Lumen Technologies Q2 2024 Earnings Call Transcript

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Provided by Quartr
August 6, 2024

Key Takeaways

  • Lumen’s enterprise operational turnaround shows strong momentum with North American large-enterprise and mid-market sales up 26% YoY, net contract value up nearly 40%, and transaction Net Promoter Scores rising across all channels—driving lower churn and higher future revenue.
  • Lumen has been named the trusted network for AI with over $5 billion in signed private-connectivity-fabric (PCF) deals, visibility to nearly $7 billion more in opportunities, and partnerships with tech giants like Microsoft to meet explosive data-center connectivity demand.
  • PCF deal cash receipts and an asset sale have fully funded the free-cash-flow deficit, boosting 2024 free-cash-flow guidance to $1–1.2 billion and enhancing liquidity to self-fund transformation investments and accelerate debt reduction.
  • Lumen expects to deliver $1 billion in cost savings by end-2027 via unifying four enterprise networks into one, reducing product codes to ~300 and consolidating IT systems—enabling further margin expansion and operational efficiency.
  • Due to upfront PCF-related OpEx and CapEx, Lumen now sees 2025 adjusted EBITDA below 2024 levels before a significant rebound in 2026, indicating near-term earnings headwinds despite longer-term growth catalysts.
AI Generated. May Contain Errors.
Earnings Conference Call
Lumen Technologies Q2 2024
00:00 / 00:00

There are 13 speakers on the call.

Operator

Greetings and welcome to Lumen Technologies Second Quarter 20 24 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. And as a reminder, this conference is being recorded. I would now like to turn the conference over to Jim Breen, Senior Vice President, Investor Relations.

Operator

Jim, please go ahead.

Speaker 1

Good afternoon, everyone, and thank you for joining Lumen Technologies' 2nd quarter 2024 earnings call. On the call today are Kate Johnson, President and Chief Executive Officer and Chris Stansbury, Executive Vice President and Chief Financial Officer.

Speaker 2

Before we begin, I

Speaker 1

need to call your attention to our Safe Harbor statement on Slide 1 of our 2nd quarter 2024 presentation, which notes that this conference call may include forward looking statements subject to certain risks and uncertainties. All forward looking statements should be considered in conjunction with the cautionary statements and the risk factors in our SEC filings. We will be referring to certain non GAAP financial measures reconciled to the most comparable GAAP measures, which can be found in our earnings press release. In addition, certain metrics discussed today exclude costs for special items as detailed in our earnings materials, which can be found on our Investor Relations section of our Lumin website. With that, I'll turn the call over to Kate.

Speaker 3

Thanks, Jim. Good afternoon, everyone. Thanks for joining. I'm cognizant of the timing of this call because over the past 2 days, the markets have been a bit noisy with lots of uncertainty about the health of the economy in the next 6 to 12 to 18 months. And in contrast, the announcement we made last night about Lumin's pivot to growth is all about building critical infrastructure to support the AI economy for the next several decades.

Speaker 3

And to net it out, there are 3 key takeaways from our call today. 1st, Lumin's enterprise operational turnaround is progressing well with continued sales momentum across our growth portfolio and further improvement in customer satisfaction. We are also executing extremely well in our Quantum Fiber business. 2nd, Lewin has been anointed as the trusted network for AI by some of the most important technology companies on earth. With over $5,000,000,000 in major partnerships, Inc.

Speaker 3

To date and visibility to nearly $7,000,000,000 more in opportunities, we see the market for Lumin's private connectivity fabric as providing a major positive momentum shift for this company. 3rd, given our success in forging these partnerships, we're seeing a significant improvement in our overall liquidity profile, further securing our ability to transform the company and pivot to growth. Let me give some detail on the operational turnaround part first. As I've described on prior calls, we're focusing on delivering dramatically improved customer experiences from quote to cash, giving customers a reason to choose Lumin for core network services. The best way to measure that progress is to look at 3 areas: sales, customer set and securing the base.

Speaker 3

I'm delighted to share our progress across the fundamentals. After our blockbuster Q1, we continue to see strong sales performance in the Q2 with North American large enterprise and mid market sales up nearly 26% year over year. Additionally, large and mid market new logo sales increased 10% and net total contract value for all channels was up nearly 40% year over year. 2 notable wins are Uber, who's leveraging custom fiber waves from Lumen to ensure unparalleled connectivity between their data centers and the state of New Mexico, who is using Lumen to build its first statewide education network. To complement these sales results, we saw another step function improvement in customer SaaS in our service delivery process with year over year transaction net promoter scores rising 10 points for large enterprise, 35 points for wholesale, 37 points for mid market and a whopping 42 points for public sector.

Speaker 3

Once again, every one of our enterprise customer channel shows significant year over year improvements, which should manifest in lower churn, higher gross sales and improved overall revenue growth over time. Finally, we're making progress securing the base with our relentless focus on 5 key levers: installs, renewals, migrations, usage and disconnects. We think the best way to measure our progress here is to compare ourselves to market trends. And once again, we saw less revenue declines this quarter than our industry peers. We continue to find in our motions, developing and launching new product bundles and educating our customers on the best migration path from legacy to modern technologies.

Speaker 3

And while we're excited about the progress for our operational turnaround in legacy core network services, the real breakthrough to share with you is how we're repositioning the company for the future in the growing market of AI. 2 ways that we're repositioning Lumen. 1st, we're cloudifying telecom by delivering a digital platform to enable enterprise customers to digitally design price order and consume secure network services quickly, securely and effortlessly. We're thrilled with our progress driving adoption of our Lumen Digital flagship network as a service offering with companies like Versa, T Marzetti and DXC Technologies as well as many other companies across the industry. Okay.

Speaker 3

The second way we're repositioning the company for growth is with Lumin's private connectivity fabric. To summarize what's happening, the dramatic rise in AI innovation is spring explosive growth in data center build outs and data centers simply have to be connected. We're honored that technology powerhouses like Microsoft and several other big technology firms are choosing Lumen to build their AI backbone. And they're choosing us for two reasons. 1st, our world class fiber network with its unique routes, vast coverage and state of the art fiber solutions from our strategic partnership with Corning.

Speaker 3

And second, the digital platform we're building that makes consumption quick, secure and effortless. With $5,000,000,000 in closed deals so far and the active discussions we're having with a long list of additional customers, we believe Lumin is becoming known as the trusted network for AI. The growth in this type of sale will be meaningful and accretive to our cash position in the short term and positions us for long term predictable revenue growth in the future. Looking ahead, I'm sure you like everybody else on planet earth is wondering how big are these networking deals going to be for AI and what's the market look like. So I'm going to share our early hypothesis with you.

Speaker 3

We think there are likely to be 3 distinct phases. The first phase, as evidenced by our closed deals, is with huge technology companies, cloud providers, social platforms, etcetera, who are AI thought leaders and are building and training AI models responsible for the explosive growth in data center build out. They were the first to recognize that today's Internet simply won't serve tomorrow's AI economy, and they're partnering with Lumin to massively expand their connectivity infrastructure. We think the next tranche of demand is likely to come from the AI model inference phase, probably with forward thinking enterprises who see AI as a way to transform their businesses. Think financial services, healthcare and retailers to start.

Speaker 3

And finally, in the 3rd phase, we suspect breakout growth in demand for connectivity and digital on demand network services will come when AI starts talking to AI in rings and exchanges. We're in very early discussions with strategic partners who are helping shape our view in this space. Please note that these recent announcements, which were not included in our 2024 guidance, fund the necessary upfront OpEx and CapEx to ramp and scale these new AI workloads. Additionally, these deals provide funding for continued innovation and strategic cost takeout. And that leads me to my next important piece of news.

Speaker 3

Today, we're announcing that we see a path to creating $1,000,000,000 in cost takeout by the end of 2027. This next cost wave of efficiency will come from deeply strategic infrastructure simplification in 3 major areas: network, product portfolio and IT. These infrastructure projects are rooted in network standardization. We're now integrating the networks from 4 different architectures, engineering them into one simplified, standardized and unified network fabric. This move provides a step function change in the level of simplification that we can drive inside the company, providing breakthrough improvements in our customer and employee experiences.

Speaker 3

Let me provide just a little bit more color on the impact of the plan. Our target is to ensure that the majority of our net new services are on this unified network fabric by the end of 2025. This will enable massive simplification in our product portfolio, enabling us to significantly reduce our product count from thousands of product codes to a target of around 300, a massive simplification enabler across Lumen and our ecosystem. Once we unify the network and simplify the product portfolio in our enterprise business, we'll go after technical cost savings in IT. For example, we'd like to compress our 24 order management systems to a target number of 1 and reduce our 17 billing systems to, well, you guessed it, a target of 1.

Speaker 3

This work is going to take a few years to complete, but it will yield material and enduring bottom line benefits. To reemphasize, the work wouldn't be possible without the additional liquidity gained from our private connectivity fabric sales, which also allows us to self fund a spending increase in key areas to drive out these costs for the long term. To summarize our enterprise business transformation efforts, we've got the cash, we've got the assets and we've got a world class leadership team needed to execute on the next phase of our transformation, unlocking breakthrough growth opportunities and strategic cost savings moving forward. And finally, I'm really delighted to share that our mass market segment is showing steady result improvement. We continue to opportunistically deploy capital, enabling 136,000 locations in Q2, on track to deliver 500,000 new fiber enabled locations this year.

Speaker 3

We also continued our strong fiber sales momentum from Q1 'twenty four, as indicated by our record level of 2Q fiber net adds of 40,000. And we're happy to announce we've reached over 1,000,000 fiber subscribers in July. This is a significant milestone and reinforces the value of the product we're delivering to the consumer. And it also shows our mass markets team really knows how to execute well. With that,

Speaker 2

I'll turn the call over to Chris. Thanks, Kate. Before I discuss the quarter, I want to take a moment to reflect back to Q2 earnings last year. Since that time, we successfully completed a refinancing that addressed over $15,000,000,000 of our debt and extended over $10,000,000,000 of our maturities. And we secured access to over $2,300,000,000 in new liquidity.

Speaker 2

And we launched our PCF solutions as well as our suite of new digital offerings. And we've generated early growth in our public sector and the growth segment of our large enterprise business. And as of yesterday, we announced the largest sales in the company's history totaling nearly $5,000,000,000 fueled by our AI hyperscaler customers. This is all as we drive a network unification from 4 discrete enterprise networks to 1, resulting in over $1,000,000,000 in cost efficiencies. None of this would be possible without our world class management team, who's executing on our vision.

Speaker 2

We're moving with pace and we're not done. The recent developments in our business reflect major proof points in terms of early and material execution on Lumin's transformation path forward and we are pleased the market is starting to value this opportunity. We believe we are in the first inning of the AI growth opportunity for our fiber infrastructure and Lumin Digital Services. Accordingly, the positive impact these private connectivity fabric sales will have in our financials are powerful and clear. First, we believe the progress we've made on driving PCF sales these past few months is just the beginning of a vast new TAM, which brings long term sticky revenue, offsetting higher churn legacy product declines.

Speaker 2

2nd, we estimate that the cash received from PCF sales will close any free cash flow deficit between now and when we reach sustainable positive free cash flow growth. 3rd, we will have ample free cash flow to invest in our transformation and reduce debt. And finally, in our view, PCF sales are significant and incremental to the overall value of Lumin's business. The building blocks of our value creation are clear, starting with our nationwide fiber network. We believe Lumin is one of the few companies with the resources and scale to provide the critical infrastructure for AI and the partnerships we've announced represent a large and growing opportunity to provide private connectivity fabric solutions.

Speaker 2

We see a runway to growth as we transform telecom and we believe this sets up a value creation path for Lumin, all as we continue to execute on our core strategic goals of commercial excellence, securing the base and innovating for growth. As Kate mentioned, our sales growth engines within our large and mid market enterprise channels in our business segment along with our mass market segment showed solid performance this quarter with large enterprise and mid market sales both up over 26% year over year. Additionally, Quantum Fiber Broadband net additions of 40,000 again set an all time record and we passed the 1,000,000 total fiber subscriber mark in July, outstanding work by the team. While consolidated revenue and adjusted EBITDA still feel the impacts of legacy declines, we are encouraged by improvements we're making in the business. Now let's move to the discussion of financial results for the Q2.

Speaker 2

On a year over year basis, total reported revenue declined 10.7 percent to $3,268,000,000 36% of the decline was due to the impact of divestitures, commercial agreements and the sale of CDN Business. Business segment revenue declined 11.4% to $2,577,000,000 and approximately 42% of that decline was due to the impact of divestitures and commercial agreements. Mass Markets segment revenue declined 8.2 percent to $691,000,000 Adjusted EBITDA was $1,011,000,000 with a 30.9% margin and free cash flow was negative $156,000,000 Next, I'll review our detailed revenue results for the quarter on a year over year basis. Within our North America enterprise channels, which is our business segment excluding wholesale, international and other, revenue declined 3.6%. We continue to expect public sector to be the 1st channel to pivot to sustainable growth later this year, followed by mid market and then large enterprise.

Speaker 2

Overall, North American business declined 5.5%. Large enterprise revenue declined 6.9% in the 2nd quarter. Our Gro revenue was approximately flat year over year with continued pressure in our churn harvest product revenue. We expect continued variability in trends as we drive towards overall stabilization. Mid market revenue declined approximately 7% year over year with improvement in Gro offset by Nurture and Harvest.

Speaker 2

Public sector revenue increased 8% year over year, driven by strength in our grow and other product revenue and partially offset by declines in nurture and harvest. We continue to see traction with large bookings in this space, which take time to ramp to revenue and these wins give us continued confidence that Public Sector will be the 1st sales channel to return to sustainable growth this year. Wholesale revenue declined approximately 10% year over year. The harvest portion of the wholesale portfolio, which is comprised of products like TDM voice and private line, saw revenue contract by 17.9% year over year in the Q2. This is primarily driven by telco partners that are selling legacy services.

Speaker 2

Our Harvest product revenue will likely continue to decline over time and is an area that we will manage for cash. International and other revenue declined 67.1%, driven primarily by the divestiture of our EMEA business and the sale of select CDN contracts in the Q4 of last year. Moving to our business product life cycle reporting, I'll reference the results based on our North America enterprise channel. The 3.6% year over year decrease was due to declines in our nurture and harvest segments, partially offset by growth, particularly enterprise broadband, Dark Fiber and IP. While results can vary in any quarter, we expect sustained strength in the Gro product revenue as we execute on our core turnarounds.

Speaker 2

Within nurture and harvest, we continue to expect headwinds in these markets, declining categories. However, we continue to take proactive steps to migrate customers to newer technologies and these actions improve our customers' experience and will provide an uplift in customer lifetime value for Lumin. Additionally, we will continue to pursue opportunities for cost optimization when we help customers migrate from off net legacy and TDM based services onto Lumin's network. Within North American enterprise channels, Gro Products revenue increased 1.5% year over year. Gro now represents approximately 40 3% of our North America enterprise revenue and for our total business segment carried an approximate 80% direct margin this quarter.

Speaker 2

Nurture products revenue decreased 12.1% year over year. Nurture represents 30% of our North American enterprise revenue and for our total business segment carried an approximate 66% direct margin this quarter. Harvest products revenue decreased 10.6% year over year and continues to be negatively impacted by declines in TDM based voice and private line. Harvest represented approximately 16% of our North America enterprise revenue in the 2nd quarter. And for our total business segment, it carried an approximate 77 percent direct margin this quarter.

Speaker 2

Other product revenue improved 18.5% year over year. As a reminder, other product revenue tends to experience fluctuations due to the variable nature of these products. Now moving on to mass markets. Our fiber broadband revenue grew 14.6% year over year and represents approximately 38% of mass markets broadband revenue. During the quarter, fiber broadband enabled location adds were 136,000 bringing our total to over 3,900,000 as of June 30 and pacing towards our targeted annual 500,000 build target this year.

Speaker 2

We also added 40,000 Quantum Fiber customers, which is our best fiber net add quarter reported to date and this brings our total to 992,000. Fiber ARPU was $62 up slightly both sequentially and year over year. Importantly, we reached a significant milestone of 1,000,000 fiber broadband subscribers in July. At the end of the Q2, our penetration of legacy copper broadband was approximately 9% and our quantum fiber penetration stood at approximately 25%. As we look ahead, we will continue our market by market assessment of the mass markets business as we explore a range of strategic options to maximize its value.

Speaker 2

Those options include potential joint ventures, wholesaling arrangements or future divestitures to generate incremental cash. Now turning to adjusted EBITDA. For the Q2 of 2024, adjusted EBITDA was $1,011,000,000 compared to 1 point $229,000,000,000 in the year ago quarter. 2nd quarter EBITDA was positively impacted by our strong first quarter sales bookings as well as efficiency improvements from our 2nd quarter cost actions and overall margin management. Special items impacting adjusted EBITDA totaled $136,000,000 The majority of special items in the quarter were related to severance.

Speaker 2

For the Q2 of 2024, our adjusted EBITDA margin was 30.9 percent, capital expenditures were $753,000,000 and free cash flow, excluding special items, was negative $156,000,000 As we previously stated, we're leaning into our network investments to support the rapid growth and demand our customers are facing. Now before I provide an update on our 2024 financial outlook, I'd like to provide some color around the near term impacts of our PCF sales and the additional liquidity and flexibility we have. As Kate mentioned, we're moving full speed ahead in investing in our transformation, which includes additional spending on network and systems unification that will ultimately lead to more efficient operations and a better customer experience. Given our improving liquidity profile, we intend to pull forward some expenses from 26% and 27% into 2025%, accelerating the timeline of our cost takeout goals. With the investments in transformation and costs associated with recent PCF sales and in conjunction with continued legacy revenue declines, directionally we see 2025 EBITDA below 2024 levels with a significant rebound in 2026 and growing thereafter.

Speaker 2

We will provide more detailed 2025 guidance on our Q4 2024 call in February. Now moving on to our financial outlook. We now estimate fiscal year 2024 EBITDA to be in the range of $3,900,000,000 to $4,000,000,000 CapEx in the range of $3,100,000,000 to $3,300,000,000 cash interest in the range of $1,150,000,000 to $1,250,000,000 and free cash flow in the range of $1,000,000,000 to $1,200,000,000 This guidance includes some incremental OpEx, CapEx and cash flows associated with our PCF sales growth, the gain on a sale of an investment as well as incremental spending to ultimately improve our cost structure and margins. This additional OpEx and CapEx will be fully funded upfront by incremental PCF cash flow. And with that, I'll turn it back to Kate for closing remarks.

Speaker 3

Thanks, Chris. Before we open up the call for questions, I wanted to pause to acknowledge where we are. AI represents one of the most significant technology shifts in history. Every person and every organization on earth will be impacted. AI needs data, data needs data centers and data centers need to be connected.

Speaker 3

What was once an overbuilt fiber network is shifting from commodity to something much more valuable. At Lumin, we aren't streamlining and digitizing our operations to try to find growth in legacy telco markets. Instead, we're building a digital platform to help us become the trusted network for AI, so we can capitalize on the markets that will likely see explosive growth for decades. This is Lumin's moment. We are playing to win.

Speaker 3

This is the business that we are in. Operator, we're ready for questions.

Operator

Thank you. The floor is now open for questions. Your first question comes from the line of Michael Rollins with Citi. Please go ahead.

Speaker 4

Thanks and good afternoon. First, with respect to the $5,000,000,000 of sales, curious if you could give some additional color on the competitiveness of that process. Are these customers using single vendors for the solution or multiple vendors? So this is something that's not just helping Lumin, but maybe the ecosystem. And then for Lumen specifically, can you share the mix of assets that are existing fiber, existing conduit, leveraging assets that are already out there from you versus what you're building as new infrastructure?

Speaker 4

And do you consume some of those fiber inventories such that investment mix or margin mix might look differently over time as you continue to sell within this new PFC segment? Thanks.

Speaker 3

Hey, Mike. So I'll take the first part. I'll let Chris handle the second part. So first part, what does the competitive landscape look like? Look, obviously, I'm a little bit biased, but here's my observation.

Speaker 3

Our network is the crown jewel that we always thought it was. It's got great coverage, unique routes, it's diverse and it's got state of the art fiber because we've been taking care of it for a long time. And that's giving us great positioning with our customers. They're looking at sometimes building some routes by themselves, most of the time understanding that we can get them there faster

Speaker 2

economics, it's a really good question. And then I'm not going to be evasive with you, but the reality is it's really complicated. So it's a deal to deal. Every deal is different in terms of where they want to go from and to, how much capacity they need. And inevitably, you will end up with a combination of existing fiber, new fiber, existing conduit, new conduit.

Speaker 2

It really does vary deal to deal. Now on that, we'll never disclose it because these are called private connectivity fabric for a reason. And our customers want to keep it private because it's competitive secret that they have as is it a competitive secret for us. So it will vary deal to deal but the video that we released, I think gives a good flavor on average.

Speaker 4

Thank you.

Speaker 2

Next question.

Operator

Your next question comes from the line of Sebastiano Peri. Please go ahead.

Speaker 5

Perry. Just had a quick question on the free cash flow guidance. Can you help us think about is that fully driven by the customer deposits from the just private custom fiber fabric AI or is that also reflective of the, I think, Chris, you said gain on the sale? And in addition to that, can you help us maybe think, does the free cash flow uplift that you're seeing here, is that something that we should expect to stay on the balance sheet in 2024? Or is this something that will probably get spent as you probably to fund the increasing CapEx that you guided to today?

Speaker 5

Just trying to help think about the commencement of the build out and pacing. Thank you.

Speaker 2

I'll give you credit because you asked one of the great questions in the call early. So the cash flow guidance for this year is driven by both some of the upfront cash received. We haven't received all of it obviously for the PCF deals and it is also related to the asset sale that we did. So both of those things contributed to the free cash flow. As it relates to where we go from here and again I want to get really be really careful because we're not giving 2025 guidance yet.

Speaker 2

But we haven't received all the cash yet that will be received some this year, some next year, some the following year because again these are massive construction projects, they take time. And we will start to spend the CapEx as evidenced by our guidance this year and have more next year. But the point is on these deals, we're not financing the build. So we get paid in advance of the construction. The only thing that is kind of hanging as you go out 12 months is, we pay tax on the cash received.

Speaker 2

So even though the revenue is amortized, the IRS likes to get paid on a cash basis for these deals. So that will be something that we deal with and we'll give more color on that as we move through. But high level I would say that next year free cash flow looks good.

Speaker 6

Thank you.

Speaker 1

Next question?

Operator

Your next question comes from the line of Batya Levi from UBS. Please go ahead.

Speaker 7

Great. Thank you. Looking at the EBITDA guidance change for the year, is that purely related to the incremental OpEx for getting ready for these network nodes or is there any change in terms of the underlying trends? And can you just go over the $1,000,000,000 cost savings you expect over the next 3 years, the pacing of that? I think you mentioned some of the expenses will be pulled forward.

Speaker 7

And then is there any incremental cost to achieve that saving through the next 3 years? Thank you.

Speaker 2

Yes. So, as it relates to this year, the vast majority of the there's obviously a lot of things that go on inside of EBITDA, but the main driver here are the TCF deals and the OpEx investments we need to make to get that construction factory up and running in a more scaled way. It's a group that exists. It's one of Lumin's core competencies, but the size of that group needs to get substantially larger to support just the quantum of these deals. And so that's the key driver.

Speaker 2

As it relates to the $1,000,000,000 cost takeout, we haven't again, I want to stay away from 2025 guidance as much as I can. We're not expecting those savings to start until next year. There will be some investment next year and we'll disclose that when we give guidance for next year. But my comments on just trying to dimensionalize where we go from here are really around the fact that we're taking the opportunity near term balance of this year and 2025 to really pull forward investments we were going to have to make in 2026 and 2027 to get to a place where our IT systems as Kate mentioned are more consolidated simplified to drive a customer experience. And I would say if there's one key driver in that it's going from what are 4 enterprise networks today to 1.

Speaker 2

And that is a legacy that exists today that needs to be cleaned up because it just drives a much more seamless customer experience as we go forward.

Speaker 7

Got it. Thank you.

Speaker 1

Next question please.

Operator

Your next question comes from the line of David Barden from Bank of America. Please go ahead.

Speaker 6

Hey guys, thanks so much for taking the question. Chris, I guess it's not so much a question is, I'm going to put forward a hypothesis and I want you to tell it would be, I think, super helpful for people to share what you think is right or wrong about it. So we've got this $5,000,000,000 deal, but the majority of the cash is coming in, in the next 3 to 4 years. And the majority of the cash of that cash is also going out the door in the next 3 to 4 years. So any kind of cash inflow we're getting is kind of a timing benefit relative to the CapEx that's required under the contract.

Speaker 6

And if it's a $5,000,000,000 contract and the majority of it is related to the construction piece, let's just call it $3,000,000,000 for round numbers. That means that the actual IRU sale piece is about $2,000,000,000 And as you shared in your video, that IRU revenue doesn't start until after the build is done, which would be probably year 4 or 5. Over a 20 year period, dollars $2,100,000,000 in revenue a year, very high margin, maybe $85,000,000 in EBITDA, tax affected, as you mentioned in your video, maybe again, the taxes will be timing related, but let's just call it 65,000,000 dollars of tax affected cash flow over a 20 year period. So a $5,000,000,000 deal announcement turns into $65,000,000 of cash flow 5 years from now. What's right and what's wrong about that?

Speaker 2

I'd say most of it's wrong. Yes, I think David, here's where I would go. So again, it's multiple deals that added up to the 5,000,000,000 dollars not just 1. And in the video, we talked about a cash contribution margin, which is effectively the EBITDA less the CapEx pretax. It's roughly in the ballpark of our existing EBITDA margin.

Speaker 2

So you do the math on that, that will give you the pre tax free cash flow associated with these deals. And that cash flow to your point does come largely at the front end. Now there's ongoing payments for space and power for operating and maintenance if they want us to run the networks for them that gives us nice cash flow over the years. But the tax would also be front end loaded. So the key thing here is that in one set of deals, in those $5,000,000,000 deals that the net after tax cash generated from that fully funds the liquidity gap that we've talked about for so long on these calls.

Speaker 2

It's over. It's behind us. And we're not done. So as we said, there's another $7,000,000,000 of discussions underway right now. And this trend will continue.

Speaker 2

The demand isn't 1 and done. So that's the key differences. So there's more cash in the deal than you've laid out and there's more to come.

Speaker 3

And additionally, it's not one deal. The $5,000,000,000 represents multiple customers and each contract is very different. I think that's important to stress. Yes.

Speaker 8

Thank you. So I just want to

Speaker 6

follow-up on that, Chris, if I could. So just to make so if the majority of the cash is coming in, as you say in the press release, for the next 3 to 4 years, and it's also going out in the next 3 to 4 years. So then you've got this minority of the $5,000,000,000 that's then realized over the following 20 years. Is that what's so there's a net kind of 0 and then there's this tail of income. Is that how is that not what you said in the press release?

Speaker 2

I'm not I guess I'm not following you. We can do it in the after call. I'm not following the net zero. The net is significant and fully funds the liquidity gap that you and your peers have modeled over the next number of years. That's now fully addressed.

Speaker 2

So and you're right then, yes, the revenue bleeds in over a much longer timeframe, But that cash allows us to fund the transformation. It allows us to pay down debt and start to attack the debt structure. And again, that's what these first bundle of deals that total $5,000,000,000 and there's more coming.

Speaker 6

And so my last and this is my last follow-up, Chris. So when you say in the press release that the majority of the cash comes in the next 3 to 4 years and there's a roughly equal amount of disbursements. So that the CapEx related to the deal is smaller than so if I add the deficit and the CapEx necessary to win these deals, that gets us to the breakeven, the liquidity that you're talking about?

Speaker 2

That's right. So said another way David, the cash contribution, the $5,000,000,000 less the OpEx to support it, less the CapEx to support it, leaves us with an amount of cash. We pay tax on that cash and the after tax impact of that fully funds the liquidity gap that we have modeled over the next few years from this first side of

Speaker 6

the deal. Okay. Thank you, Chris.

Speaker 1

Operator, next question please.

Operator

Your next question comes from the line of Jim Schneider with Goldman Sachs. Please ask your question.

Speaker 9

Good afternoon. Thanks for taking my question. I was wondering if you could maybe give us some color on within the $5,000,000,000 of closed deals, the diversity of customers within that, is that a few large hyperscale type customers? Is it a much longer tail of customers, including corporates? And then if you could give us any kind of sense about the same kind of color on the additional $7,000,000,000 you're pursuing now?

Speaker 3

So the first $5,000,000,000 is that first tranche that I talked about. It's hyperscalers. It's social platforms. It's huge technology companies. It's a cloud company.

Speaker 3

It's everybody building the AI model, right, where they're building them and they're training them. They're seeing the data flows and they're saying, holy cow, current networks simply don't serve where this data growth is going. So they're building out their data centers because data needs compute and that is driving the requirements that they bring to us about, hey, can you get me from here to there? And by the way, can you connect me back to the main Internet highways that I can continue to serve my customers there as well? So that's the first one.

Speaker 3

The second tranche is and we're just at the really early phase of that piece, which is enterprises that are using the AI models. And frankly, we're one of them. We're using AI models to transform our business. We have great partnerships with all of these guys to try and take cost out, drive efficiency, gain insight, more intelligent services. And those enterprises that are leading the way are in health care, retail and financial services for the most part.

Speaker 3

And they're doing it in a different way. It's not necessarily an end to end custom private network per se, but it's a little bit of fiber and some advanced services on top of it, dramatically increasing their bandwidth and performance needs.

Speaker 9

Thanks. And then maybe just relative to the network build out itself, I believe your Analyst Day last year, you referenced that you had 6,000,000 inner city fiber route miles in the network and you were planning on doubling that, which is I think the same commentary you made on one of your earlier announcements. So is it with the prefunding and the revenue associated with these deals, is that simply accelerating the build outs you already had contemplated and pulling them forward in time? Or is there any change to the profile or complexion of that build plan?

Speaker 3

So I struggle to figure out where the baseline is from your question. I'll just give you contextually what's happening. We are increasing connectivity both inside the metro areas as well as in the long haul networks. And that's with new routes and pulling more fiber on existing routes. And so it's a combination of all of it and each deal is a bit different when you overlay them all together.

Speaker 3

What you see is a doubling in metro and a significant increase in long haul.

Speaker 2

I would just add to that that the fiber that we put in the ground already and the fiber that we're adding today supports 400 gig waves. And over the next 2 years that will scale to 801.6 terabytes. So the fiber that's going in the ground has enormous expandability and I don't think at least I'm unaware of anyone else who's investing at that rate to meet the needs of customers.

Speaker 9

Thank you very much.

Speaker 1

Next question please.

Operator

Your next question comes from the line of Jonathan Chaplin with New Street. Please ask your question. Great.

Speaker 8

Thanks for taking the question, guys. First, just a follow-up on David's question. Wondering if you can help contextualize the recurring revenue piece that comes on the back of these massive transactions that you're doing. How should we think about these transactions sort of driving growth in the growth segment? Presumably, this is sort of all large enterprise at this point.

Speaker 8

And then given how important this sort of transformative event for the business is, I'm like embarrassed to be asking about mass markets, but you did really well on net adds in mass markets this quarter. It's been a sort of pretty dramatic acceleration in the business over the course of the last two quarters. I'm wondering if you can give us some context for what's driving that. And also just speak to sort of the strategy around ARPU a little bit. It looks like ARPU is well below peers.

Speaker 8

I assume that's sort of a conscious decision to drive penetration. I'm wondering if you if there's sort of a plan to close the gap over time. Thanks.

Speaker 2

Yes, there's a lot in there. I'll try to remember. As it relates to the PCF deals, we did say in the video that once you get the scale and again as David pointed out, it's anywhere between that 3 5 year window. In some cases, not all, customers will ask us to run the networks. We'll also provide space and power.

Speaker 2

So again, if you're powering a signal from San Francisco to New York along the way, you're going to need huts, where you can put racks, you can put all the equipment that powers those signals. And we said that on average, think about that as roughly 10% of the total contract value. And that revenue and cash will be earned in the year the services are provided. So that's I think a good broad guideline. As it relates to mass markets, yes, could not be more proud of the team.

Speaker 2

They're killing it. There's been intense focus on driving marketing execution and really a focus on both enablement and penetration. And they kept the enablement machine chugging along, but we're just super pleased is the growth in penetration. They're to to order under price. In fact, we have raised prices where we see the opportunity to do so and we'll continue to do that.

Speaker 2

But we're pleased with the way everything is working in combination ARPU penetration etcetera. So more to come.

Speaker 8

Thanks, Chris.

Speaker 1

Next question please.

Operator

Your next question comes from the line of Nick Del Deo with Moss and Michenson. Please go ahead.

Speaker 10

Hi. Thanks for taking my questions. First, Chris, the comments you've made around the cash contribution margins associated with these deals seem to apply mostly to the $5,000,000,000 in signed deals. As we think about future deals, like the $7,000,000,000 you have in a negotiation, would you expect those to have more favorable cash economics by leveraging some of the fiber being put in the ground for these earlier deals? Or should they be kind of in the same ballpark?

Speaker 2

Yes. I would say on average, I think the guidance we gave is pretty good. Again, it's hard to say. So I mean, I can tell you that we've had discrete decisions that we've made along the way of do we make some incremental investments now on routes where we may have slightly less capacity to try to help for the future and that would obviously be a benefit to your point. But then we don't know yet the full scale of what all of the customers want and that may require us to do additional things that we don't have today.

Speaker 2

So it's just again given the quantum of the deals and the complexity, it's hard to answer right now. But I would tell you that I think the guidance we gave is good general guidance around how to think about it.

Speaker 10

Okay. So not trying to get too far ahead of signed deals in terms of capital commitments and whatnot?

Speaker 2

Right. I mean, look, we will continue to invest in our network as we have for years and I view that more as kind of baseline responsibility. As it relates to big CapEx expansions, we will be very measured in how we do that. This is not a gamble. We will if we see a route where we know there's going to be demand in the future and we're already pulling fiber, we may pull

Speaker 4

more.

Speaker 2

If it's a route where we've got lots of capacity, we won't. So it really is route by route, mile by mile, that we do those analytics. And it's actually really impressive what the team is doing as they model this out. That's a core capability and quite frankly I think it's one of the reasons in addition to the digital services that we can offer these customers that customers come to Lumin.

Speaker 5

Okay. Okay. And then

Speaker 10

Chris, you quickly alluded to it in your prepared remarks, but I was hoping you could expand a bit on how you're thinking about cannibalization risk, whether current revenue or revenue that you otherwise might have generated. So for example, if you're selling someone dark fiber, I'm guessing you're not selling them waves on that route going forward?

Speaker 2

So think about it this way. Private Connectivity Fabric is a bundle of everything from dark fiber to waves to IP. It's your network, your way. And these first deals happen to be very large infrastructure dark fibery kind of deals with some of the other things mixed in. As time goes on, I would expect that mix to continue to evolve.

Speaker 2

And so it depends on what the again, what the customer wants, where they want to get as to whether we've got some of that fiber already in the ground or whether we need to pull more.

Speaker 3

I'd also like to add, as a person coming from the tech world into telecom, there's this proclivity to worry about cannibalization rather than evolution of portfolio. And I think that's how we got to a place of being quite overbuilt. And as I look at the demand for these services and our strategy moving forward, we are going to prioritize penetration of our assets to deliver return to our shareholders. And I think that that's going to be very accretive long term.

Speaker 2

Yes. This is not to be very clear, we haven't even talked about cannibalization. This isn't cannibalization of legacy at all. This is about net new and where we're going. And this is why we see the upside that we see in our ability to drive returns for shareholders.

Speaker 1

Next question, please.

Operator

Your next question comes from the line of Greg Williams with TD Cowen. Please go ahead.

Speaker 4

Greg, thanks for taking my questions. We're all trying to size the total adjustable market of AI and you did a good job of articulating those 3 phases. Maybe we'll start just with that first phase and all these deals are more dark fibery as Chris said. So really, I think the industrial market would be how many new data centers are they creating? And we were taking a stab at it earlier this week and some reports.

Speaker 4

And maybe the better way of asking is to you guys, how many new data centers are you feeding roughly $45,000,000,000 of deals? Is it like $10,000,000,000 is it $30,000,000 I'm

Operator

just trying to get a

Speaker 4

sense of that and it helps us with our scope. Thanks.

Speaker 3

I mean, we're not tracking that really. What we're tracking is across the group of technology companies that we're what do their needs look like? What are the synergies between the requests that we can drive economies of scale? And how can we drive to closure as fast as possible so we can group them in those ways by route and by how operationally we can deliver upon these. The one thing we do look at when we model it out is where's the power.

Speaker 3

Data centers need power space cooling and fiber. And I think the energy piece of the equation is where can you build a data center that you can deliver a green footprint because there's also that piece of it as well. And so it's pretty complex.

Speaker 1

Next question please.

Operator

Your next question comes from the line of Frank Poussin with Raymond James. Please go ahead.

Speaker 9

Great. Thank you. Maybe you can

Speaker 11

give us a little more color within this sort of $5,000,000,000 group. Can you give us an idea of the largest deal as a percentage of revenue? And then as it relates to the $5,000,000,000 in bookings here, what do you what's an average annual bookings and how much is it up this year including the PCF deals? Thanks.

Speaker 2

So yes, in terms of the biggest one, again, that starts to get close to really starting to disclose stuff around customers because then if I give you that, then it's just a guessing game as to which customer it is and that's not fair to the customer. And frankly it's sensitive information for us. So we're not going to give that. As it relates to the bookings, I want to make sure I understand. Are you asking that once we get the scale, how much or how does that relate to what we're selling today?

Speaker 2

Is that the question?

Speaker 11

Well, it seems maybe I'm miss using the terms here, but it seems like you've done $5,000,000,000 in sales for here, which sounds like a bookings number, not necessarily something hitting revenue in the income statement. What it, I'm just getting an idea of what the incremental upside from that from bookings is in 2024 versus say 23 inclusive of this bump from the PCF deals?

Speaker 2

Yes. I would say from a modeling standpoint, I would think about that as largely all incremental. We always sell dark fiber. And I think the dark fiber run rate, I'd have to go back and check, Frank, because I don't know off the top of my head, but ex these deals, Dark Fiber is obviously in the grow bucket and we continue to grow that segment. But this yes, and we had the State of California in the fall that we mentioned, right?

Speaker 2

So that was a big deal. But again, we've done those in the past and we'll do other deals like that going forward. This shift that we're seeing right now, which quite frankly, I don't think comes as a surprise, right? There's been so much research and communication around the amount of investment required to support AI and everybody forgot about the fact that the data doesn't originate in the data center and stay in the data center, right? It's got to get in, it's got to get out.

Speaker 2

So what we're really seeing is that now finally being realized and I'd say that's largely incremental.

Speaker 11

Okay. And one quick thing, did you can you clarify the split and the increase in free cash flow between the asset sale and the upfront cash?

Speaker 2

The asset sale was I think after tax $190,000,000

Speaker 4

Okay. Thank you.

Speaker 1

Next question please, operator.

Operator

Your next question comes from the line of Eric Wiebschow with Wells Fargo. Please go ahead.

Speaker 12

I appreciate you taking the question. Thank you. So you talked about getting back to EBITDA growth in 2026 after a step down next year. How should we think about the visibility of getting back to revenue growth given the trajectory of bookings you've had? And it sounds like these PCF deals, since they'll be amortized over a very long contract duration, they'll certainly help revenues, but I don't know if they're enough to really get you back to revenue growth by 2026 as well, if you could kind of talk through the moving parts there.

Speaker 12

Thanks.

Speaker 2

Yes. So, again, I don't want to get too close to guidance here. As we've said, revenue will obviously lag the EBITDA turnaround because of our ability to drive significant cost takeout as we fix what's broken, right? And we go from 4 networks to 1. So the timing on the revenue, I guess what we said most recently is that that's going to lag by at least a year.

Speaker 2

And I think that still holds in this situation. But again, the comments that I made, I want to be really clear about this around kind of directionally $25,000,000 and $26,000,000 to be very clear that excludes the $7,000,000,000 set of discussions we're having right now, right. We don't count that till it comes in because just like this first batch of deals, they're very hard to predict 1, what's required to deliver them and 2, what the timing is.

Speaker 12

Yes, understood. And just one follow-up. These new data center deals, the ones you've announced and then the ones that are in your pipeline, you tied them to the inner city fiber investments that where you'll double your fiber capacity over the next handful of years. We've heard a lot about data center deals moving to more further out rural locations given power constraints in a lot of markets. So can you talk at all about like splits between middle mile, long haul fiber versus metro fiber that's in your pipeline to support these types of deals given data center deals are being done and further out locations it seems based on what we've seen?

Speaker 12

Thanks.

Speaker 2

Yes. What I'll say is this, our network, one of the reasons why it's so attractive and by the way, when I say network, it's fiber and in some cases it's conduit, right? It's this vision that was built 25 years ago. And now because of the advances in fiber technology, we have the ability to monetize it. So it's both.

Speaker 2

It's both of those things. And so I would say it's the strength of both the inner city and the metro that customers broadly speaking are wanting to access. And as we continue to invest in things like waves, it will be to deliver against both of those. Waves customers want 2 things. They want to get where they want to get and they want to get there quickly.

Speaker 2

And I don't know of anyone else in the space who is investing the kind of money that we are to make sure that happens.

Speaker 1

Next question please.

Operator

Since there are no more questions, I will now turn the conference back over to Kate Johnson, COO for closing remarks. Please go ahead.

Speaker 3

Thanks so much. To wrap, it's an exciting time for Lumin as AI charts the course for our pivoted growth and our future is very, very bright. Thanks for joining today. We look forward to meeting you at the upcoming conferences and updating you on the significant progress we're making in transforming our company. Have a great night.

Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

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