right. Over time, once those ports are installed, again, we expect that to dramatically shorten because those services are delivered digitally. Too early to call yet, but that's where things sit today.
All right. Thanks, Chris.
There are no further questions at this time. I will now turn the call back to Kate for closing remarks.
Thank you all for your questions and the time that you took to spend with us today. Lumen's building the trusted network for AI, and we look forward to sharing more with you next quarter. See you soon.
That concludes the conference call for today. We thank you for your participation and ask that you please disconnect your line. Have a great day, everyone.