Good afternoon, everybody. Welcome to the Lumen Fireside Chat at the Goldman Sachs Communacopia + Technology Conference. My name is Mike Ng, and I cover Lumen and media cable telecom here at Goldman. I have the privilege of introducing Chris Stansbury, who's the President and CFO at Lumen. First and foremost, thank you so much for being here this afternoon.
It's great to be here.
Chris, you've had a very busy year with the sale of fiber to the home assets to AT&T, the Alkira acquisition. Now that those deals have closed and you've hit your leverage target, maybe you can talk a little bit about what execution looks like from here and what the strategic priorities are for the company.
Yeah. The future for us is very clear, and that is a complete digitizing of the networking experience. When you think about our portfolio today, we've already got a significant growth company inside of Lumen that's over half of our revenue. Last quarter, it grew 14%. We separately have a legacy stream of revenue, and that's sole purpose is to generate cash while we pivot this transformation. That's something that we'll continue to do on that side. As we go forward, Alkira, combined with what Lumen's footprint is today and our ability to provide direct cloud access.
When you combine that direct cloud access and our NaaS capabilities to get you from premise to the cloud, we now have what we would refer to as an east-west capability, which is really the ability, in a very network and cloud agnostic way, move data from anywhere to anywhere on demand. As enterprise moves to inference, the network is the bottleneck. It is not energy, it is not GPUs, it is the network. We have just created the unlock to make all of that work in a much more efficient way, but also a lower cost of ownership way. We think it is the right solution at the right time, and that is the focus.
Great. You talked about the strategic revenue within Lumen, over 50% of business revenue today. I believe strategic revenue includes PCF, Private Connectivity Fabric, digital and other growth revenue.
Yep.
To set the stage, maybe you could just talk about what is in strategic revenue, what key products are there.
Sure. The historical base of strategic revenue is really connectivity solutions. You are going to have fiber waves, IP, security will be in there as well. That is the bulk of what is in there. What we are really seeing in terms of growth today is significant growth in on-demand waves, which is not a surprise. When we talk about PCF and those big pipes, those are really of interest to a very few customers.
The capacity is enormous. It is largely hyperscale focused. Even with existing conduit and existing routes where we can deploy relatively quickly, it is still years until that capacity is fully online. When you get into other customers that are big customers, big users, neoclouds as an example, Wavelengths is really the solution because it is ready and it is ready now. We have invested significantly in the network and our ability to provide 400G Wavelengths on demand. We had revenue grow, I think it was 11% last quarter, but sales actually grew 35%. Connectivity is still the underlying piece that is driving the strategic revenue.
That is super interesting. Why do not we talk a little bit more about Wavelengths, private dedicated bandwidth, SLA reliability. Why are neoclouds asking for Wavelengths? Where else is demand coming from, and what does the competitive landscape look like?
Yeah. If we think about what has happened in the connectivity environment over the last few years, there was this burst at the beginning, which was really PCF driven, which was hyperscale demand for training of their LLMs. It was for internal consumption. They need massive pipes to deal with the training aspect of AI.
As we move into inference, the next largest customers who are part of that ecosystem is the neoclouds. Immediately on the heels of that is enterprise. That is where you start to move into the Wavelengths environment because it gives you that connectivity that you need right now. Our ability to sell that is bolstered by the fact that our Wavelengths product today on a NaaS circuit is digitally available.
You can self-provision, and you can be up and running in a very short period of time rather than waiting for trucks to drive around. It is the combination of what we have today as a capability and what is being deployed through Network-as-a-Service that makes this a very compelling offer for enterprise and the neoclouds.
Great. That is super interesting. Maybe we can talk a little bit about PCF. Lumen has one of the largest fiber networks in the world. Obviously, some direct exposure to support distributed AI training in the case of PCF. Maybe you can just talk a little bit about PCF, the growth in that business, potential opportunities you see for more PCF orders, in addition to all the success that you have had with that product to date.
Yeah. Let us talk about just the broader network footprint for a minute. Because where there is not a return today is new builds. New routes that require new conduit have really low single-digit returns on investment, and we have been very clear that we are not interested in doing that. We do not need to do it. We do not need to do it because we have got, by 2030, we estimate 58 million miles of fiber in the ground.
At the same time that we are providing a digital access layer to consume it. With Alkira, a product that allows enterprise to orchestrate across anybody's fiber. To invest hundreds of millions of dollars in new routes is just not where we are going to focus. PCF is different. PCF is existing routes. It is conduit that was put in the ground 25 years ago.
It was put in the ground at a time where they thought they would get about a dozen strands through each 2-inch PVC, and today we are pulling over 1,700 through each 2-inch PVC. The reality is that we have got excess capacity. PCF really solves three things for us. The first is it allows us to monetize a dormant asset, and at great margins and great returns. That has in turn allowed us to delever.
The second thing is that it has created proximity with the hyperscalers, which is why we have direct cloud on-ramp access in our facilities. Gone are the days where you have to slow down your signal and pay interconnect fees to get access to the cloud. You can get 400G access through Lumen's network without having to go through an interconnect logic.
Without the infrastructure that you need at every point of interconnect. You do not need hundreds of firewalls and load balancers and all the equipment that has to be managed. You can simplify all of that. The third thing that PCF brought us is, as we are pulling fiber for the hyperscalers, we have pulled fiber and continue to pull fiber for our enterprise customers. We have talked about RapidRoutes.
We have talked about metro rings. Our ability to deliver a 35% sales growth on Wavelengths is because we have made those investments, and we have got capacity that is ready to sell today. When we look at our CapEx guidance, which we talked about at Investor Day back in February, that is inclusive of all those investments. PCF is a great opportunity to unlock that value in those three ways. There will be more. We are in multiple conversations today. Whatever is incremental to what has already been sold is not part of our algorithm or our guidance from Investor Day. It is upside, and we will use those cash proceeds to continue to delever.
Right. Just to clarify, the CapEx associated with PCF is not for digging new routes, it is for the fiber that goes into the pipes?
That is exactly right.
Okay.
Of our roughly $3 billion of CapEx that we have guided for the year, about $1 billion is for PCF. It is not capital intensive because it is paid for before we pay to the supplier. So there is about $2 billion that is supporting the ongoing base Lumen business and $1 billion that is going into PCF.
Great. Before we move on from PCF, I was just wondering if you could talk a little bit about the financial contributions that you expect from PCF in terms of revenue, maybe talk about the cash margins, and that sort of thing. You guys have had a tremendous amount of success with Microsoft, GCP, AWS, Meta Platforms, Anthropic, I believe as well. Just talk about what the cash margins look like.
So what we said is that the cash contribution is roughly 30%, roughly our EBITDA margins. EBITDA less CapEx gets you to roughly 30%. We gave guidance, I cannot recite it off the top of my head, but we gave guidance at Investor Day that talked about how the revenue would ultimately come into play, because what happens is we recognize the revenue as route segments get delivered.
It gets recognized over the balance of that contract. The cash we gave guidance on because the cash, 90% of the contract value of the cash is received in the first three years, and that is to support the rental fee for the conduit as well as to support all the CapEx. 10% is earned in year to run the network. The Investor Day materials gave an idea of how the revenue would flow, how the CapEx would flow, and what the free cash flow looked like.
Great. One of the things that you mentioned on last quarter's earnings call that I thought was interesting was just your work around satellite backhaul, and obviously satellite has been more of a topic of focus recently. I think Lumen provides satellite backhaul for many enterprises. Are the number of ground stations increasing? Are you seeing that in your satellite backhaul demand? Is it meaningful enough to show up in the P&L? How do you think about that?
It is an area of growth, and I think clearly as we see more players in that space providing network connectivity, we will continue to see growth there. I think the bigger point is we are at a point in our transformation where enterprise, whether it be a satellite provider or whether it be a multinational bank, people are moving enormous quantities of data today.
It is getting more and more dispersed because every piece of data has a home. It is sitting on a storage array somewhere. The issue is there are so many somewheres today that it is getting impossible to manage in the way that networking has traditionally managed it. The way networking is traditionally managed it is, you need a pipe between A and B? Okay, I will build it for you. You need another one? Okay, I will build another one. There are too many to build.
The issue is the complexity and the static nature of those deployments today. When you combine a network footprint that is extensive, then you provide an orchestration layer that literally lets you provision, manage security, manage segmentation, give you visibility into the network, provide security, and do that, frankly, on a global scale, there is a number of enterprises where that is going to be attractive. Satellite is just one of them.
Great. I wanted to ask about Starlink as a potential threat, if I could. Starlink has ambitions to build a very large enterprise business, whether that is providing connectivity to enterprises or whether that be for broadband or for backhaul.
Yep.
Do you see that as something that is competitively differentiated relative to what Lumen currently offers?
I see it as complementary. Because the reality is that there will be endpoints where the most logical way to connect is satellite. It's not going to make sense to bring fiber to every location. The reality, though, is that data that flows up to a satellite and back down to planet Earth is going to need to find fiber as fast as it can. So it's another point of consumption that ultimately ends up on fiber. Again, what it does is it feeds into the complexity, which is enterprise is going to have more and more data that continues to be dispersed further and further away.
We don't know where all those endpoints are today, and what we thought was going to be an endpoint last month is not an endpoint this month because there's a new regulation that says we're not going to allow data centers in our neighborhood. That uncertainty and that complexity is exactly what we're able to solve today. Complexity is good. Complexity brings margin.
Great. If we shift gears a little bit, I wanted to ask about digital revenue. Lumen has guidance for $800 million - $900 million in digital revenue by 2030. First, could you just talk about what's in digital revenue, and then what are the primary drivers of that growth through the end of the decade?
Digital is really taking what is traditional services, traditional connectivity, and digitizing it, meaning that you can buy it, provision it, deploy it without a truck having to roll to your location. What we've provided some level of insight to are adoption metrics for Network-as-a-Service. Number of customers, number of ports. We're ahead of our own internal desires.
A lot of those ports haven't been installed yet because the customer's not ready. They bought it, but they've got to do some work on their end. As soon as those ports are installed, they give us the ability to then sell every other service digitally through software at incremental margin that is starting at 80% and fast approach is 100% because it's digitally delivered. The marginal cost to provide that is effectively zero.
That is the goal, is to digitize the entire network so that all services can be provided digitally. Interestingly, and we have talked about this and there will be more to come, but in earnings, Kate talked about the fact that some legacy services, I should say, traditionally delivered services that fall into our strategic bucket, Direct Internet Access. There are a number of ports in our system today that Alkira and their technology effectively makes a digital port. It allows us to deliver more than the service that that port was installed for. The important point is it allows us to scale.
Right.
That piece was not in our guidance. We are doing some work on that, and we will communicate more with the market. Ultimately, to the extent that we can digitize those circuits, it allows us to then scale and sell n plus one services beyond that. That is another way that we can drive growth.
Right. And as evidence that the digital services are resonating. Like last quarter, 20% of the first-time NaaS, network-as-a-service adopters were completely new to Lumen. So you're getting net new logos as a result of what you're putting out in the market.
Well, just really quick, what is important on that, Michael, is that the basic connectivity market, so premise to, whether that is premise to cloud, premise to DC, premise to another premise. There is data explosion, but the TAM is growing at less than 1%. What is that? That is legacy enterprise commoditization and price compression. That is the lane where NaaS plays. NaaS is growing at an annual rate right now of 200%. It is clearly taking share because we are taking what is a very static, unfriendly way of deploying network and making it easy to consume.
That is the role that NaaS plays. But more importantly, it's a gateway into then saying, "Okay, now that I've digitized that, I need to move data from AWS to Azure, from Azure to Google, from Google to a DC." And you will be able to provision those services from Lumen entirely digitally and move data from anywhere to anywhere on demand.
Right. Super interesting. Who are the main players that NaaS is enabling you to gain market share from? And why aren't your competitors trying to do something similar?
Yeah, I think ultimately they will try. Part of the problem that our traditional competitors have is they don't have the network footprint that we have. While our limitation historically was endpoint, and NaaS erases that, and I'll give you an example in a second, our strength is in long haul. So when you think about the amount of data that has to be moved, that's where we shine.
The vertical that is the fastest adopter of NaaS today, and I would say where the level of engagement around our programmable layer is highest, is financial services. Because in your industry, you're dealing with massive quantities of data that is very sensitive, that is regulated, and regulated differently around the world. It's complex. And it's a nightmare to manage.
I mean, the large financial institutions are spending tens of billions of dollars a year just to keep that data safe. And we can simplify that. We announced in second quarter that a large multinational bank had purchased about 650 NaaS ports. That's now up to 1,000. So that's where we see the most traction. Now, what's interesting is that most of those endpoints, back to the point I just made, do not sit on Lumen's network. We are the backbone, but the last mile connectivity in most of those locations is actually AT&T. But as soon as that NaaS port hits that branch, that port has a digital twin that sits in Lumen, which means every other service that that location needs will be purchased from Lumen. So we've erased the endpoint disadvantage.
We've now brought scalability to enterprise networking that has never existed because literally every service required its own box, its own infrastructure layer. That's the beauty of this. The old enterprise networking model didn't work. It wasn't scalable. It was a commodity. We brought scalability to the commodity side, and we brought integration and orchestration to the programmable layer to move product east and west, and that's where there's significant margin.
Right. What's maybe an example of the ability to cross-sell multiple services through a NaaS port? Is it, "Hey, I wanted broadband or Direct Internet Access, and now I want cloud to cloud connectivity," .
Yeah. Now I need access to cloud. I need access to my own DC. I need to have automated and real-time backup. The way this is built is there's the physical pipes we have, there's the programmable layer, which is largely Alkira, and then there's an ecosystem. Think of that as API-based partners who do things better than we do that add to that selling motion. Commvault.
All right. I want real-time backup, click buy, now I have real-time backup. Palo Alto Networks. With Lumen, Black Lotus Labs. Palo Alto Networks as last line of defense, and Black Lotus Labs as early threat detection of what's going on in the internet more broadly so that the Palo Alto Networks lock is updated and ready. That ecosystem will continue to grow. But when you think about the revenue streams historically, enterprise networking, Lumen included, has been limited to that physical layer.
Right.
The real growth in terms of revenue and margin is coming from the programmable layer and the ability to move traffic from anywhere to anywhere and the ecosystem layer where I can now provision other API-driven services.
Alkira sits in that middle, enabling that.
Exactly.
Great.
Yeah.
Could you talk a little bit about AI cloud on-ramps? At your Investor Day, you set a goal of getting to 90% on-ramp coverage by the end of this year, calendar 2026.
Yes.
Where are you in that goal? What demand are you seeing for AI on-ramps from your enterprise customers? How does that translate into-
Yeah. Multi-Cloud Gateway is in the market today. We will continue to see that access grow. We are on target to deliver against the 90%. I will tell you what the most important feedback is. It is actually from the hyperscalers. When you think about cloud traffic, there are three things that matter. There is prem to cloud, there is movement within cloud, and then there is movement between clouds.
The hyperscalers will largely control the movement within their own cloud environments. They may want us to participate or not to help with that. But the reason that they love what they see early on in terms of our ability to deliver prem to cloud and between clouds is it is increasing cloud consumption, it is reducing the spin-up time for enterprise, which means it is faster time to revenue for the cloud providers. The customers love it because what we have done is we have just simplified their ability to move data around the system as they start to inference and drive AI consumption. So that is the win-win. We are early stages, but we are very encouraged by the early data that we are seeing.
Great. I wanted to ask about financial guidance. Lumen has 2026 EBITDA guidance for $3.1 billion-$3.3 billion, with business revenue declining 3%-4% on an underlying basis, excluding some of the PCF related timing items.
Yeah.
How are you pacing against that guidance? Anything that you would call out as we think about second half seasonality, that sort of thing?
So, a few things. We are committed to the EBITDA guidance that we laid out. We obviously do not guide revenue. We guide EBITDA and the cash flow, and we are confident in those guidance numbers. We do have seasonality quarter to quarter. One of the things we told the Street is that second quarter to third quarter, there is always a seasonal reduction in EBITDA because there is an enormous amount of CapEx that is spent in the summer for maintenance, stuff that cannot be capitalized. There is also a lot higher energy costs, right, to fuel the network and keep it cool. Our guidance is take Q2 and eliminate the state of California PCF deal, which was very chunky. We got that all delivered. That was about $36 million. Off of that base, you have got to adjust down $90 million-$100 million for seasonality from Q2 to Q3.
The balance to get you to our guide is Q4, which is a big quarter, and that is historically true as well. The one thing, though, that I do want to touch on, and I know Kate talked about this in New York yesterday, is as we look at our legacy portfolio, I think the market has put too much weight in the value of that revenue. We are fast approaching the point, like others in the space who are ahead of us, where the EBITDA generation from that revenue is becoming lower and lower quality. What do I mean? I mean, the amount of CapEx that we have to spend every year just to keep those 30 and 40-year-old systems running is getting to the point where it is no longer worth the investment.
The whole role of the legacy portfolio to Lumen is cash generation, and for years that has been driven by revenue. I think we are approaching the point in the next few years where that will start to pivot to things like we are taking out the CapEx, letting the revenue atrophy, and then mining copper. There is a lot of copper that can be mined.
That copper is of very high value because it is pure. It was put in the ground 50 years ago. That will be a natural transformation. Our focus when we talk about revenue is really on the strategic piece of the portfolio, which grew 14% last quarter and is over half of what we have. The reality is that the revenue declines in the legacy side are really not the point. It is about cash generation and managing for cash, and the way we do that will evolve over time.
Super interesting. I guess the natural follow-up would be, relative to what was communicated at Analyst Day, does the outlook for CapEx or legacy revenue look different?
We will see. We have already announced this year that we stopped sale of legacy voice product. The question becomes, and it is not an easy one to answer, by the way, that when you look at the mining activities of some of our competitors, when you start to mine copper, the copper does not know whether you are servicing a home or you are servicing an enterprise.
So you have got to be ready to turn off both at the same time at a wire center by wire center level. So there is a lot of work going into understanding that, and the answer is right now, we do not know yet. But if we do that, logically, we will do that at some point. But when we do that, we would expect CapEx to fall because we are probably spending $200 million or $300 million a year just to keep those old services running.
Right. Then relatedly, Lumen is targeting $700 million in run rate cost savings this year with a $1 billion target by 2027. Maybe you could just expand a little bit on the drivers of those cost savings beyond what you just mentioned.
It really is a simplification of the network. So when you think about legacy telco, back to where we started the conversation, the cloud that hung over legacy enterprise networking's head was it was not scalable. It was a commodity, and so there was price compression. So the way that that was managed, or at least attempted to be managed, was, well, we will just keep consolidating and we will eliminate spans and layers of humans. What was never done, and by the way, that is not just a Lumen story, it is across the industry, they did not integrate IT systems, they did not do a whole bunch of things. So you end up with multiple order entry systems. It is a mess.
As we simplify, and quite frankly, as we move further into a scenario where over half of our revenue is coming from newer, more modern products, it's allowing us to take out a lot of expense. Now, a lot of that is human-based. The amount of headcount in the organization has fallen, but a lot of that is frankly driven by people that have dedicated themselves for years to keeping these things alive, and they're nearing the end of their careers. It's not easy to find a developer who wants to work in a system that started to be retired 30 years ago. That's where a lot of the savings comes, is our ability to get IT costs out of the system and just a lot of operational inefficiency.
Great. As we wrap up the conversation in the last couple of minutes here, maybe you could just tie it all together for us and talk about key priorities that the company has, that you and Kate have over the next couple of years, operational milestones that investors should be looking out for.
The number one focus of the entire organization is on driving digital growth. We have a tremendous growth engine inside of the company. It's over half of what we do today. With Alkira now acquired, our ability to accelerate that is higher. We haven't quantified what that is yet, and frankly, we don't even know. But the point is that there's real demand at the right time with complexity in enterprise networking, and enterprise needs us.
Getting great feedback from customers, great adoption on NaaS, and we're going to continue to hammer that. Separately, we are going to do what we said we were going to do, which is manage legacy for cash. That will become less revenue-based over time and more cost efficiency and copper mining based. I'd say that's 5% of the focus, and there's a much smaller group of people who have to work on that and figure it out. But the rest of the organization is 95% of our energy is focused on driving digital growth.
Great. Chris, thank you so much for participating in the conference. It has been a privilege to have you on stage here.
Thanks so much.