Executive Summary / Key Takeaways

• Lumen Technologies is undergoing a significant transformation, pivoting from a legacy telecom model to a digitally-focused network services provider aiming to capitalize on the AI economy and multi-cloud connectivity, funded partly by strategic asset monetization and cost reduction.
• The company is leveraging its extensive fiber network and investing in technological differentiators like the Lumen Digital platform, Fabric Ports, and Direct Fiber Access to cloud providers, positioning itself for a net new $15 billion TAM in multi-cloud AI-first enterprise needs.
• Recent financial results reflect this transition, with Q1 2025 revenue of $3.18 billion showing a 3.3% year-over-year decline, but the high-margin 'Grow' segment, crucial for the new strategy, saw revenue increase by 7.3%.
• Lumen is executing a $1 billion cost takeout plan by the end of 2027, driven by unifying network architectures and simplifying IT systems, with an expected run rate savings of over $250 million exiting 2025, which is key to future margin expansion.
• While 2025 is projected as an investment year with EBITDA expected to be below 2024 levels, management forecasts a significant rebound and return to total EBITDA growth in 2026 (> $3.5 billion), supported by cost savings, improving sales mix, and revenue from over $8.5 billion in signed Private Connectivity Fabric (PCF) deals.

Setting the Stage: A Telecom Transformation in the Age of AI

Lumen Technologies operates at the intersection of legacy telecommunications infrastructure and the burgeoning demands of the digital economy, particularly those driven by artificial intelligence and the proliferation of multi-cloud architectures. The company's core business revolves around providing integrated network products and services to enterprise and mass markets customers, underpinned by one of the world's most interconnected networks, built over decades through strategic acquisitions and infrastructure development.

The company's history, marked by significant mergers like the integration of Level 3 Communications, Inc., has endowed it with a vast fiber footprint, including a valuable conduit-based network. However, this growth also brought complexity, including accumulated technical debt and multiple disparate network architectures. Recognizing the secular headwinds facing traditional telecom services and the transformative potential of emerging technologies, Lumen has embarked on a bold strategic pivot. The overarching goal is to move beyond being a provider of "dumb pipes" to become a trusted digital network services company, enabling customers to connect people, data, and applications quickly, securely, and effortlessly in an increasingly complex digital landscape.

This strategic shift is centered on three key priorities: driving operational excellence, building the backbone for the AI economy, and Cloudifying Telecom. These pillars are not merely aspirational; they are supported by concrete initiatives leveraging Lumen's foundational assets and technological advancements.

At the heart of Lumen's competitive positioning is its extensive fiber network. This physical infrastructure provides a strategic moat, offering unique routes, vast coverage, and the capacity required for high-bandwidth, low-latency applications critical to modern enterprises and AI workloads. Lumen is enhancing this asset through partnerships, such as its collaboration with Corning (GLW), which enables the deployment of new fiber solutions capable of quadrupling capacity on existing and new routes. Further leveraging Photonics innovation can yield up to two times greater fiber efficiency. These technological advancements are projected to significantly increase total inter-city fiber network capacity from 12 million miles in 2022 to a potential 47 million miles by 2028, alongside its 22 million metro miles, providing substantial room for growth.

In the competitive landscape, Lumen faces formidable rivals like AT&T (T), Verizon (VZ), T-Mobile (TMUS), and Charter Communications (CHTR). While these larger peers often boast greater scale, broader market share (e.g., AT&T's significant wireless and broadband presence), and stronger overall financial metrics (higher revenue, typically better margins, and more robust cash flow generation), Lumen is carving out a differentiated position. Its focus on specialized fiber infrastructure and emerging digital services directly targets the evolving needs of hyperscalers and large enterprises in the AI and multi-cloud space, areas where its network assets and strategic investments in digital platforms offer distinct advantages. For instance, Lumen's direct fiber access capabilities aim to bypass traditional third-party intermediaries, potentially offering customers cost and performance benefits that differentiate it from competitors relying on older interconnection models. While precise, directly comparable market share figures for all niche segments are challenging to ascertain, Lumen's targeted approach in high-growth areas like PCF and NaaS suggests an intent to capture share by offering capabilities not universally matched by its peers.

Strategic Pillars and Operational Execution

Lumen's transformation is actively being executed through its three core priorities. Driving operational excellence involves a rigorous focus on improving fundamental business processes. This includes upgrading systems, simplifying the product portfolio, unifying disparate network architectures, and enhancing go-to-market strategies. Evidence of progress includes improved customer satisfaction scores across enterprise segments and a notable 14% sequential improvement in disconnects in Q3 2024, reaching their lowest level in over five quarters. Sales momentum in North American enterprise channels has been strong, with large enterprise and mid-market sales up nearly 26% year-over-year in Q2 2024, including significant growth in IP and high-capacity wave sales.

A critical component of operational excellence is the ambitious cost takeout program, targeting $1 billion in annualized savings by the end of 2027. This initiative is rooted in deeply strategic infrastructure simplification. By unifying its four legacy network architectures into a single, standardized fabric, Lumen aims to enable massive simplification across its product portfolio, reducing thousands of product codes to a target of around 300. This network unification also paves the way for significant IT simplification, including consolidating numerous order management and billing systems. While this multi-year effort requires upfront investment, it is expected to yield material and enduring bottom-line benefits, with a target of over $250 million in run rate cost benefits delivered by the end of 2025.

Building the backbone for the AI economy is a major growth vector for Lumen, leveraging its unique fiber assets. The company has secured over $8.5 billion in Private Connectivity Fabric (PCF) sales with major technology companies, including hyperscalers and social platforms. These deals are deeply accretive and strategically timed, providing significant cash flow that funds the company's transformation efforts and enables deleveraging. Construction on these PCF projects is underway, with the first tranche of 24 locations on track for completion in Q2 2025. This initiative not only monetizes existing assets like empty conduit but also involves building new routes, strategically increasing the utilization of Lumen's expansive network from 57% in 2022 to a target of 70% by 2028. The demand from hyperscalers and enterprises upgrading their networks (evidenced by a nearly 50% increase in 100- and 400-gig wave sales in 2024) underscores the critical need for this infrastructure in the AI era.

Cloudifying Telecom represents Lumen's second major growth vector, aiming to disrupt the industry by building a digital layer on top of its physical network. This involves creating the Lumen Digital platform, designed to provide friction-free, high-performing digital network experiences. Unlike many traditional telcos, Lumen is natively integrating this platform with its fiber network to enable enterprises to digitally design, price, order, and consume secure networking services in a hybrid multi-cloud world. Key technological components include the Lumen Digital Control Center, which digitizes the customer lifecycle, and the Fabric Port, a device capable of supporting thousands of services on a single port, a significant departure from legacy architectures. This approach enables "cloud economics" for networking, where revenue can grow with reduced marginal cost. The Lumen Connectivity Fabric (LCF) is the portfolio of digital services delivered via this platform, including flagship Network-as-a-Service (NaaS) offerings like Internet on Demand and Ethernet on Demand. Lumen is seeing promising early adoption, with new Lumen Digital customers growing 23% quarter-over-quarter in Q1 2025, new Fabric Ports increasing 26%, and services layered on ports growing 29%. The company also sees significant potential in voice cloud services, launching the Lumen cloud communications platform (LCC) to target the growing $47 billion+ cloud voice TAM, offering legacy customers a migration path to a more efficient IP-based network. This digital transformation is expected to open access to a net new total available market estimated at least $15 billion.

Financial Performance and Outlook

Lumen's recent financial performance reflects the dynamics of its transformation – managing legacy declines while investing in and growing new areas. For the three months ended March 31, 2025, total operating revenue was $3.18 billion, a 3.3% decrease compared to $3.29 billion in the prior-year period. This decline was influenced by ongoing secular pressures in legacy services and the impact of prior divestitures.

Breaking down revenue by segment reveals the strategic shift in action. The Business segment generated $2.52 billion in revenue in Q1 2025, down 2.6% year-over-year. Within this, the 'Grow' product category, representing areas of significant investment and future focus, saw revenue increase by 7.3% to $1.14 billion, driven by strength in dark fiber, conduit, and IP services. This growth, particularly in high-margin areas like Grow (carrying approximately 77% direct margin in Q1 2025), is critical to offsetting declines in the 'Nurture' (down 14.1% to $666 million, ~61% direct margin) and 'Harvest' (down 8.2% to $534 million, ~69% direct margin) categories, which represent more mature and legacy offerings. The Mass Markets segment reported revenue of $658 million, a 5.9% decrease year-over-year, primarily due to declines in copper-based broadband and voice services, partially offset by strong growth in Fiber Broadband revenue (up 22.9% to $209 million). The Mass Markets team continues to execute well on fiber deployment, adding 101,000 enabled homes in Q1 2025 to reach approximately 4.3 million, and adding 39,000 Quantum Fiber customers to surpass 1.1 million subscribers with an ARPU of around $64.

Operating income for Q1 2025 was $107 million, compared to $45 million in Q1 2024. Total other expense, net, was $352 million, compared to $57 million in the prior year, primarily driven by higher interest expense ($347 million vs. $291 million) and a net loss on early retirement of debt ($35 million vs. a $275 million gain in Q1 2024 related to prior debt transactions). This resulted in a loss before income taxes of $245 million and a net loss of $201 million (basic and diluted loss per common share of $0.20), compared to net income of $57 million (basic and diluted earnings per common share of $0.06) in Q1 2024.

Adjusted EBITDA for Q1 2025 was $929 million, resulting in a 29.2% margin. This compares to $977 million and a 29.7% margin in Q1 2024. The slight margin compression reflects the impact of investments in transformation and PCF startup costs, alongside legacy revenue declines, partially offset by cost management efforts.

From a liquidity perspective, Lumen held $1.90 billion in cash and cash equivalents as of March 31, 2025. Net cash provided by operating activities was $1.09 billion in Q1 2025, slightly down from $1.10 billion in Q1 2024, influenced by timing differences and lower net income adjusted for non-cash items, partially offset by increased deferred revenue from PCF deals. Net cash used in investing activities increased to $769 million from $698 million, primarily due to higher capital expenditures ($791 million vs. $713 million). Net cash used in financing activities decreased significantly to $314 million from $1.06 billion, mainly due to higher net proceeds from debt issuance in Q1 2025 compared to Q1 2024, and lower debt extinguishment costs.

Lumen has made significant strides in strengthening its balance sheet. Since Q2 2023, it has refinanced over $15 billion of debt, extended over $10 billion in maturities, and secured over $2.3 billion in new liquidity. Key actions include the March 2024 debt modification and extinguishment transactions and the March 2025 refinancing of $2.4 billion in term loans, extending maturities to 2032 and reducing annual interest expense by approximately $55 million. As of March 31, 2025, total long-term debt was $17.33 billion. The company believes it was in compliance with its debt covenants as of this date. The cash generated from PCF sales is expected to fund the transformation, close any free cash flow deficit until sustainable positive free cash flow growth is reached, and provide flexibility for further deleveraging. Recent news confirms the sale of the Mass Markets fiber business to AT&T for $5.75 billion cash, expected to close in 1H 2026, which is anticipated to significantly reduce debt and interest expense, further strengthening the balance sheet and allowing a sharper focus on the enterprise segment.

Looking ahead, Lumen reiterates its 2025 EBITDA guidance range of $3.2 billion to $3.4 billion. This outlook anticipates continued organic declines similar to 2024, offset by roughly $200 million in incremental costs related to PCF ramp-up and cloud investments, alongside the initial benefits from modernization efforts. Excluded from this EBITDA guidance are approximately $300 million in transformation costs associated with the $1 billion cost takeout goal. Total capital expenditures for 2025 are projected between $4.1 billion and $4.3 billion, with the increase primarily driven by PCF contract execution costs, alongside approximately $1 billion for Quantum Fiber and $400-$600 million for maintenance CapEx. Free cash flow for 2025 is guided to be between $700 million and $900 million. While 2025 is framed as an investment year with EBITDA expected to be below 2024 levels, management expresses confidence in a significant rebound and return to total EBITDA growth in 2026, projecting EBITDA greater than $3.5 billion, driven by the realization of cost savings, improving sales mix, and the ramp-up of PCF revenue.

Risks and Challenges

Despite the strategic pivot and progress, Lumen faces significant risks and challenges. The secular decline in legacy services continues to be a headwind, impacting overall revenue and profitability. The success of the transformation hinges on the pace at which growth in the 'Grow' segment and new digital services can offset these declines, a process that takes time and is subject to market adoption rates and competitive pressures.

Macroeconomic uncertainty, inflation, supply chain constraints, and geopolitical factors could impact operating costs, delay network expansion plans, and affect customer spending decisions, potentially slowing the transformation timeline and impacting financial results.

The ambitious $1 billion cost takeout plan requires complex execution, including integrating disparate network architectures and IT systems. Delays or unforeseen challenges in these projects could impact the realization of expected savings and the timeline for EBITDA growth.

While significant progress has been made on the balance sheet, Lumen still carries a substantial debt load. Although PCF cash flow and asset sales are intended to improve liquidity and enable deleveraging, adverse changes in credit markets or inability to meet debt covenants could pose challenges.

Competition remains intense across all segments. Larger competitors like AT&T and Verizon possess greater scale and financial resources, enabling significant investments in network upgrades and aggressive pricing strategies. Lumen's ability to differentiate through its fiber assets, digital platform, and specialized services is crucial to gaining and retaining market share against these powerful rivals.

Furthermore, potential liabilities related to legacy infrastructure, such as lead-sheathed copper cables, and ongoing legal and regulatory proceedings represent contingent risks that could result in unexpected costs or penalties, potentially impacting financial condition and cash flows.

Conclusion

Lumen Technologies is in the midst of a profound transformation, strategically pivoting to leverage its core fiber assets and emerging digital capabilities to address the high-growth demands of the AI economy and multi-cloud world. The narrative is one of actively managing decline in legacy businesses while aggressively pursuing new revenue streams and driving significant operational efficiencies.

Key to this story is Lumen's differentiated technology – its extensive fiber network enhanced by partnerships for increased capacity and efficiency, and the development of the Lumen Digital platform, Fabric Ports, and Direct Fiber Access to enable a new paradigm of digital network services. These technological advancements, alongside strategic initiatives like the $8.5 billion+ in PCF deals and the $1 billion cost takeout plan, form the foundation of the company's investment thesis.

While the financial results in Q1 2025 reflect the ongoing challenges of legacy decline and the costs of transformation, the growth in the high-margin 'Grow' segment and the clear roadmap for cost reduction and future revenue streams from PCF and digital services provide a credible path to improved financial performance. The projected rebound to EBITDA growth in 2026 signals management's confidence in the trajectory. For investors, the focus is on Lumen's execution against its strategic priorities – the successful implementation of the cost takeout plan, continued adoption of digital services, timely execution of PCF builds, and further strengthening of the balance sheet through deleveraging. The competitive landscape remains challenging, but Lumen's targeted approach and technological differentiation offer the potential to capture value in critical, growing markets. The transformation is complex, but the pieces are in place for Lumen to unlock its digital potential.