Stock of Lumen Slips After the Latest AI Deal Numbers Are Released

Lumen Technologies Inc. has announced over $3.5 billion in new business driven by its private connectivity services, marking significant growth in the telecommunications company's partnerships with data-intensive sectors, particularly in artificial intelligence. The company revealed that a portion of this growth includes a new partnership with Google Cloud, part of Alphabet Inc., where Lumen will provide infrastructure support to help manage data and power AI applications.

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“AI relies on data, data requires data centers, and data centers need robust connectivity, which is our specialty,” Lumen’s Chief Financial Officer, Chris Stansbury, explained. Stansbury emphasized how these AI-related deals have introduced new financial benefits that go beyond what previous agreements offered.

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Initially, Lumen used its AI-related earnings to address gaps in its financial strategy, enabling investments that fueled the company’s transformation. “The first $5 billion allowed us to invest in patents, fund our turnaround, and manage debt as it matured,” Stansbury explained. This recent $3 billion, however, supports efforts to strengthen Lumen’s financial structure, particularly by reducing debt, which is a critical step for the company.

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Lumen’s strategy includes navigating a significant debt burden, and its entry into the AI sector has boosted investor confidence, resulting in a stock surge of over 450% in the past year. Much of this increase occurred over the summer as Lumen made strides in expanding its AI business. While Lumen's stock initially climbed 8% after hours on Tuesday, it later dropped 3%, reflecting some market caution.

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Stansbury acknowledged the challenges presented by Lumen’s older telecom business, which is facing declining EBITDA. “The legacy telecom sector still weighs on us, and we expect this trend to continue, but we’re also positioning ourselves well for dual growth paths,” he said. The first growth path comes from private connectivity fabric (PCF) deals, and the second stems from digital services that allow clients to seamlessly access these networks. This dual approach has attracted interest from hyperscalers like Google Cloud, as it aligns with the evolving digital landscape.

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For the third quarter, Lumen posted $899 million in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA), down from $1.049 billion a year earlier. Analysts had anticipated EBITDA of $988 million, but Stansbury pointed out that third-quarter expenses tend to be higher due to summer construction and related seasonal factors.

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Alongside its earnings report, Lumen reported a net loss of $148 million, or 15 cents per share, which was larger than the $78 million loss, or 8 cents per share, it reported a year earlier. On an adjusted basis, the company’s loss per share reached 13 cents, while analysts had predicted a loss of 9 cents per share. Revenue also declined from $3.64 billion to $3.22 billion, though it slightly exceeded analysts' forecast of $3.21 billion.

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“We’re excited by our progress,” Stansbury said, yet he also acknowledged the ongoing decline in Lumen’s legacy business, which includes older services like voice communication. Given its size, this segment will take time to offset with growth from newer AI-based initiatives. However, Stansbury is optimistic that the company’s investments in AI infrastructure will help it successfully transition and eventually generate positive revenue growth.

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In addition, Lumen raised its forecast for full-year free cash flow, now expecting between $1.2 billion and $1.4 billion, up from the previous range of $1.0 billion to $1.2 billion. The company noted that its AI partnerships offer a substantial upfront cash infusion, even if it may take time for these agreements to show up in metrics like revenue.

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As Lumen pursues more opportunities in AI, Stansbury indicated that the company is in talks for additional partnerships worth several billion dollars. However, he cautioned that some of these potential deals may take longer to finalize, as they often involve large-scale infrastructure development, including trench digging for data cabling.

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