Executive Summary / Key Takeaways

• Strategic Pivot to Growth: Lumen Technologies , through its subsidiary Qwest Corporation (CTBB), is undergoing a fundamental transformation, shifting from legacy telecom services to a digital networking powerhouse focused on the AI economy. This pivot is expected to drive business segment revenue growth of $900 million to $1.1 billion by the end of 2028, combining contributions from Private Connectivity Fabric (PCF) deals and Lumen Digital capabilities.
• Technological Leadership in Cloud 2.0: Lumen is building a differentiated, AI-ready network and digital platform, featuring "Fabric Ports" that support thousands of services per port, direct fiber access to hyperscalers, and an expanding "connected ecosystem." This innovation aims to deliver cloud economics, offering customers higher performance, enhanced security, and reduced costs by bypassing traditional intermediaries.
• Strengthened Financial Foundation: Significant debt reduction and refinancing efforts, including the pending $5.75 billion sale of the Mass Markets fiber-to-the-home business to AT&T , are projected to cut annual interest expense by up to $535 million and reduce overall leverage below 4x adjusted EBITDA. This financial strengthening provides ample liquidity to fuel ongoing transformation and growth investments.
• EBITDA Inflection and Cost Optimization: The company anticipates achieving adjusted EBITDA stability in the near term, with an inflection to growth in 2026, targeting over $3.5 billion. This is supported by aggressive modernization and simplification initiatives, expected to yield $350 million in run-rate cost takeout by the end of 2025 and over $1 billion by 2027.
• Competitive Differentiation: Lumen's unique combination of an expansive, high-capacity fiber network and an innovative digital platform positions it "well ahead of the competition" in addressing the urgent needs of AI and multi-cloud architectures, creating a significant competitive moat in a rapidly evolving industry.

A New Era for Lumen: From Legacy to Digital Backbone

Qwest Corporation (CTBB), an indirect wholly-owned subsidiary of Lumen Technologies, Inc., stands at the forefront of a profound industry transformation. Historically rooted in providing traditional telecommunications services across a 14-state local service area, Lumen is now aggressively reshaping its identity to become a leading digital networking services company. This strategic evolution is driven by three core priorities: achieving operational excellence, building the essential backbone for the burgeoning AI economy, and "cloudifying telecom" to meet the demands of a multi-cloud, AI-first marketplace.

The industry landscape is undergoing an unprecedented shift. The advent of artificial intelligence (AI) is projected to expand the data center footprint tenfold by 2030, with public cloud spending expected to surpass $1 trillion in the same period. This explosive growth necessitates a fundamental reset in network architecture. Traditional networks, designed for simpler times, are proving insufficient to handle the extreme bandwidth, low latency, and secure connectivity required for AI workloads and complex hybrid cloud environments. Lumen's strategy directly addresses these critical needs, leveraging its extensive fiber infrastructure and pioneering digital innovations to carve out a unique competitive position.

In this dynamic environment, Lumen's approach stands in stark contrast to many traditional telecom providers. While competitors like Verizon (VZ) and AT&T (T) boast broader national footprints and diversified offerings, Lumen is differentiating itself by focusing on specialized, high-value enterprise solutions. Its strategy is not merely to compete on price for commoditized services, but to offer a fundamentally different, intelligent, and programmable network fabric. This focus allows Lumen to outpace its peers in key growth areas; for instance, Lumen's total business revenue decline of 3.2% year-over-year in Q3 2025 was "well ahead of the competition".

Technological Edge: The AI-Ready Network and Digital Platform

Lumen's competitive advantage is deeply embedded in its technological differentiation, which forms the bedrock of its "Cloud 2.0" strategy. The company is actively investing in a three-pronged approach encompassing its physical layer, digital layer, and a connected ecosystem.

At the physical layer, Lumen is not just expanding but also dramatically enhancing its network capacity and utilization. The company is building new routes, often customer-funded and multi-tenant, and partnering with innovators like Corning (GLW) to deploy advanced fiber solutions that can yield up to four times more capacity from existing and new routes. Further, photonics innovation is enabling up to two times greater fiber efficiency. These efforts are projected to increase Lumen's total inter-city fiber miles from 12 million in 2022 to a remarkable 47 million by 2028, excluding its 22 million metro miles. Simultaneously, overall network utilization is expected to climb from 57% to 70% by 2028, driven by hyperscalers leasing unused conduit and enterprises upgrading their networks. This strategic investment in rapid routes, data center expansion, and metro expansion is creating a ubiquitous, high-capacity networking fabric essential for AI and multi-cloud architectures.

The digital layer is where Lumen truly "cloudifies telecom." The company's Network-as-a-Service (NaaS) offerings provide real-time, on-demand connectivity, allowing customers to control bandwidth, latency, and security through a cloud-style consumption model. A cornerstone of this platform is the "Fabric Port," a device that acts as a bridge between Lumen's Control Center and the physical network. Critically, a single Fabric Port can support thousands of services, a significant departure from legacy architectures that required one port per service. This innovation drives scaled revenue growth at declining marginal costs. NaaS adoption metrics underscore its success: in Q3 2025, active customers grew by 32% quarter-over-quarter, NaaS fabric ports deployed increased by 30%, and services sold rose by 36%. The recent launch of Internet on-demand (IoD) off-net has expanded Lumen's addressable market by nearly 100 times in the United States, further accelerating digital service sales and revenue growth. Looking ahead, "Project Berkeley," a pre-provisioned cross-carrier fabric port, is slated for an early 2026 launch, promising AI-ready, intelligent, and universal access for both first- and third-party services, regardless of who owns the underlying infrastructure.

Lumen is also cultivating a connected ecosystem by partnering with dozens of technology companies, including hyperscalers like Microsoft (MSFT), Google (GOOGL), and AWS (AMZN), data center providers such as Digital Realty (DLR) and QTS, and AI platform companies like Palantir (PLTR). This ecosystem enables direct fiber access to customer data centers, bypassing traditional carrier-neutral facilities and their associated cross-connect fees. For example, a partnership with Google Cloud provides direct fiber access with speeds up to 400 gigabits per second and reduces latency by over 40% when integrating with Google's cloud WAN solution. This unique approach simplifies network operations, enhances performance, security, and scalability, and positions Lumen to capture a significant share of the fast-growing $15 billion multi-cloud networking market. This comprehensive technological strategy forms a formidable competitive moat, as "nobody is doing what we're doing" in integrating physical infrastructure with a programmable, API-first digital platform.

Strategic Evolution and Financial Transformation

Lumen's journey has been marked by a decisive shift away from legacy constraints towards a more agile, growth-oriented model. A pivotal moment in this transformation was the agreement on May 21, 2025, to sell the Lumen Mass Markets fiber-to-the-home business in 11 states to AT&T (T) for $5.75 billion in cash. This divestiture, expected to close in early 2026, is not merely a transaction but a strategic realignment, providing "strategic clarity and a path to financial freedom". The proceeds are earmarked to pay down approximately $4.8 billion in Lumen's super priority debt, which is projected to reduce annual interest expense by an impressive $535 million and decrease capital expenditures by roughly $1 billion.

This move is expected to bring Lumen's overall leverage below 4x adjusted EBITDA post-transaction, solidifying its balance sheet as a "point of strength". Following this strategic shift, Lumen voluntarily relinquished its Rural Digital Opportunity Fund (RDOF) awards in Q2 2025, incurring an $11 million revenue reduction and $12 million in fees, further underscoring its commitment to the enterprise digital networking focus.

The company has aggressively managed its debt profile, executing multiple refinancing and redemption activities. In Q3 2025 alone, Lumen priced $2 billion of 7% first lien notes, added $425 million to these notes, and repriced a $2.4 billion term loan, collectively reducing annual interest expense by $135 million in the quarter and $235 million year-to-date. These actions, coupled with credit rating upgrades, demonstrate a proactive approach to financial health, moving away from a historically challenged balance sheet.

Operational excellence is being driven by a comprehensive modernization and simplification program. Phase 1 of a new ERP system (quote-to-cash) was successfully implemented in Q3 2025, with Phase 2 (procure-to-pay) slated for next year to create a unified ledger and enhance efficiencies. These initiatives are on track to deliver over $250 million in run-rate cost takeout by the end of Q3 2025, with a target of $350 million by year-end 2025 and over $1 billion by the end of 2027.

Financial Performance and Operational Momentum

Lumen Technologies reported strong financial results in Q3 2025, with revenue, EBITDA, and free cash flow all exceeding Street consensus. This performance reflects the early successes of its strategic transformation.

Qwest Corporation's total operating revenue decreased by $202 million for the three months ended September 30, 2025, compared to the same period in 2024. This decline was primarily driven by its Mass Markets segment, where "Other Broadband" revenue fell 18% due to fewer copper-based broadband customers, "Voice and Other" revenue decreased 13% from continued customer losses and the RDOF relinquishment, and "Fiber Broadband" revenue declined 15% as customers migrated to Lumen's Quantum Fiber services. In the Business segment, Qwest's "Harvest" revenue (legacy services) decreased 12%, "Nurture" revenue (mature offerings) fell 12%, and "Grow" revenue (invested products) saw a 6% decline. Affiliate Services revenue also decreased 16%.

However, a closer look at Lumen's consolidated performance reveals a compelling narrative of strategic growth. The "Grow" revenue base now constitutes 50% of North American enterprise revenue, a significant increase from 35.5% just three years ago. This "Grow" segment, which includes dark fiber and IP services, increased 10.5% year-over-year in Q3 2025, with non-PCF products driving the largest portion of this growth. These "Grow" products typically carry an approximate 80% direct margin.

Adjusted EBITDA for Q3 2025 was $787 million, with a 25.5% margin. This was impacted by anticipated declines in public sector "Harvest" revenue and $216 million in special items related to severance, transaction costs, and modernization initiatives. Despite these factors, the company's underlying operational improvements are evident. In Q1 2025, Lumen achieved the lowest level of absolute dollar disconnects in five quarters, an over 8% improvement from Q1 2024. The company also reported over 15% year-over-year sales growth in its North American enterprise channels in 2024, including over 13% growth in IP and waves sales.

Capital expenditures for Q3 2025 were approximately $1 billion. Free cash flow, excluding special items, was over $1.7 billion in Q3 2025, though management notes its lumpiness due to large PCF builds.

Outlook and Strategic Trajectory

Lumen's management has provided clear guidance, signaling confidence in its transformation. For the full year 2025, adjusted EBITDA is reiterated to be near the high end of the $3.2 billion to $3.4 billion range, despite the $46 million RDOF giveback. This guidance includes approximately $200 million in incremental costs associated with PCF team expansion, proactive disconnects of uneconomical legacy services, and cloud infrastructure investments, but excludes $300 million in transformation costs.

Looking ahead to 2026, Lumen anticipates adjusted EBITDA to exceed $3.5 billion, marking an inflection to growth. This growth is expected to be driven by continued modernization and simplification savings, coupled with improving revenue trends. The company's 2025 capital expenditure guidance remains at $4.1 billion to $4.3 billion, with expectations to be at the low end of this range, and overall capital intensity is projected to fall over time. Cash interest for 2025 is expected at the low end of $1.2 billion to $1.3 billion.

The long-term revenue growth story is compelling. The over $10 billion in Private Connectivity Fabric (PCF) deals, combined with existing operations and maintenance, is expected to generate a recurring revenue stream of $400 million to $500 million by the end of 2028. Furthermore, Lumen Digital capabilities, including NaaS, Edge Solutions, Security, and the Connected Ecosystem, are projected to yield an additional $500 million to $600 million in incremental revenue run rate by the end of 2028. This combined incremental revenue of $900 million to $1.1 billion by 2028 is the clear pathway for Lumen's business segment to achieve revenue growth. The company also expects to receive a $400 million tax refund in 2025 from recent legislation, contributing to a raised full-year free cash flow guidance of $1.2 billion to $1.4 billion.

Risks and Challenges

Despite the strong progress, Lumen faces several risks. The successful completion of the Mass Markets fiber-to-the-home divestiture to AT&T (T) is subject to regulatory approvals and other conditions, and any delays or failure to close could negatively impact financial markets and debt reduction goals. The company also continues to manage declines in its legacy "Harvest" and "Nurture" revenue streams, which, while becoming a smaller portion of the business, still represent a headwind. New build construction projects for PCF are "inherently expensive, risky and lower margin," requiring careful management to ensure value accretion. Macroeconomic factors such as inflation, supply chain disruptions, and delayed customer decision-making could also impact financial results.

Lumen is also exposed to various legal and environmental contingencies, including allegations regarding lead-sheathed copper cables and patent infringement lawsuits, for which it has accrued $70 million as of September 30, 2025, but cannot fully estimate potential losses. The company's liquidity, while improving, remains dependent on Lumen Technologies' ability to repay affiliate obligations.

Conclusion

Lumen Technologies (LUMN) (CTBB) is executing a bold and necessary transformation, shedding the vestiges of legacy telecom to emerge as a critical enabler of the AI economy. By strategically divesting non-core assets, aggressively managing its debt, and relentlessly pursuing operational efficiencies, Lumen is building a robust financial foundation. Its innovative digital platform, anchored by the expansive fiber network and pioneering technologies like Fabric Ports and direct cloud access, is creating a powerful competitive moat in the rapidly expanding multi-cloud and AI networking markets.

The company's clear path to adjusted EBITDA growth in 2026 and projected business segment revenue growth of $900 million to $1.1 billion by 2028 underscores the tangible results of this strategic pivot. While challenges remain, particularly in managing legacy declines and the complexities of large-scale infrastructure builds, Lumen's commitment to disciplined investment and technological leadership positions it favorably. For discerning investors, Lumen represents a compelling opportunity to participate in the fundamental reshaping of network architecture, driven by the insatiable demands of artificial intelligence, with a company that is not just adapting, but actively defining the future of digital connectivity.