We're now opening the floor for Q&A. If you have a question, please raise your hand and we'll bring a mic your way.
Okay. All right. Thank you so much for spending the time with us. I hope that was insightful. We're ready and open to answer any kind of questions. First thing I want to do is just quickly run through the faces that weren't on stage today, an integral part of our team, and we'll start with you, Mark. Can you just tell them who you are?
Yeah, thanks, Kate. I'm Mark Hacker. I've been with Lumen about 10 months now and I'm the chief legal officer. I'm responsible for the legal team as well as the public policy team and also the public sector segment.
Hi everyone, my name is Kai Pri. I've been with Lumen for two and a half years. Interestingly, my first day at Lumen was the last investor day here in New York. And I can tell you it is a completely different company compared to the company that I joined a couple of years ago. I'm the chief commercial operations officer. I look after the planning, the design, the deployment, manage professional service operations of the network and as of a couple of weeks ago also have the accountability for the remaining mass markets business.
Hi everyone, I'm Anna White. I'm the chief people officer and I've similar to Kai been here for two and a half years. Joined a few months after you and I head up HR and really drive the people and culture agenda to increase employee engagement and also work to drive business performance.
Three extremely humble people. I think of Mark as the guy who helps us safely get to yes in transforming a telecom into a digital company. I think of Kai as the person that took us from negative net promoter score to positive across literally every single segment and did it on time and on budget. Thanks, buddy. And I think about Anna as the culture ninja, literally inculcating everything about our culture into all of our processes. It's why we're here. So, thanks to the three of you. There's a new kid in town.
I appreciate you calling me a kid, by the way.
You got it. You got it. Anything. By the way, return the favor. So, Jeff Sheritz joined us two weeks ago. Three weeks ago.
Have you sold anything yet?
All right. So, why don't you tell them about yourself?
Good morning. I'm Jeff Sheritz. I'm the chief revenue officer and I joined the company, like Kate said, about two weeks ago. I spent 24 years at Cisco Systems prior to coming to Lumen.
Awesome. Think connected ecosystem and think Cisco sales model and you might be on to what we're trying to accomplish here. So, we're super excited about that. You're the moderator. Did I tell you that?
I get to moderate. You go.
So, we've got mic runners. Please wait for the mic to get there to ask a question because we've got hundreds of people that are streaming in today for this and we want to make sure they can hear your question. Also, please say your name and the company that you're with. But with that, why don't we get started?
Giddy up.
Bat from UBS. Thanks for all the information that you provided. Maybe stepping back, what we're really focused on is this transition of digital revenues ramping and legacy base coming down. So can you set the stage in terms of where we are right now in terms of that MR90 of digital? Where is the legacy piece and where is the sort of the new digital customers? Are they all new? Are they accelerating the legacy declines to take on these digital services? And you have made assumptions that maybe legacy declines similar to market rate, but because you're accelerating the digital effort, does that accelerate the legacy decline? So that path would be helpful and maybe just sort of what do you see as the biggest risk to this five-year outlook? Thank you.
I'll take the customer patterns, you take the rest of you take the hard stuff.
Okay, great. So if we think about who's buying NAS and why, we really again kind of started this as a test. It was a little bit of a hobby and what we saw were customers that were requiring a network upgrade and they wanted to modernize and do so quickly were the ones that came. Lots of midsize companies and frankly the platform was tailor made for them. As we started taking our story to large enterprise, there were a few things that we needed to do in order to cover their requirements, which I think we've gotten locked and loaded and we've got some really exciting large enterprise multi-site opportunities in the pipe right now. And it's a mix. These are companies that are in existence today and they've recognized that their networks aren't big enough, fast enough, smart enough, or secure enough. And so they're making the transition. Sometimes we're doing a migration project and there's services involved. Sometimes it's the beginning of the life cycle and it's just a test and once that test happens we usually get to yes pretty quickly after there. I think there we're going to have a hybrid environment, Batia, for a really long time. And I will just say one word: cloud. We've seen this movie before. Remember when we thought everything was going to cloud and then first nothing was going to cloud. I'm not putting my data in that thing. Then when CIOs got their head around moving data into the cloud, it was kind of like, okay, now everything's going to go. And that's just not the case. It's what's the most cost-efficient way for me to drive storage and compute. And now how can I have a programmable network that helps me achieve that cost efficiency curve? And that's going to be hybrid. There's still going to be on-prem. There's still going to be edge. There's going to be lots of multi-cloud and data center and it's the opportunity for our company. We move data for a living and it needs to be moved from anywhere to anywhere all the time. So you want to translate that to numbers? Good luck.
Yeah. So first of all in the model the assumption on that 600 million is the incremental piece. Now with that, there isn't one of us on stage, if granted one wish, who wouldn't wish for complete cannibalization of our legacy business because what we're seeing in the customers that consume digitally is a much lower rate of churn, a much higher rate of service adoption, and a much faster time to revenue at higher margins. So the reality is this is an industry, again, let's go back to that phrase, playing not to lose. Oh, protect the legacy. Protect the legacy versus playing to win. Playing to win is I want to take all that share to myself. And if we can get customers on that platform, then we would expect the 600 million to be higher. So, first of all, and second of all, we think that that's got a much better lasting economics for our shareholders.
I think there's one more point to add and Jim, I might ask for your help here. What we described today in the tech platform, the intelligence sits in Lumen Connect, right? Lumen Connect, the single pane of glass, the control panel for a programmable network is what makes a fabric port a fabric port. And what we're testing and we don't have this baked into our numbers is our ability to go into our install base and remotely see legacy ports and convert them to become fabric ports. Now, that wouldn't change the state of the customer. It would simply enable us to make that customer port into a port that could carry multiple services, wouldn't require a truck roll, and would become a point of growth. It's limited by several factors including what's the bandwidth of that port, where is it, a bunch of different things that we're trying to figure out right now, but it's a potential accelerator. Anything to add to that?
No, you got it. So, kind of picture, if you will, we have a customer today that uses us for direct internet access. Our vision is they go into Lumen Connect, they flip a switch and all of a sudden it is now a fabric port and they have the ability to add additional services like multi-cloud gateway which then gets them kind of one place across all their meet me rooms to be able to route traffic east-west across their cloud providers. That's how we see what we have as our install base turning into a growth engine.
Oh, got one here. Hi, Bill Matthews from Global Credit Advisors. If you think about the kind of EBITDA margin expansion from 27 to the mid-30s and that $600 million revenue piece of it, can you just help us kind of understand how much that margin expansion is driven from these new revenue additions versus kind of cost saves? And maybe tying that to if you think about this NAS network up and down dynamic positioning where customers can dial up and back. How is that pricing versus existing long-term contracts they have in place?
So the margin expansion I would say is coming from four areas, right? The digital expansion, PCF, onboarding, and our modernization and simplification programs are all margin accretive but as EBITDA starts to grow we're also going to get operating leverage benefits because our fixed cost structure isn't going to change materially and so all of those initiatives are feeding that. We're not splitting that out. And I think you'd probably understand that. I don't want to hand that to our competitors, but they're all high margin services and they all benefit us over the long run. Do you want to talk about the pricing?
I'll let our chief marketing officer and strategy head talk about it.
Yeah. One of the things that we're doing is we are going across all of our products. We're looking at margin. The first thing we have to do is we have to get our customers loving our customer experience. So everything is rooted first in that customer experience. We're bringing those services to them. We're also making sure that they have value accretive services added to that and then we're able to go and deliver the experience thereafter and match the pricing where they're able to go in and have those bundles and one view that a CIO can look at end to end to look at a real value accretive solution together from a trusted partner where we're bringing it all together for them.
That's right. And it's no secret I came from the world of cloud from Microsoft. I learned a ton there. And wherever I can plagiarize from the playbook of the movie that we all saw in cloud, we're going to do so. And I think an extremely efficient pricing model that we are applying to our network as a service platform is the service price is the service price. You make a bigger commitment to us, we're going to make a bigger commitment to you in terms of driving price efficiency. And I think that's new to telecom. It provides a little bit of resiliency in terms of the go-to-market offerings and the pricings and the way that we do it. And it drives loyalty and commitment and worked like charm in the days of cloud. So we'll be copy-pasting that one.
Hi, Bill Cavaler of Odon Capital. I may be a little confused. So can you walk me through two things? They're both on the legacy side. What's going on in the legacy copper business that last time you discussed it it was worth like $6 billion as a NAV and then is the 600 million that you're talking about incremental to and is the way you're converting your legacy business revenues that are declining and is that the business that you're talking about because I think we're all confused about where does this 600 million come in and how does that fit in with the kind of growing orange bar.
Yeah. So on the 600 million, Kate talked about over 2,000 customers. Many of those customers are new. Some of them are existing. What we're seeing is that as customers engage in a digital motion, they're buying more, they're buying it more quickly, it's getting deployed more quickly, it's at higher margin, and they churn less. So that's really the path forward for growth across the entirety of our platform. As it relates to legacy, our legacy business when we talk about it it's largely copper-based and it's going away, right? Those are the businesses that are naturally declining. That's what we forecasted in the model. They're cash-rich. There's an opportunity inside of that. There's an opportunity around how we expand the amount of cash that we can extract from that business and there's also an opportunity to say, hey customer, there's this new thing over here. Now how we go about that, the timing in which we'll engage with a customer on that is going to depend but Kai's really leading our efforts on how we manage the legacy business from a copper standpoint and maybe you could provide some color.
Yeah, of course. So the copper network or we call it the network supports a large enterprise base as well as a consumer base. So, what we've been spending our time on is really mapping out the entire base, understanding each and every one of our wire centers, and of course, there's hundreds of wire centers across the country. We've been able to map the P&L for every single one of those wire centers. And so, we know the direction of travel. When one of those wire centers becomes unprofitable, that will be a trigger point for us to then work with our customers to move them to go-forward products. Right? So go-forward products for consumer, go-forward products for enterprise. We will then be able to shut down those wire centers methodically over the next few years as each and every one of those approaches that. In the meantime though we have to care for those customers. And so there's a lot of work obviously that goes into maintaining the network, making sure that when the customers have outages that we're able to respond to those customers and look after those customers to the best of our abilities. So you'll see us working on the operations on the maintenance keeping the systems up and running serving the customers that rely on those systems day in day out. But then you'll see us taking action where we need to take action where we see the P&L of a particular area of the network is heading in that direction where it's cash flow negative and then we'll be taking different actions with the customers and with the network in those areas.
Thanks. Frank Lin with Raymond James. So two questions when we look out to your longer term guidance of sort of mid-30% EBIT margins if we back out the M from the revenue and the EBITDA what would that margin look like under that kind of scenario and then for Jeff just curious your vision for the organization and how long do you think it's going to take to implement that to see the benefits from the changes you can make. Thanks.
Yeah, on the first one we're not going to break it out that way. What I'll just go back to the answer that I gave earlier if you think about the key initiatives, right? Growth in the digital and the ecosystem, growth in PCF, modernization and simplification and operating leverage, that's all those things individually contribute to the margin expansion that we're seeing and again let's not forget and this is where I think a lot of people get wrapped around the axle is they're like but the legacy business is super high margin. Yeah, so is this stuff. Okay, we're going to be okay. And so it's about when is the right time, as Kai said, to convert a customer from old to new. And we're going to be very methodical about that.
And then Yeah. Okay. Yeah. I mean, I think from a go-to market perspective, Kate talked about the transition in the cloud business, software going from on-prem or perpetual based licensing into subscription based licensing. When I was at Cisco, we did roughly 20% of our business was subscription and we moved that to north of 50%. So I've been we've kind of seen this motion and the transformation that's required in a go-to market model to be able to deliver. The good news is I think there's some good foundational pieces in place if you think about the work that's being done in the connected ecosystem. We have some good work and pilots going on around customer success in the new motion. But there is some work to do on how do we upskill our sellers as it relates to moving up the stack, delivering more value to clients, calling on a different buying center that's a little higher in the stack than what they're used to traditionally. Think about scaling customer success motion, scaling the connected ecosystem, and then there's a significant opportunity to scale through general partners in the marketplace as well. So, if you think about VARs, resellers, SIs, etc., we think there's an opportunity to drive growth through an extended channel as well. So there's work to do, but I think there's a good foundation in place to build upon.
Jeff Harb with Barclays. Chris, two things. First, on the revenue outlook slide when you said legacy decline in line with market, grow in line with the market. Can you quantify that a little bit? And then the comment on opportunistic deleveraging. Anything else you can say about that? Is that going to be through the free cash flow you expect in '26? I know you've pushed out a lot of your maturities to '28, '29, etc.
Yeah. So, on the deleveraging piece, we will be opportunistic and it's really going to depend on what happens with things like our borrowing rates, right? That'll be a market condition. It'll also be based off of what happens with upgrades. And so if we see an opportunity where it makes economic sense to retire something earlier then we'll do that. But again the model assumes for now nothing opportunistic. It simply assumes that everything is paid on maturity when it comes due. And sorry the first part of the question slipped my mind.
The other one was on the revenue legacy.
Oh yeah. So in terms of what defines the market rates of growth and decline for strategic and legacy, that's really what you would see published by industry analysts. So, the Gartners, the Forresters of the world. It's really those numbers.
Hey, Nick Del with MoffettNathanson. Thanks for hosting the event. Two questions. First on NAS, the slide with all the different logos, a lot of diversity there. So, I was wondering if you could talk about some of the commonalities between those customers and why they came to you for the service and the education process required to get them to sign up. And then from an M&A perspective, a few months ago at your industry analyst event, Kate, I think you talked about potentially acquiring service capabilities, and I was wondering if you could expand a bit on that and whether that's still something that's of interest. Thanks.
So we are looking actively for any capabilities that are available in the marketplace that will help us accelerate our path to growth, period. And we have a very crystal clear vision about what a programmable network looks like, what Lumen Connect and the single pane of glass looks like and the kinds of things that would help us leapfrog. We're not looking for continued linearity. That's expensive. That's not interesting. It's if we see a leapfrog, you're going to see us move to grab it. And when I say service, I want to make sure we're not talking about professional services. We're talking about digital services that we would be able to put on ports and grow that NAS business through the J-curve. Okay. NAS customers and themes. It's interesting because I took you through an engineering design firm with 60 sites. You think financial services, retail, hospitals, they're all multi-site. They all have a need to move data in between these buildings. But it's not just about networking buildings anymore. It's about networking workloads and agents and applications and they all are seeing that fundamental need with this urgency around being on the most efficient point of the cost curve like CIO deliver insight at the speed of thought in a sea of complexity at a cost point that probably is less money than you were allowed to spend last year and NAS helps us do that in a number of different ways because operationally it's easier to manage once you get that first fabric port in there. You can grow and expand without the traditional marginal cost associated with that. There's an efficiency of cloud-based solutions. You're counting on Lumen to do the innovation for you. So you get that by default and we continue to give you more and more. So it's going to put a little bit of wind in your sails. These are the kinds of things that the companies that first took a step into this thought about and it's still pretty early but I think what you'll see is with Lumen validated designs and with our technology partners as technology companies mature they start to really align by industry so that they can speak the language really have mastery over the business outcomes and for the first time ever for this company and probably in networking link the value of the network to the business outcomes that our customers are trying to drive. That will be the next couple of steps that we take and we'll do so as and when we can. I think Jeff and Ryan who's jumping to add to this would obviously share.
Yeah. The one thing I would add here is I talked about quick, secure and effortless during the presentation, but when you talk to some of our customers, they are saying that what we've actually promised, we are delivering and that is not something that always happens. They're surprised at the customer experience. You heard as Kai talked changing our NPS scores and some of the metrics that our customer satisfaction plays a key role into some of the things that we're delivering with rapid routes where you're actually turning up some of these routes much faster than ever before and then you're turning the bandwidth up and down as you need it. That is not something that these customers have had before and so we see this across industries and we are committed to what we're presenting here actually delivering and exceeding that and that's what we've been doing which is why you see the growth of the customer count going up significantly in that manner.
I'll start. Hey guys, thanks for the day. Dave Barton from New Street Research. Kate, I really liked your presentation because you did something I've never seen before, which is try to create a P*V construct around this industry. Something that I know Chris has been working on for a long time. So what I saw was customers, ports, active ports, services per port, and MRR per port. And if you could kind of continue to disclose that, I think that would strengthen people's conviction in getting to that $600 million number. Are you guys going to do that?
Don't answer that question. She was waiting for you to ask a question. So yes, and so it's certainly to begin with it's number of customers, ports, services, the MRR piece in time. I don't know that we'll do that right away but yes we will continue to share adoption metrics so that you guys can see the pacing of what we're doing. I think what's really encouraging and gives us conviction is that if you just look back over the last few quarters, those rates of growth have been in the high 20s to 30s quarter on quarter. And so, it's important that we continue to do that and we will.
Follow for you. How does that long-term outlook slide change if an old person like me wants to back out the non-cash IRU revenue, which seems to be a big part of the pivot in revenue growth and IBIT margin?
But isn't really about what's happening in the business today. It's about what happened last year and two years ago.
No, it's a good question. And what we have said publicly about that is that if you get the model right, what you're going to see is that the PCF business generates a lot of free cash flow. And then everything else is effectively break even. Now that's a bit we're burdening that a little bit too much because we're assuming all the tax liability of PCF actually sits in the base. So we've got to do a little more work on that. But the reality is that the non-PCF business is fully funding itself, including all the things that I talked about like pension and debt retirement and whatnot. We're not allocating any of that to PCF in our thinking. So, we like where that lands right now because we're in growth mode. We're investing every extra dollar that we have from that business back into that business. So, I think that's what you'd find if you split it up.
Thanks, Mike Rollins from Citi. Thanks for hosting us and congrats on the progress. So I have three questions if I could. The first is on the TAM, the second on strategy, and third a financial question. So on the TAM, you've gotten to 2,000 NAS customers in a very short period of time. Can you help frame that relative to the number of customers that your company has captured over the past 25 years and also how many customers are out there that you could go after that you currently don't have. So just trying to size that TAM. The second...
