- Lumen recently won an additional $3 billion in Private Connectivity Fabric (PCF) sales
- The company’s CEO Kate Johnson said there’s no future for Lumen in traditional telco
- But she’s pivoting the company to two key growth areas related to the AI boom
Lumen’s President and CEO Kate Johnson was surprisingly candid about the company’s legacy telecom business during its third quarter 2024 earnings call this week. She said the company’s current financial results, coupled with the fact that telcos are not talking about a turnaround, make it difficult to imagine long-term success for Lumen.
Ouch.
She also mentioned Lumen’s plan to cut costs by $1 billion by the end of 2027. The plan is to unify its four network architectures into one, allowing simplification of its product portfolio and IP estate. “While this work is incredibly complicated, given our long history of mergers and accumulation of tech debts, we are on track to developing the plan to execute,” said Johnson. “These cost-out efforts will require upfront spending with a back-end loaded cost takeout curve.”
These messages — that the legacy telco business may prevent success for the company and that its hodge-podge of corporate systems must be streamlined — kicked off the call on a dire note. But Johnson quickly moved to her positive plans to turn the company around. And they were pretty positive.
She reminded everyone that in Q2 Lumen booked more than $5 billion in Private Connectivity Fabric (PCF) sales, and she noted during Q3 the company booked an additional $3 billion in PCF sales. The sales will allow Lumen to “close near-term funding gaps” and have “extra cash to do some deleveraging,” she said.
Johnson recently told Fierce on The Five Nine podcast that the company had a $7 billion PCF pipeline beyond the initial $5 billion it inked in Q2. That would leave roughly $4 billion in deals unannounced. To date, it has signed agreements with Amazon Web Services, Microsoft, Meta and Google Cloud, but Johnson said its pipeline included forward-thinking enterprises as well as Big Tech.
AI awakening
Lumen’s long term salvation rests on the artificial intelligence (AI) boom. To serve AI, the company is pursuing two major growth vectors: building the AI backbone and cloudifying telco.
Johnson said, “Lumen is building the backbone for the AI economy. The market now recognizes that AI needs data, data needs data centers, and those data centers need to be connected. And several of the biggest names in technology, including Microsoft, Meta, AWS, and Google have chosen Lumen as their trusted network for AI.”
The analysts at New Street Research wrote, “It seems the company is up to 15 PCF customers from the 10-12 they disclosed previously. The $3 billion in new PCF revenue was from new and existing customers. Management suggested that the remaining $3.5 billion of the $12 billion total opportunity could take longer to materialize.”
In August Fierce Network spoke with Lumen’s CTO Dave Ward, who said the demand for connectivity from AI is creating “the largest expansion of the internet in our lifetime,” and Lumen is well-positioned because it has a national long-haul backbone. “There is no other provider in the U.S. that has the capacity of all the infrastructure that Lumen does,” said Ward.
On this week’s call, Johnson said as long as hyperscalers, social platforms and cloud companies are massively expanding their networks to support data center buildouts for their AI model training, Lumen will have the opportunity to connect them. “These deals are deeply accretive to Lumen and well-timed for our transformation,” she said.
Lumen isn't the only one benefitting from the need for transport networks for AI. Zayo Group CPO Bill Long recently told Fierce on The Five Nine podcast that it, too, has a billion-dollar pipeline.
However, the analysts at MoffettNathanson wrote that Lumen has a competitive advantage for these sorts of long-haul deals “given the spare conduits it has from the Level 3 build-out a quarter century ago." Moffett said competitors and customers can’t match Lumen from a cost and time-to-market perspective. However, Lumen’s advantage may diminish when it comes to new construction.
Lumen’s second big bet
Johnson also talked about “the second phase of AI evolution,” which is the enterprise business that Lumen plans to tap into as companies begin to use AI models at scale.
“These enterprises are calling Lumen because they know we connect all three public clouds, and they also see that we are investing in the future networking needs, unlike any other company in the networking marketplace,” she said.
Telcos have been talking about and, to some extent working, to cloudify their networks. But Johnson expects that work to accelerate in light of AI. Cloudification of telecom networks is “going to disrupt the industry and provide Lumen with another major growth sector,” she said.
To that end, Lumen is building a digital network-as-a-service (NaaS) platform, natively integrated with its fiber network, to enable enterprises to digitally design, price, order and consume secure networking in a hybrid multi-cloud world.
More than 400 customers have adopted Lumen’s NaaS. “To our knowledge, no other telco that owns a fiber network is doing this, and we see it as a material differentiator and revenue generation opportunity for Lumen in the future,” said Johnson.
But for all that it intends to help telcos, Johnson reiterated it doesn't see a long-term future as a traditional one itself.
“I want to be clear here. We are not here to find revenue growth in legacy telco. All of our transformation work is in service to customers who need and want to leverage technology like Gen AI to transform their business. And the legacy networks of yesterday just won't serve tomorrow's enterprise,” she concluded.