Executive Summary / Key Takeaways

• Qwest Corporation (CTBB), an indirect subsidiary of Lumen Technologies (LUMN), is undergoing a significant transformation, leveraging its extensive fiber network and developing digital platform to pivot from declining legacy services towards growth opportunities in the AI and multi-cloud markets.
• The company has secured over $8.5 billion in Private Connectivity Fabric (PCF) deals with major technology firms since June 2024, providing crucial liquidity to fund strategic investments, deleveraging efforts, and accelerate its transformation initiatives.
• Lumen is targeting $1 billion in cost takeout by the end of 2027, driven by unifying its network architecture, simplifying its product portfolio, and consolidating IT systems, with an expected $250 million run rate savings exiting 2025.
• While Q1 2025 results showed continued revenue declines across most categories, reflecting ongoing legacy headwinds, the company is investing for future growth, with 2025 EBITDA guided at $3.2 billion to $3.4 billion (including ~$200M incremental costs for strategic initiatives) and expects EBITDA to return to growth in 2026 (> $3.5 billion).
• Key factors for investors to monitor include execution on the PCF builds, adoption of the Lumen Digital NaaS platform, progress on cost takeout targets, managing legacy declines, and potential impacts from macroeconomic conditions and litigation risks like those related to lead-sheathed cables.

A Legacy Network's Pivot to the Digital Frontier

Qwest Corporation, operating primarily across a 14-state region in the Midwest and Western United States, stands as a foundational piece of the broader Lumen Technologies network. Historically, Qwest built its business on providing essential telecommunications services, relying on infrastructure that includes legacy copper assets, some dating back to the early 20th century. This history, marked by the integration of various networks and systems through past acquisitions, has resulted in a complex operational environment characterized by multiple network architectures and disparate IT systems. While these legacy assets generated significant cash flow, they also face secular declines and contribute to operational inefficiencies and technical debt.

Today, Qwest's story is inextricably linked to Lumen's ambitious transformation strategy. Recognizing that the traditional telecom model is insufficient for the demands of the modern digital economy, Lumen is executing a pivot centered on three core priorities: driving operational excellence, building the backbone for the AI economy, and cloudifying telecom. This strategy aims to leverage Lumen's core strength – its expansive fiber network – to capture growth in emerging high-bandwidth, low-latency markets driven by artificial intelligence and the proliferation of multi-cloud architectures.

The competitive landscape for Qwest and Lumen is intense, featuring major national carriers like Verizon (VZ) and AT&T (T), as well as cable providers and emerging technology firms offering alternative connectivity solutions. While Verizon and AT&T boast diversified portfolios including significant wireless operations and national scale, Lumen's competitive positioning is increasingly focused on its differentiated fiber infrastructure and its strategic response to the evolving needs of enterprise customers. Unlike competitors primarily focused on traditional service delivery, Lumen is aiming to differentiate through its technological advancements and a new digital service delivery model.

Technological Edge and the AI Backbone

At the heart of Lumen's strategic pivot is its fiber network, viewed as a critical asset for the AI era. This network, encompassing both intercity and metro fiber miles, is being enhanced through significant technological investments. Lumen is partnering with innovators like Corning (GLW) to deploy new fiber solutions, such as the 864 count fiber, capable of delivering up to four times the capacity of previous generations within the same conduit. Furthermore, advancements in Photonics technology are expected to yield up to two times greater fiber efficiency. These enhancements dramatically increase the network's capacity and performance, addressing the escalating bandwidth demands driven by AI workloads and real-time data processing.

Beyond the physical layer, Lumen is building a unified network architecture, consolidating from four disparate legacy systems into one. This standardization is already showing tangible benefits, enabling 85% of new Ethernet and IP data service sales in major metro markets. Management reports that this unification reduces average service delivery time by over 12 days and cuts implementation costs by as much as 50%. The target is to have the majority of net new services running on this unified fabric by the end of 2025, paving the way for massive simplification across the product portfolio (reducing thousands of product codes to around 300) and IT systems (consolidating 24 order management systems and 17 billing systems to a target of one each).

The strategic "so what" of these technological advancements for investors is clear: they are foundational to building a competitive moat. The increased capacity, efficiency, and simplified architecture enable Lumen to offer higher-performing, more reliable, and more cost-effective services. This is particularly critical in the AI market, where Lumen's Private Connectivity Fabric (PCF) architecture is gaining traction. PCF leverages Lumen's unique conduit-based network to provide dedicated, secure, high-capacity connections between data centers and cloud providers. This direct fiber access model disrupts traditional cloud connectivity that often relies on third-party intermediaries and cross-connect fees, offering customers enhanced performance, security, and scalability while potentially lowering their overall costs. The partnership with Google Cloud (GOOGL), providing direct fiber access up to 400 Gbps and latency reduction through Cloud WAN integration, exemplifies this differentiation. Lumen estimates this network ecosystem and direct fiber access capability opens up a net new, rapidly growing total addressable market of $15 billion.

Transformation Underway: Performance and Outlook

Lumen's transformation is not without its challenges, as reflected in recent financial performance. For the three months ended March 31, 2025, Qwest Corporation reported total operating revenue of $1,222 million, a decrease of 12% from $1,392 million in the same period of 2024. This decline was primarily driven by ongoing erosion in legacy copper-based services ("Other Broadband" down 19%, "Voice and Other" down 10%) and legacy business services ("Harvest" down 12%, "Nurture" down 6%). Even Fiber Broadband revenue decreased by 13%, attributed to customer migration to Lumen's Quantum Fiber service where Lumen bills directly. Affiliate Services revenue also saw a 12% decrease, mainly from lower legacy services provided to affiliates.

Despite revenue pressures, operational efficiency efforts are beginning to show. Total operating expenses decreased by 7%, from $897 million to $834 million, driven by lower employee-related expenses, reduced bad debt, and decreased affiliate expenses. Depreciation increased slightly due to asset growth, while amortization decreased. Net income for the quarter was $284 million, down from $353 million year-over-year. Adjusted EBITDA for Q1 2025 was $929 million, down from $977 million in Q1 2024, resulting in a margin of 29.2%.

In the Mass Markets segment, the focus remains on the Quantum Fiber buildout. In Q1 2025, Lumen added 101,000 fiber-enabled homes, bringing the total to approximately 4.3 million, and added 39,000 Quantum Fiber customers, exceeding 1.1 million subscribers. Fiber ARPU stood at $64. While Quantum Fiber penetration is 26%, legacy copper broadband penetration is 8%, highlighting the ongoing transition and the strategic review of the Mass Markets business.

The strategic PCF deals, totaling $8.5 billion signed since June 2024, represent a significant turning point. These long-term contracts, often involving leases of conduit and fiber or funding for new routes, are deeply accretive and provide critical liquidity. This cash infusion is funding the transformation, including the upfront costs associated with the $1 billion cost takeout program and investments in growth areas.

Looking ahead, management's guidance reflects this investment phase. For the full year 2025, Lumen reiterates its EBITDA guidance of $3.2 billion to $3.4 billion. This includes organic declines similar to 2024 and approximately $200 million in incremental costs related to building the PCF team, investing in cloud infrastructure, and proactive legacy disconnects. Notably, this guidance excludes approximately $300 million in transformation costs associated with the $1 billion cost takeout initiative. Management projects that EBITDA will return to growth in 2026, exceeding $3.5 billion, driven by anticipated improvements in sales performance, lower absolute legacy declines, and the realization of $250 million in run rate savings exiting 2025. Capital expenditures for 2025 are guided at $4.1 billion to $4.3 billion, with the majority allocated to PCF builds, approximately $1 billion for Quantum Fiber, and $400 million to $600 million for maintenance. Free cash flow for 2025 is expected to be in the range of $700 million to $900 million, though it may be lumpy quarter-to-quarter due to the timing of PCF-related cash flows.

Competitive Dynamics and Key Risks

Lumen's strategy directly addresses its competitive position. While facing intense competition across all segments, the company is leveraging its unique fiber footprint and technological advancements to differentiate itself, particularly in the enterprise and AI-driven markets. The focus on PCF and the Lumen Digital platform aims to move beyond competing solely on price in commoditized legacy services and instead offer higher-value, differentiated solutions. The ability to provide direct fiber access and NaaS capabilities positions Lumen against both traditional telcos and digital-native companies that lack owned infrastructure. Management believes its North American business decline rate in Q1 2025 was approximately one quarter of its peers, suggesting early signs of stabilization relative to the industry.

However, significant risks remain. The continued decline of legacy revenues poses an ongoing challenge, requiring successful migration of customers to newer services. Execution risk on the large-scale PCF builds and the complex IT/network transformation is substantial. Macroeconomic factors, including inflation, supply chain constraints, and delayed customer decision-making, could impact financial results and buildout timelines. Regulatory changes, particularly concerning intercarrier compensation, universal service, and broadband deployment, could affect the business. Litigation, including potential costs and liabilities related to legacy lead-sheathed copper cables and the Marshall Fire, represents a notable uncertainty. Furthermore, as a subsidiary, Qwest's liquidity and financial flexibility are significantly tied to Lumen Technologies' overall financial health and ability to meet its obligations, including repayment of amounts due to Qwest. The company's credit ratings (Moody's Caa2, S&P (SPGI) B, Fitch B) reflect its current financial position and leverage, which could impact its access to capital markets.

Conclusion

Qwest Corporation, as a key component of Lumen Technologies, is at a critical juncture, actively transforming its business model to capitalize on the burgeoning AI and multi-cloud markets. The strategy hinges on leveraging its extensive fiber network, enhancing it with advanced technology, and building a digital platform to deliver differentiated, high-value services. The significant PCF deals secured over the past year provide essential funding for this ambitious pivot and the targeted $1 billion cost takeout program. While near-term financial results reflect the ongoing decline in legacy services and the upfront investments required for transformation, management's outlook points to an expected inflection to EBITDA growth in 2026, driven by cost efficiencies and growth in strategic areas. The success of this transformation depends on effective execution of complex buildouts and IT modernization, successful adoption of new digital offerings, and navigating competitive and regulatory pressures. For investors, the story is one of a legacy asset being repurposed and digitized to capture future growth, with the potential for significant value creation if the strategic vision is successfully realized, making progress on PCF construction, NaaS adoption, and cost reduction key indicators to monitor.