Key Takeaways:
Lumen Technologies, a leading provider of fiber-optic networking, has once again raised its annual free cash flow forecast, supported by new AI-driven agreements that bolster its private connectivity fabric (PCF) offerings.
Despite significant strides in data-center connectivity for AI applications, the company continues to navigate challenges posed by its declining legacy telecom services.
Expansion of AI Partnerships Boosts Cash Flow
Lumen reported an additional $3.5 billion in new business within its private connectivity fabric sector since its last update, driven by recent contracts aimed at supporting AI operations for major tech companies.
This includes a new agreement with Alphabet’s Google Cloud, which Lumen announced Tuesday morning, to provide data insights and connectivity solutions critical for AI infrastructure.
“AI needs data, data needs data centers, data centers need to be connected, and that’s what we do,” said Chief Financial Officer Chris Stansbury, highlighting the importance of Lumen’s services in linking data centers to support AI demands.
In his comments, Stansbury emphasized that these recent AI deals are financially more impactful than previous ones.
He explained that the initial $5 billion in AI deals helped Lumen “invest in the turnaround” by addressing patent investments and paying down debt.
Now, the additional $3 billion in new business allows Lumen to “actually reduce debt,” which is “meaningful for us,” he said.
Stock Fluctuations Reflect Financial Adjustments
Lumen’s stock has surged by more than 450% in the past year as the company repositions itself within the AI connectivity space, although recent trading sessions have shown volatility.
After an initial 8% increase in Tuesday’s extended session, the stock later dropped by 3% in after-hours trading, underscoring investor caution about Lumen’s legacy business.
Despite revenue from new AI deals, Lumen continues to experience a financial drag from its legacy telecom operations.
The company posted $899 million in adjusted EBITDA for the third quarter, a drop from $1.049 billion the previous year and below analyst estimates of $988 million.
Additionally, Lumen reported a net loss of $148 million, or 15 cents a share, which was a wider loss than the 8 cents a share from the same period last year.
On an adjusted basis, the company’s loss of 13 cents per share exceeded the FactSet consensus of 9 cents.
“The weight of legacy enterprise telecom is still there,” Stansbury noted, acknowledging that declining EBITDA results in legacy sectors will continue to impact Lumen’s overall performance. “But this positions us really well for what we see as two curves of growth: the first being these PCF deals and the second being digital services.”
Legacy Challenges Persist Despite AI Momentum
While the new AI deals signal growth potential, Lumen’s older business segments, such as voice and broadband services, remain in decline, impacting overall revenue.
For the third quarter, revenue dropped from $3.64 billion last year to $3.22 billion, closely aligning with analysts’ projections of $3.21 billion.
“We’re really excited about the progress we’re making,” Stansbury remarked. However, he expressed humility in recognizing that Lumen’s “legacy business is in decline, and it will continue to be.”Given the size of Lumen’s legacy operations, he anticipates it will “take a while for total revenue to start to grow” despite AI-driven revenue gains.
As a result, Lumen’s strategy involves leveraging its PCF solutions to support AI companies while continuing to seek additional AI-driven opportunities.
Stansbury mentioned that ongoing negotiations could lead to “several billion dollars” in further AI contracts, though these projects may take longer to materialize due to their scale, which often requires extensive construction.
“The conversations around possible future arrangements are really exciting, but they’re also huge construction projects, because you’re now talking about digging trenches,” Stansbury said, highlighting the infrastructure demands of future AI deals.
Financial Outlook and Future Prospects
Looking forward, Lumen has adjusted its full-year free cash flow projection from $1.2 billion to $1.4 billion, an increase from the previous forecast of $1.0 billion to $1.2 billion.
Upfront cash collections from AI deals drive this revised forecast, though it will take time for these contracts to translate into tangible revenue gains.
Lumen’s pivot towards AI-driven data connectivity presents substantial growth opportunities.
However, its long-term success will depend on balancing the demands of its new AI initiatives with the financial weight of its legacy telecom services.
October 22, 2024: Lumen Partners with Meta to Expand AI Network Capabilities! August 22, 2024: Lumen’s Lucrative $5 Billion Deals from Booming AI Connectivity August 21, 2024: Microsoft Partners with Lumen to Tackle AI Data Center Demands!
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