Lumen says Trump’s AI action plan bolsters its fiber network plans

Speaking to investors during its second-quarter earnings call, Kathleen Johnson, CEO of Lumen, said the provider is making progress executing on the $8.5 billion PCF contracts it announced last year.

“Our pipeline of PCF opportunities remains strong with a combination of demand for overpulls on existing conduit, which are higher margin and lower risk, as well as new route construction, which is inherently expensive, risky, and lower margin,” she said.

To support its growing pipeline of PCF customers, Lumen is expanding its fiber and optical networking facilities. It is building 119 ILA In-Line amplifier sites. Additionally, it has deployed 1,200 miles of fiber on 16 routes and completed IRU conduit deployments across 55 additional routes.

“In another 2 years or so, we expect to finish this construction and overpull work, generating over $400 million of annual revenue for Lumen for the remaining duration of the 20-year contracts,” Johnson said. “We now have just under $9 billion in PCF business, adding nearly $500 million in new contracts since our last update.”

Targeted builds

Lumen may be bullish about how it will pursue new fiber builds to accommodate AI and other new high-speed data demands, but its approach will be focused on targeted builds.

Last August, Lumen struck a large fiber supply deal with Corning. The agreement, Lumen’s largest cable purchase, will equip the service provider to meet the network infrastructure needs of major data center operators for years to come, including Microsoft, which announced last week that it’s investing with Lumen to support the rising demand for its data centers.  

It will serve Lumen’s U.S. intercity network, which includes diverse routes to more than 50 major cities nationwide.

Johnson emphasized that in building any new route, it will work “with our customers on creative deal structures to mitigate risks and manage costs,” and that “none of these remaining deals in the pipeline have been contemplated in our guidance or long-range growth plans as they are purely upside.”

However, Lumen is not going to take a build it and they will come approach to its fiber build process.

“We will remain deeply disciplined in our approach by only inking deals that are value accretive to Lumen's shareholders, even if this means stepping away from an opportunity,” Johnson said. “We simply won't be pulled back into the field of dreams, route construction practices of legacy telecom.”

Three-phase AI evolution

Lumen sees a three-phase evolution for AI that will accommodate hyperscalers and enterprises alike.

In the first phase, Lumen will focus on connecting data centers for the hyperscalers.

Johnson said this is a response to hyperscalers that are looking to ramp up capacity by building new data centers and connecting them with a mix of lit services like optical wavelengths or dark fiber.

“It's about the hyperscalers saying, gosh, we need so much more compute,” she said. “It's about building new data centers and connecting them. We're doing that in parallel. We're building the routes in parallel with the construction of the data centers.”

During the second phase, enterprises will ramp up their consumption of AI, which will require more data centers to be built over the next three to four years.

While she could not share any specific customer targets, Johnson said Lumen is in conversations with those companies as well to connect them,” adding, “that’s a different nature and size of contract, obviously, than the hyperscaler.”

Finally, the third piece will be an additional expansion of the physical fiber network once AI is talking to AI. The service provider continues to build out fiber in metros to accommodate AI rings.

Johnson said that once these new rings are built, “we're focusing on the build-out for #2 and 3, which are where the advanced services come into play and sort of accrue to that grow bucket.”

Business revenue opportunities, challenges

While AI will certainly bring Lumen new revenue opportunities, the company’s second-quarter overall business service revenue was again a mix of hits and misses as it saw gains in its growth categories and public sector lines, but struggled due to declines in legacy services and wholesale.

The service provider's three segments of Grow, Nurture and Harvest all saw varying results:

·       Grow: Grow revenue rose 8.5% year-over-year to $827 million.

·       Nurture: Nurture revenue declined 18% year-over-year to $$429 million.

·       Harvest: Harvest revenue was $289, up 2.1% year-over-year.

North American Enterprise Grow revenue rose 8.5% year-over-year. Driven by large enterprise and public sector growth, with continued pressure in “Nurture” and “Harvest” product revenue, “Harvest” product revenue is up slightly year-over-year. Overall, North American business declined 3.1%.

Chris Stansbury, CFO of Lumen, said a “highlight from the quarter was total IP sales up nearly 38% and IP revenue up in the mid-single digits.”

On a year-over-year basis, considerable enterprise customer revenue declined 2.3% in the second quarter, and mid-market revenue fell 11%. In large enterprises and mid-markets, “Grow” revenue was up 13.3% and 1.2%, respectively, offset by Nurture and Harvest.

Public Sector remained a star in the business services portfolio, with revenue growing 8.2% year-over-year. The Public Sector was helped by “Grow” revenue being up 9.4% and Harvest revenue was up approximately 49% year-over-year.

“Public Sector Harvest revenue has been elevated over the past couple of quarters, and we estimate it will return to more normalized levels in the second half of 2025,” said Stansbury. “We would expect Public Sector Harvest revenue to remain lumpy quarter-to-quarter based on future voice disconnects.”

Meanwhile, Wholesale revenue declined about 5% year-over-year to $690 million. The Harvest portion of the wholesale portfolio, which is primarily driven by voice and private line, saw revenue contraction by 6.2% year-over-year in the second quarter.

Stansbury said, “This is driven mainly by telco partners that are selling legacy services.”

Within Lumen’s North American enterprise channels, which is its business segment, excluding wholesale, international and other, revenue declined only 2.4% $2.1 billion.

Lumen’s Harvest product revenue will likely continue to decline over time, and is an area that it says it will manage for cash. Nurture revenue was down 8.6% in the second quarter due to declines in VPN and Ethernet, and wholesale Grow revenue was down 0.4%. International and other revenue declined 10.9% or $10 million, driven primarily by declines in VPN revenue.

Due to declines in VPN and Ethernet revenue, overall Business segment revenue fell 3.4% to $2.49 billion.

Despite the near-term declines, Stansbury said the company is confident that the $5.74 billion sale of its consumer fiber business to AT&T in May is a positive step because it “allows us to invest and focus on our core enterprise capabilities while also significantly improving our balance sheet.”

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