Lumen's Q3 2025 Earnings Call: Contradictions Emerge on Public Sector Revenue, AI/Transformation Investments, PCF Pipeline, and Hyperscaler Deals

Date of Call: October 30, 2025

Financials Results

• Revenue: $3.087B, down 4.2% YOY
• Operating Margin: Adjusted EBITDA margin 25.5% (Adjusted EBITDA $787M vs ~ $900M in the year-ago quarter)

Guidance:

• Q4 revenue expected to be negatively impacted by normalized public-sector harvest declines.
• 2025 adjusted EBITDA reiterated to be near the high end of $3.2–$3.4 billion.
• 2025 CapEx guidance $4.1–$4.3 billion (expect to be at the low end).
• 2025 cash interest guidance $1.2–$1.3 billion (expected at low end).
• Full-year 2025 free cash flow $1.2–$1.4 billion (assumes a $400M tax refund); expect EBITDA stability and an inflection to growth in 2026.

Business Commentary:

• Revenue and Financial Performance:
• Lumen reported strong financial results with revenue, EBITDA, and free cash flow all ahead of street consensus.
• The company experienced a 10.5% year-over-year increase in North America enterprise grow revenue, with grow now representing 50% of North American enterprise revenue.

• The financial performance was driven by Lumen's successful phase one implementation of its new ERP system, cost takeouts, and strategic business transformations.

• Private Connectivity Fabric (PCF) and Digital Platform Expansion:

• Lumen signed an additional over $1 billion in PCF deals, bringing the total to over $10 billion.
• The digital platform saw a 32% increase in active customers and a 30% growth in Network-as-a-Service (NAS) fabric ports deployed in Q3.

• These developments reflect Lumen's strategy to pivot the company back to growth by building a digital platform and expanding private connectivity services.

• Balance Sheet Improvement and Strategic Investments:

• Lumen completed a $2.4 billion debt refinancing and a $2.4 billion term loan repricing, reducing annual interest expense by $135 million.
• The company is targeting the closure of its $5.75 billion sale of its fiber-to-the-home business to AT&T, expected to close in early 2026.

• These financial moves are aimed at improving Lumen's debt profile, reducing leverage, and enhancing financial flexibility for future growth.

• AI and Network Infrastructure Investments:

• Lumen is focused on expanding its physical network and investing in three major fabric infrastructure projects to support AI architecture needs.
• The company is constructing over 3,200 miles of overpulls on 27 data center routes, meeting or exceeding end-year targets.
• These investments are driven by Lumen's recognition of the urgent need for structural change in network architecture to support the growing demands of AI workloads.

Sentiment Analysis:

Overall Tone: Positive

• Management highlighted 'strong financial results', 'pivot this company back to growth', and 'debt is no longer a headwind'; they reiterated adjusted EBITDA near the high end of $3.2–$3.4B and projected $900M–$1.1B incremental revenue run-rate exiting 2028 from PCF and digital, signaling constructive outlook and execution.

Q&A:

• Question from Mike Rollins (Citi): On the PCF deals, how does the new $1B of bookings compare to prior tranches (margins)? How much pipeline remains? And on grow revenue (now >50% of NA enterprise), what is driving that and is double-digit growth sustainable?
  Response: PCF bookings signed this quarter have margins equivalent to prior tranches; the pipeline is sizable but management declined to quantify; grow revenue strength is broad-based (dark fiber, IP, Waves, connectivity) and double-digit in the quarter is driven by those products rather than being PCF-dependent.

• Question from Sebastian O. Petty (J.P. Morgan): Given the run rates for PCF and digital buckets versus transition/transformation costs in 2025, can you help frame the EBITDA bridge from 2025 to 2026? Also, is the company strategically complete to attack growth areas?
  Response: EBITDA improvement to 2026 is expected to be driven by an improving revenue mix (grow products increasing share) plus modernization and simplification savings; balance sheet actions (including AT&T sale) materially reduce leverage, enabling further strategic execution.

• Question from Frank Luthan (Raymond James): For the recent announcements (10M business locations, Palantir, QTS), what revenue impact, timing, and magnitude should we expect?
  Response: These connected-ecosystem deals accelerate digital adoption and overlay onto existing digital pathways; timing and magnitude are gradual—contributions fold into the broader digital revenue build toward the $500–$600M incremental digital run rate exiting 2028 rather than immediate discrete line items.

• Question from Greg Williams (TD Cowen): Given recent stock strength, would you consider equitizing (selling shares) to bolster the balance sheet; and are we in a prolonged phase-one training cycle for AI that would extend demand?
  Response: Management is open to all capital allocation options but has prioritized debt reduction and will evaluate equity as appropriate; AI infrastructure demand is intense and may be prolonged/intensifying, but timing is uncertain and Lumen is focused on execution.

• Question from Eric Luchow (Wells Fargo): What incremental internal investments (OpEx/CapEx) are required to achieve the $500–$600M digital target, and any timing-related legacy disconnects to expect?
  Response: Investments for the digital platform are already in the plan and expected to lower marginal capital intensity over time as digital scales; legacy disconnects normalized after a prior-quarter public-sector anomaly and the main timing headwind is a one-time positive grow item in Q4 2024 to compare against.

• Question from Nick Del Dio (MoffettNathanson): How are you promoting NAS and incenting sales to sell it over legacy services, and how are you prioritizing on-net vs off-net opportunities?
  Response: Lumen is reallocating sales, engineering, marketing and operations resources to prioritize NAS, demoting legacy analog offerings where NAS is available, and pursuing both on-net and off-net aggressively via product, sales incentives, and Project Berkeley to make off-net commercially comparable.

• Question from Mike Funk (Bank of America): What did you mean that Lumen 'does not fit the models of traditional telecom'?
  Response: Lumen is shifting to a 'one port, many services' digital + ecosystem model that reduces per-service infrastructure, increases digital delivery and margins, lowers capital intensity over time, and pairs a unique physical backbone (PCF) with programmable, API-first services—differentiating it from legacy telco commoditization.

• Question from Jonathan Atkin (RBC Capital Markets): Can you expand on off-net NAS capabilities, demand, and what Project Berkeley will enable?
  Response: Off-net NAS (Internet on Demand/IoT Offnet) allows Lumen to deliver NAS regardless of who owns the last-mile pipe; Project Berkeley is a cross-carrier fabric port enabling plug-and-play provisioning, multi-transport aggregation and third-party services, accelerating commercial expansion beginning in 2026.

Contradiction Point 1

Public Sector Revenue Performance and Expectations

It involves differing perspectives on the sustainability and expected performance of the Public Sector revenue, which is crucial for understanding the company's financial health and growth projections.

What is the revenue impact and timing of the recent announcements involving 10 million business locations, Palantir, and QTS Network? - Frank Luthan (Raymond James)

2025Q3: We are working on a multi-year Public Sector contract with the National Oceanic and Atmospheric Administration, which will provide a significant amount of capacity to the Public Sector over time. - Kate Johnson(CEO)

Can you clarify the Public Sector revenue performance and the EBITDA impact from temporary rate increases? - Nick Del Deo (MoffettNathanson)

2025Q2: Public Sector revenue includes EPH increases offsetting some cost increases, but these are temporary and expected to moderate over time. - Christopher David Stansbury(CFO)

Contradiction Point 2

Investment in AI and Transformation

It highlights differences in the company's approach to AI development and transformation costs, which are essential for understanding Lumen's strategic direction and capability to drive growth.

What incremental investments are required to achieve digital revenue targets? What should we expect regarding legacy service disconnects? - Eric Luchow (Wells Fargo)

2025Q3: The investments are significant and planned for, focusing on cloudifying telecom for scalable revenue growth. - Kate Johnson(CEO)

Could you provide an update on incremental costs and their 2026 impact? Is there potential EBITDA upside beyond current guidance’s high end? - Batya Levi (UBS)

2025Q2: We would say the very significant investments in AI and the transformation are in the training and development phase right now. - Kathleen E. Johnson(CEO)

Contradiction Point 3

PCF Pipeline and Hyperscaler Deals

It involves the timing and nature of deals with hyperscalers, which are critical for Lumen's growth strategy and financial projections.

How does the new $1 billion in bookings compare to previous PCF deals? What is Lumen’s remaining pipeline for these types of deals? - Mike Rollins(Citi)

2025Q3: The billion-plus deals are more than one deal with a composition of bookings equivalent in margin to prior tranches. Lumen remains disciplined in pursuing value-accretive deals. The pipeline is vast, involving various hyperscalers and NeoCloud providers. The growth is expected to be protracted across three phases: hyperscaler connections, NeoCloud connections, and AI corridors requiring massive upgrades. - Kate Johnson(CEO)

How will the remaining $3.5 billion in the PCF pipeline be realized? Will enterprise deals come before hyperscaler deals? - Jim Schneider(Goldman Sachs)

2025Q1: The majority of the $3.5 billion remaining in the PCF pipeline is anticipated to roll-in over the next 3 years. As I mentioned in my prepared remarks, Lumen continues to have very strong momentum in the business-to-business market with our network platform capabilities and our services. Hyperscaler build-outs are also noted as critical infrastructure investments. - Kate Johnson(CEO)

Contradiction Point 4

Public Sector Revenue and Opportunities

It impacts expectations regarding the public sector's contribution to revenue and growth opportunities, which are key for Lumen's strategic positioning.

How to model the EBITDA bridge from 2025 to 2026, considering PCF and digital revenue trends and transformation costs? - Sebastian O. Petty(J.P. Morgan)

2025Q3: Public sector revenue declined 2.2% to $1.1 billion. For the year, public sector revenue was up 4.4% to $4.5 billion. - Chris Stansbury(CFO)

Did public sector revenue receive another large payment, similar to last quarter? - Nick Del Dio(MoffettNathanson)

2025Q1: Public sector revenue declined 2.2% to $1.1 billion. For the year, public sector revenue was up 4.4% to $4.5 billion. - Chris Stansbury(CFO)

Contradiction Point 5

PCF Deal Impact on Revenue

It affects the expected revenue contributions from Private Cloud Fabric (PCF) deals and the timing of their impact on Lumen's financial performance.

How does the new $1 billion in PCF bookings compare to the previous deals? What is the remaining pipeline for Lumen in these deals? - Mike Rollins(Citi)

2025Q3: The billion-plus deals are more than one deal with a composition of bookings equivalent in margin to prior tranches. Lumen remains disciplined in pursuing value-accretive deals. The pipeline is vast, involving various hyperscalers and NeoCloud providers. - Kate Johnson(CEO)

How will AI fabric revenue and public sector trends affect the 2025 revenue outlook, and will public sector growth persist? - Sebastiano Petti(JPMorgan)

2024Q4: PCF deals will start to roll in by 2026, with strong sales expected to drive growth post-2026. - Chris Stansbury(CFO)