Lumen's Q3 2025 Earnings Call: Contradictions Emerge on Grow Revenue Sustainability, PCF's Role in Growth Strategy, and Booking Impacts

Date of Call: October 30, 2025

Financials Results

• Revenue: $3.087B, down 4.2% YOY

Guidance:

• Q4 revenue expected to be negatively impacted by public-sector Harvest normalization and a prior-year one-time Grow item.
• 2025 adjusted EBITDA reiterated near the high end of $3.2B–$3.4B; assumes organic revenue declines and excludes roughly $300M in transformation costs.
• 2025 CapEx guidance $4.1B–$4.3B and cash interest $1.2B–$1.3B, both expected near the low end.
• Full-year 2025 free cash flow reiterated at $1.2B–$1.4B (includes expected $400M tax refund).
• AT&T fiber-to-the-home sale expected early 2026 to enable ~ $4.8B debt paydown, materially reducing leverage and interest expense.

Business Commentary:

• Revenue Growth and Pivotal Digital Strategy:
• Lumen reported strong financial results with revenue, EBITDA, and free cash flow exceeding expectations.
• The company signed an additional $1 billion in private connectivity fabric (PCF) deals, bringing the total to over $10 billion.

• Growth was driven by the shift towards a digital strategy, including the adoption of NaaS, and the expansion of AI-ready services.

• Operational Efficiency and Cost Reduction:

• Lumen implemented phase 1 of its new ERP system, achieving $250 million in run rate cost takeout by Q3.
• Debt refinancing and term loan repricing led to a $135 million annual interest expense reduction.

• The transformation focused on simplification and modernization, enhancing operational efficiency.

• Balance Sheet Improvement and Debt Management:

• The company significantly improved its balance sheet, reducing annual interest expense by approximately $235 million.
• The expected sale of the fiber-to-the-home business will enable the paydown of approximately $4.8 billion in super priority debt.

• These actions are aimed at reducing leverage and lowering borrowing costs, strengthening Lumen's financial profile.

• Digital Platform and Connected Ecosystem:

• Lumen's digital platform saw strong growth with active customers increasing by 32% in Q3.
• The company launched Internet on-demand (IoD) off-net, expanding its addressable market by nearly 100x.
• Strategic partnerships with tech companies like Palantir and Microsoft are enhancing Lumen's ecosystem, fostering revenue growth and market expansion.

Sentiment Analysis:

Overall Tone: Positive

• Management repeatedly described the quarter as "very productive" with results "ahead of Street consensus," highlighted key metrics (Grow now ~50% of NAM enterprise revenue), $10B PCF backlog and NaaS adoption, and reiterated 2025 guidance while forecasting material debt paydown from the AT&T sale—all signaling confidence in execution and a pivot to growth.

Q&A:

• Question from Michael Rollins (Citigroup Inc., Research Division): How do the new $1B of PCF bookings compare margin-wise to prior tranches and how large is the remaining pipeline? Also, what's driving Grow revenue and is double-digit growth in Grow sustainable?
  Response: The $1B+ bookings have margins comparable to prior tranches; the pipeline is strong but unspecified; Grow's double-digit quarter was driven mainly by non-PCF core network products (dark fiber, IP) and PCF is not expected to be the sole long-term growth engine.

• Question from Sebastiano Petti (JPMorgan Chase & Co, Research Division): Given PCF and digital run rates and current transition costs, what are the main puts and takes in the EBITDA bridge from 2025 to 2026?
  Response: EBITDA improvement will be driven by an improving Grow mix (slower declines) and the benefits from modernization and simplification (cost takeout) that accelerate through year-end and into 2026.

• Question from Frank Louthan (Raymond James & Associates, Inc., Research Division): Can you quantify revenue impact, timing and magnitude from recent ecosystem items (e.g., Palantir, QTS)?
  Response: Ecosystem deals are part of the connected‑ecosystem play that accelerate existing digital revenue pathways; magnitude/timing are embedded in broader digital targets and more detail will be provided at Investor Day.

• Question from Gregory Williams (TD Cowen, Research Division): With the stock strength, does it make sense to issue equity to bolster the balance sheet? And are we in a prolonged Phase 1 training cycle for AI?
  Response: Management is open to all capital-allocation options but is focused on equity-holder value and has no specific equity action announced; AI buildout is intensifying, multi-decade and phases will overlap rather than be strictly sequential.

• Question from Eric Luebchow (Wells Fargo Securities, LLC, Research Division): What incremental investments (data centers, cross-connects, on/off-net locations) are required to hit the $500M–$600M digital target, and any timing on legacy disconnects?
  Response: Required investments are already contemplated in OpEx/CapEx plans and management expects capital intensity to decline over time; legacy disconnects are mostly normalized and Q4 will be impacted by a prior-year one-time Grow revenue item.

• Question from Nicholas Del Deo (MoffettNathanson LLC): How are you promoting and incenting NaaS to sales and how are you prioritizing on‑net vs off‑net opportunities?
  Response: Lumen is reallocating engineering, marketing, sales and operations to prioritize NaaS, demoting legacy analog offerings where NaaS is available and increasingly incenting the sales force to sell the new digital services.

• Question from Nicholas Del Deo (MoffettNathanson LLC): Clarification on PCF composition—last quarter you noted more new builds; are the margins on this quarter's $1B of deals different?
  Response: This quarter's $1B is primarily overpulls leveraging existing conduit and therefore has a similar economic profile and margins to prior tranches; management remains disciplined and selective on new-build economics.

• Question from Michael Funk (BofA Securities, Research Division): How does Lumen's model differ from traditional telecom and what should we expect for cash-EBITDA CAGR?
  Response: Lumen's 'one port, many services' digital and ecosystem layers reduce capital intensity and increase margins versus legacy stand‑alone services; detailed cash-EBITDA CAGR and modeling will be shared at Investor Day.

• Question from Jonathan Atkin (RBC Capital Markets, Research Division): Can you expand on off‑net NaaS capabilities and demand—what lies ahead?
  Response: IoD off‑net enables NaaS regardless of who owns the building endpoint; Project Berkeley (launch 2026) will make any pipe 'smart' via a fabric port, accelerating commercial expansion and cross‑carrier service delivery.

• Question from Jonathan Atkin (RBC Capital Markets, Research Division): Will M&A or tuck‑ins be used to accelerate capacity or capabilities?
  Response: Management evaluates M&A opportunistically as part of capital-allocation decisions but has no specific tuck-in announced; all options remain under consideration.

Contradiction Point 1

Revenue Growth Sustainability in Grow Segment

It involves the sustainability of revenue growth expectations in the Grow segment, which is crucial for investors and stakeholders.

What drives the growth in Grow revenue and is double-digit growth sustainable? - Michael Rollins(Citigroup Inc., Research Division)

2025Q3: Grow revenue growth is driven by dark fiber and IP services, with PCF contributing but not being the primary driver. Double-digit growth is sustainable, supported by traditional connectivity converting to digital. PCF is not a long-term growth driver as it stabilizes once built. - Christopher Stansbury(CFO)

What caused the 2.4% YoY decline in North American enterprise revenue, and how might Public Sector performance impact future revenue? - Michael Ian Rollins(Citi)

2025Q2: Growth in Grow, on a constant currency basis, was 8.2%. This growth rate was above the 12% growth target and the best performance in any quarter since 2018 when we deployed the first wave of fiber into our network in the upgrade and expansion efforts that we talked about. - Christopher Stansbury(CFO)

Contradiction Point 2

PCF Impact on Revenue and Growth Strategy

It highlights differing perspectives on the role of PCF (Private Cloud and Fiber) in driving revenue growth and the company's overall growth strategy.

How does the latest $1B in PCF bookings compare to previous tranches in margins? Can you provide an update on the PCF pipeline? - Michael Rollins(Citigroup Inc., Research Division)

2025Q3: The $1 billion plus in PCF deals is equivalent to the margins of previous tranches, with a disciplined approach to ensure only value-accretive deals are done. The pipeline includes various hyperscalers and neocloud providers, with expectations to exceed prior expectations as this process spans multiple years. - Kathleen Johnson(CEO)

How do public sector temporary rate hikes impact EBITDA, and do they offset higher off-net costs? - Nick Del Deo(MoffettNathanson)

2025Q2: PCF bookings were better than expected. We continue to expand our business in this area, which gives us confidence that our original guidance of $8.5 billion in total PCF bookings by the end of 2026 is achievable. - Kathleen E. Johnson(CEO)

Contradiction Point 3

PCF Impact on Grow Revenue

It discusses the role of PCF in driving Grow revenue, which is crucial for understanding Lumen's growth strategy and revenue projections.

Can you explain the growth in Grow revenue and whether double-digit growth is sustainable? - Michael Rollins(Citigroup Inc., Research Division)

2025Q3: Grow revenue growth is driven by dark fiber and IP services, with PCF contributing but not being the primary driver. Double-digit growth is sustainable, supported by traditional connectivity converting to digital. PCF is not a long-term growth driver as it stabilizes once built. - Christopher Stansbury(CFO)

What drove the 10% YoY increase in Grow revenue for Q1, and how much came from existing vs. new customers? Can this segment sustain double-digit growth in the coming quarters? - Michael Rollins(Citi)

2025Q1: The Grow revenue increase was driven by dark fiber deals not related to the $8.5 billion in PCF. - Chris Stansbury(CFO)

Contradiction Point 4

Grow Revenue Sustainability

It pertains to the sustainability of Grow revenue growth, which is a key metric for investors to assess the company's growth prospects.

Can you explain the factors driving the growth in Grow revenue and whether double-digit growth is sustainable? - Michael Rollins (Citigroup Inc., Research Division)

2025Q3: Grow revenue growth is driven by dark fiber and IP services, with PCF contributing but not being the primary driver. Double-digit growth is sustainable, supported by traditional connectivity converting to digital. - Christopher Stansbury(CFO)

How is the 15% North America sales growth impacting progress in large enterprises and mid-market segments? What portion of the sequential revenue growth is recurring versus one-time? - Michael Rollins (Citi)

2024Q4: Growth in Grow products is positive due to the State of California project. Grow revenue now represents about half of North American enterprise sales. - Christopher Stansbury(CFO)

Contradiction Point 5

PCF Bookings and Revenue Impact

It involves differing statements regarding the impact of PCF bookings on revenue growth, which is crucial for understanding the company's growth strategy and financial performance.

How does the latest $1 billion in PCF bookings compare to prior tranches in terms of margins? Can you update us on the PCF pipeline? - Michael Rollins (Citigroup Inc., Research Division)

2025Q3: The $1 billion plus in PCF deals is equivalent to the margins of previous tranches, with a disciplined approach to ensure only value-accretive deals are done. - Kathleen Johnson(CEO)

How is the 15% North America sales increase impacting progress in large enterprise and mid-market segments? How much of the sequential Grow revenue is recurring versus one-time? - Michael Rollins (Citi)

2024Q4: In 2024, we ended the year with $3 billion in PCF bookings with an average of $100 million in deals per transaction and a $20 billion backlog. - Kathleen Johnson(CEO)