Lumen Technologies (LUMN) Q2 FY26 earnings call: guidance and Q&A

Is the transition from legacy to strategic revenue accelerating? How can Alkira further accelerate performance? What are the implications for H2 business revenue declines given Q2 results?

Management confirmed the transition is accelerating, citing NaaS adoption by new customers and non-migratory additions by existing ones, indicating market share gains. They highlighted the growth in 100/400 gig waves driven by AI adoption and rapid routes. Alkira is seen as a disruptive cloud-native solution to accelerate digital transformation, with quantification expected in FY27 guidance. H2 revenue guidance remains on track, with Q2 benefiting from accelerated State of California revenue.

“It's not a one-for-one cannibalization. What's more? I can't -- I don't remember the exact number, but I think it's somewhere around 60%, we can confirm that off-line, of the customers that were already Lumen customers were adding NaaS circuits. They weren't migrating, okay? So this is clearly a share take, and it's not a one-for-one translation of the legacy business into strategic.”

asked by Michael Rollins · answered by Kathleen Johnson

What is the MRR of an Alkira customer and how does it compare to a traditional networking customer? Is Lumen taking market share in the waves business?

It's too early to quantify Alkira's MRR, but the focus is on driving adoption and then increasing services per port for near-zero marginal cost. Alkira allows Lumen to engage CIOs/CTOs for strategic network upgrades, aiming for a larger share of wallet. Lumen believes it is taking share in the waves business due to rapid routes and 100/400 gig capabilities, especially with neoclouds.

“With these net new services, multi-cloud gateway and the Alkira portfolio, we're now a couple of clicks up from procurement, talking about total network upgrades strategically to allow for them to achieve their AI ambitions and we're knocking on the door of the CIO and CTO and they're answering for the first time since I've been here.”

asked by Frank Louthan · answered by Kathleen Johnson

When will digital revenue growth accelerate beyond the current $2 million QoQ? Can the impact of the State of California pull-forward on public sector and PCF revenue be quantified?

Digital revenue is growing from a small base, and Alkira is expected to accelerate it, with quantification coming in FY27 guidance. The State of California milestone was accelerated into Q2 and is now largely complete, impacting both PCF and public sector revenue, but no specific quantification was given beyond the $36 million PCF revenue mentioned in prepared remarks.

“As it relates to digital revenue, remember, when we did Investor Day, we laid out not just the mix shift from legacy to strategic, but also within strategic, how much was digital. And so I would say that as a baseline, that's still a good way to look at it. Obviously, Alkira allows us to accelerate that, and that's what we've got to quantify over the next couple of months.”

asked by Gregory Williams · answered by Christopher Stansbury

What is the size and stage of the funnel for new enterprise deals? What is Lumen's comfort level with PCF deal pricing/yields in the current environment, given the comment about not chasing deals based on price?

Lumen's PCF deals monetize existing, underutilized conduit from decades ago, providing good returns and strategic proximity to hyperscalers. New builds, however, often yield returns at or below the cost of capital, which Lumen will not pursue for 'headline value'. They are happy for others to build infrastructure at low returns, as Lumen can provision higher-margin services over it. There is a pipeline of material PCF deals in conversation.

“If you look at the PCF deals that Lumen has signed to date, all of those deals were about monetizing conduit that was paid for a quarter of a century ago. Underutilized assets that allowed us to deliver faster network deployment for hyperscalers that ultimately, from a strategic perspective, created proximity with those hyperscalers that is now helping us bring differentiated services to enterprise.”

asked by Michael Funk · answered by Christopher Stansbury

Can you elaborate on the path to sunset enterprise voice services, including support for existing customers and steps to prevent churn of other services?

The strategy is customer-centric, balancing customer needs with maximizing cash flow and regulatory constraints. Lumen segments customers by MRR and other services, focusing on larger revenue footprints. They are developing partnerships to provide voice capabilities, enabling better economics. The end-of-sale was announced, and end-of-life will be aggressive, meeting obligations for big customers and regulatory requirements, but prioritizing digital growth.

“Our strategy is deeply rooted in the customer. We put the customer at the center of it. And I think it's really important to kind of segment customers in the base of a legacy revenue stream. We have a huge number of customers that have a very small monthly MRR, right, and do not have other services.”

asked by Nicholas Del Deo · answered by Kathleen Johnson