Lumen Inks Palantir Deal as Growth Strategy Takes Hold

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2:13It's time for another edition of the CFO Briefing. And this week we're joined by Chris Stansberry, the CFO and EVP of the Louisiana-based publicly traded global communication services company, Lumen Technologies. It's got a market cap of about$9.7 billion. Shares so far this year are up around 80 percent, though. Shares today down just about 11.5 percent. Chris joins us once again from Denver. Also with us, Nina Tretman, Bloomberg News senior editor. She writes the CFO Briefing newsletter. You can subscribe to it at Bloomberg.com slash CFO Briefing. Chris was featured in the most recent edition of the newsletter.

2:45Chris, you last joined us just about a month ago, and the stock since then, you reported earnings since then, but the stock since then has shot significantly higher and also come down off of those highs of November 3rd. What has changed since we last spoke just about a month ago? Yeah, I really think the market is starting to understand our role in the AI economy and the rewarding us for it. I mean, I think if you look back over time, there was a cloud over Lumen's head, which really related to debt levels and the fact that we were in a business that for a long, long time had been run in a very traditional legacy telecom way.

3:25And over the last couple of years, we've been reengineering all of that. Our debt has come down significantly. It'll come down again when we sell an asset to AT &T and close on that in the first quarter. So that cloud is gone. But more importantly, the growth story is really starting to emerge. and investors are starting to reward us with that. So it's nice to see the separation between us and our peers as we are more attached to where the AI economy is going. Yeah, maybe a good point to follow up here, Chris. Thanks for joining us again. We've, of course, seen in recent weeks concerns amongst investors about AI, whether there's a bubble occurring in that space.

4:08You just recently struck a partnership with Polentier. Talk to us about that and also then these concerns on AI, like how serious should we take them? Yeah, we really don't see an AI bubble, especially where we sit in that broader ecosystem. If you go right back to basics, AI starts with the economics of a GPU, right? Those big computing tools that AI uses. And for the economic investment in GPUs to make sense, those GPUs have to run constantly and at capacity. And what that means is in a world where companies are keeping their data across multiple platforms, some of it's internal, a lot of it's external, but then geographically it's getting more and more remote as these data centers are in search of power.

5:04The reality is today's network does not support that. It's too slow. It doesn't have enough capacity. It's inflexible to use. It's very static. And so what we're seeing is a bandwidth reckoning, not a bubble. And so the network architecture that we're bringing, what we call cloud 2.0, which is bigger pipes, faster on demand access in the hands of the customer are really what what takes us there. I mean, remember, the Internet boom was because demand wasn't there when the capacity was built. We are all catching up to today's demand for AI. So it's a very different scenario. And that's why we're convinced that this is the right path.

5:53As it relates to Palantir, it's really one of many partnerships that we've announced. We've talked about companies like Commvault and partnerships with data center companies as well. And really what that gets to is that we're not doing this alone. There's a broader ecosystem in play here where tech companies are saying, hey, wait a minute. My customer experience can be dramatically improved if I'm using Lumen's network tools to access my technologies and my solutions. So, you know, think about real time backup and recovery. That means real time. That means no latency. That means being able to backup data that's everywhere.

6:34And so as we continue to build that network out with that kind of capacity and flexibility, we're seeing a lot more tech partners come in and build APIs into our network and in turn will sell their product and they will sell ours. So it's really exciting and it's frankly really disruptive to the enterprise telecom space. Just wondering about your recent results. You posted a bigger net loss than the year before. Of course, the focus is very much on growth that came across. But I'm wondering sort of like how much pressure are you as CFO under to narrow that net loss and get to profitability at some point in time?

7:16Yeah, I mean, obviously, there's pressure there. But our focus is really on three things and in this order. The first was coming out of the debt restructuring we did not yet two years ago. I mean, it's really been a remarkable turnaround since then, is stabilizing and generating free cash flow. We've done that. And a big piece of that is the$10 billion of these big PCF deals, these big pipes that we're building for hyperscalers and other large tech companies. But it's also the fact that our total portfolio is really made up, 50 % of it, of stuff that's growing. So the legacy stuff gets smaller and smaller.

7:54So cash flow, first objective, in great shape there. And it only gets better with the delevering because our interest expense will be about half of what it was two years ago. The second is inflecting EBITDA. And that will happen next year. And it's happening next year, even while revenue continues to decline a bit, because we're targeting a billion dollars in modernization and simplification by the exit of 2027. And we're on track to do that. And then the third is getting back to revenue inflection. As those things happen, the net loss situation changes. But the focus really is those three things in that order.

8:32Just thinking about your share price, Tim just pointed it out. It's up over 80 percent this year. I know that you got authorization from shareholders earlier this year to do a reverse stock split. I'm wondering when should we expect that? And what do you think the result will be in terms of impact on your stock? Yeah, I mean, ultimately, we'd like to see the share count lower. You know, a billion shares is a lot of shares to have outstanding. I would say that's not a priority. It's something that we'll look at as we continue to move along. We authorized that earlier on when the stock price was a lot lower.

9:07And we wanted to make sure that the value of the stock in the markets was high enough to be attractive. And it would have been, you know, a financial engineering scenario. But we really don't have to do that now. So it's on the list to eventually do. But it's not something that has to be done now, because, again, the the balance sheet pressures of the debt and the and the cash flow pressures are behind us. one thing i'm curious about chris and i just think for people who might not be familiar with you guys i mean it sounds you know you've been shifting right to a more ai play ai oriented play so who are your big customers or who are your customers so we have an understanding of kind of where you fit into this puzzle yeah so it today when you think about uh where ai is we're We're really starting to transition from AI training to inference, where a large enterprise starts to use it.

10:05And so the initial big builds were really for the big hyperscalers and the companies that were developing these learning algorithms for their own consumption. These were really big pipes so that those algorithms could continue to learn. And that network is still being deployed because I saw someone speak recently and they said the capability of AI three years from now will be 10 ,000 times what it is today. So that that continues. But what we're starting to see and where you see a lot of messaging from us on additional bandwidth capacity, but then digital tools to access the network, not people in trucks plugging things into other things that takes months to enable.

10:49But digital access to that data, large enterprises really starting to need, as is mid-market companies. And so the tools that we bring in terms of access, but also the ability to move data around in an AI world in a very efficient, low latency, high secure way are the tools that we're bringing to market. And candidly, no one else is doing it. And, you know, we talk about dumb pipes, which is just the connectivity. Yeah, it's got to be connectivity in that physical layer, but it's also how you access and interact with your own data. So the success of your company and what you guys are doing, does it matter whether it's on premise or whether it's up in the cloud?

11:32No, in fact, one of our significant advantages is, is that in this AI multi-cloud world, accessing the cloud data has really been an Achilles heel. Because the only way to do that is to really go through neutral third party carriers, because the telecoms years ago when cloud developed basically delegated that and said, yeah, somebody else can go build it. The analogy would be it's like taking county roads to go from New York to San Francisco. It's slow. There's lots of stops along the way. It's expensive. We have things like direct cloud on ramps with with very high capacity connectivity. where you will be able to go direct as a large enterprise, say a bank, into your cloud environment through our network and immediately start moving data around, you know, at your own fingertips.

12:22So that's a real competitive advantage that no one else has. Chris, just as we're wrapping up, we have about a minute left. Talk to us a little bit about your investment plans for next year. The reason I'm asking is the One Big Beautiful Bill Act, which reduces the tax liabilities that come with spending on capital infrastructure plans, but also other assets that wear off. How does that impact how you think about spending next year? It's material. I mean, the reality is, is that, as we've talked about in the past, big infrastructure companies, which tend to have higher leverage, were really penalized in the 2017 legislation because we lost things like interest deductibility, as an example, and accelerated depreciation.

13:11So by getting those back, it really does incent that we stay ahead as a nation in terms of AI. And we're committed to that. We are continuing to roll out more rapid routes, more of our metro area rings that support large enterprise and their consumption of AI. And so all of those things are being baked into next year's plan as we go forward. So it's a huge win for us and a huge win for the industry. Chris, so appreciate it. Chris Stansbury, CFO, Lumen Technologies. Nina Tretman, our senior editor of Bloomberg News.

13:53What if data didn't sit still? What if intelligence moved with us? Not buried in reports, but activated in real time. Where lives are being shaped. Where decisions are being made. It all starts with a question. Where is the potential? Cotality turns data into clarity. Intelligence into insight. Insight into action. Because when intelligence moves, we all move forward.

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