Lumen Technologies, Inc. 2026 Q2 Earnings Call

Please go ahead. Good afternoon, everyone, and thank you for joining Lumen Technologies' second quarter 2026 earnings call.

Before we begin, I'd like to remind everyone that today's presentation will include forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements reflect our current expectations, assumptions, and projections about future events and financial performance. Actual results may differ materially from those expressed or implied in these forward-looking statements due to a number of risks and uncertainties. A detailed discussion of these factors can be found in our most recent filings with the Securities and Exchange Commission, including our most recent annual report on Form 10-K and quarter report on Form 10-Q for this quarter, and any subsequent filings. We undertake no obligation to update or revise any forward-looking statements made today, whether as a result of new information, future events, or otherwise.

Today's presentation may also include non-GAAP financial measures. Reconciliations are provided in our posted materials. With that, I'll hand it to Kate.

Thanks, Jim. I'll start by sharing how excited we are to welcome John Hinshaw to the Lumen Board of Directors. John's led complex technology organizations through major moments of change, and his perspective will be a great asset as we continue Lumen's transformation. To that end, we're pleased to report that Lumen delivered another solid quarter with financial results in line with expectations. Before Chris covers the numbers, I'll give some color on our strategy and transformation progress. Great companies don't win by fitting neatly into existing categories. They win by solving hard problems in new ways, sometimes creating new company categories along the way, and that is exactly what we're doing at Lumen. We're using three assets together in a way no other traditional telecom company is: our physical infrastructure, our programmable network, and the connected ecosystem we're building on top.

We are redefining enterprise networking for AI, the market's noticing. Most recently, Gartner named Lumen the company to beat in enterprise networking, one of several strong endorsements of our strategy and progress. Since closing the Alkira transaction, our market position has only strengthened. Alkira is now a Lumen Connect solution, and it gives us a critical capability customers really need: a simpler, faster way to connect and secure multi-cloud and AI environments. Let me double-click on the problem we're solving. Over the past decade, people, data, and applications have dispersed geographically. The software industry responded with wave after wave of innovation to help the physical network keep up, launching new capabilities in cloud connectivity, SD-WAN, SASE, firewalls, and colo-based interconnection. Basically, they made distributed work possible.

Because telecom ceded that innovation to big tech, it happened around the network, not in the network, and that created a whole new set of problems. Customers ended up having to stitch together too many tools, policies, and handoffs. It created sprawl, which is expensive and difficult to manage, secure, and adapt to the speed of today's business. Lumen is stepping up. We're bringing innovation back where it belongs, inside the network. Together with Alkira, we can simplify architecture, improve control, and create more value for customers. By giving customers one cloud-based control point to connect and secure distributed environments, we can help them connect to any building, data center, or public cloud while reducing sprawl. Our network fabric is simple, secure, and built for scale and agility. Look, we're not talking about a vision here.

These are capabilities that are already delivering breakthrough business outcomes for many customers. Two real-life examples. On Alkira, Koch Industries simplified network hub setup across multiple clouds, compressing implementation time from eight months to a single day. At Michaels, Alkira helped connect more than 1,400 retail locations to Google Cloud in just a few weeks with no CapEx and reduced OpEx. In Alkira's real economic value report, you can find many more examples of business value delivered with our platform. It's a new chapter for Lumen, our customers, and our investors. In the past, too much of telecom's value conversation came down to price, we're changing all of that. Our digital capabilities help customers reduce costs, move faster, and create new revenue opportunities. Lumen can now deliver value to customers through business outcomes, not just through discounts.

Our sales team, as you can imagine, are excited to bring these new capabilities to existing Lumen customers. As such, we're rapidly scaling our Alkira go-to-market muscle. Just since we closed, we've already trained nearly 4,000 Lumen employees on the Alkira value proposition. We've established a scalable sales motion and aligned incentives, we're doing outbound marketing and demand gen to scale the sales pipeline. The feedback so far from customers? Very positive. We feel confident that Alkira will accelerate our strategic revenue growth curve I want to also share our plan for technical integration of the Lumen Connect and Alkira platforms.

Our goal is really simple. We want to give customers a quick, secure, effortless digital experience to discover by provision and manage all of their services across their network. That includes traffic moving into and out of the enterprise, which we call north-south, as well as traffic moving across clouds and data centers, which we call east-west, and do it all on one platform. Our plan is to deliver most of that integration in the next 18 months. Even earlier than that, we plan to bring the digital experience to existing Lumen customers, starting with DIA. We are in the process of making Lumen DIA ports digitally discoverable and service-ready through our platform.

That's going to allow us to remotely provision, manage, and support these circuits, upsell additional capability on existing ports without a truck roll, and create a path toward more consumption-based offers. This is a huge strategic unlock. I cannot stress this enough. Our DIA install base carries traditional telecom economics today. The platform gives us a path to layer on high-margin digital services like Lumen Defender, DDoS, Lumen Multi-Cloud Gateway, and more. Those incremental services are expected to approach 80% adjusted EBITDA margins, helping drive Lumen's margin expansion. That's why product portfolio simplification matters so much. We're moving capital and talent towards the existing and future products that define next gen Lumen, their digital platform-based services that solve real customer problems and expand our margins over time. This strategy includes pruning the portfolio with discipline.

Our recent decision to phase out our enterprise voice and communications products was part of this strategy. We're setting our sights and allocating our capital on higher growth markets where Lumen has a differentiated position to win. Speaking of winning, we had another great quarter of NaaS adoption. Today the total number of NaaS customers exceeds 3,000. In Q2, new customer adoption grew 22% quarter-over-quarter. More than 20% of these first-time NaaS adopters were brand new to Lumen. Active ports grew 34% quarter-over-quarter. Active services grew 29% quarter-over-quarter. I have to say, our NaaS growth rates, they exceeded even our own internal ambitions for the first half. What's more, we achieved these results in the north-south connectivity market, a segment that's growing less than 1% per year.

We are clearly taking market share. We believe this is for two reasons. Enterprise customers want digital consumption-based network services. They also see real differentiation in Lumen. Let me close where our strategy compounds in the connected ecosystem. We just paired Black Lotus Labs network-level threat intelligence with Palo Alto Networks' leading security platform to create a managed offering that's better together. Customers get early visibility, a fast response, and far less tool sprawl against security threats that are growing more and more complex every single day. We're scaling this partner model in the connected ecosystem by making sure that Lumen brings unique network intelligence and our incredible fiber capabilities together with our tech partners who bring their best products and technologies. Together, we help customers move, control, and secure data in an AI-first world. Chris, over to you. Thanks, Kate.

I'll build on Kate's remarks by showing how our strategy is showing up in our financial model through disciplined simplification, improving revenue mix, focused capital allocation, and a clearer path to higher growth strategic revenue. Before I get into the second quarter results, I want to talk about some of the decisions we're making with respect to product simplification. Product simplification is not just a cost action. It's a strategic capital allocation decision, and it's letting us focus resources on the digital platform-based, high growth, high margin services Kate described. It's imperative that as an organization, we aggressively manage our product portfolio to maximize margins and cash flow. These are purposeful decisions that are a means to an end in driving cash flow to fund our growth.