US network operator Lumen Technologies, which has reinvented itself as a provider of high-capacity datacentre-to-datacentre connectivity to the big tech and large enterprise community, is increasing its capital expenditure (capex) budget by 30% to $4.2bn for 2025 in order to meet the intercity network services needs of its major customers and capitalise on the growing demand for AI-fuelled data network capacity.
The operator noted in its fourth-quarter and full year 2024 earnings report that it expects its capex spending to be in the range of $4.1bn to $4.3bn this year, up from $3.23bn in 2024, in order to “build the backbone for the AI economy”.
The move is a reflection of the company’s customer success in 2024: In the past year, Lumen has landed a number of major network capacity deals with hyperscalers and big tech firms, such as AWS, Microsoft and Meta. Such companies require increasing levels of data transport capacity on the routes between their datacentre facilities as AI usage continues to ramp up and Lumen needs to be able to meet its contractual commitments and ensure it can accommodate further deals.
And demand for its data transport services is only likely to increase further as infrastructure investors and hyperscalers pump billions of dollars into new datacentres and the expansion of existing facilities. The recent announcement of the Stargate Project is just one example of ongoing intensive AI-fuelled digital infrastructure investment plans in the US – see Tech giants unveil $500bn AI investment plan in the US.
Lumen is set to continue investing heavily in its network for years to come. The operator noted during its earnings webcast on Tuesday that it expects to end 2025 with 17 million intercity fibre route miles and for that total to increase to 47 million by 2028, with “hyperscaler utilisation” of its network capacity to increase from 45% this year to 57% in 2028 and overall utilisation to be up from 64% this year to 70% in 2028 (see graphic above).
This is all encouraging and exciting for Lumen, but its plans have yet to translate into sales growth and improved profitability, though that is on the horizon. For the full year 2024, Lumen generated revenues of $13.11bn, down 10% year on year, while its adjusted EBITDA came in at $3.94bn, down 15% year on year.
Of those revenues, $10.36bn came from its business services portfolio (hyperscalers, enterprises, wholesale), which is Lumen’s core focus. Its residential broadband division (which it calls Mass Markets) generated sales of $2.75bn: Lumen is reportedly looking to sell its Mass Markets division in order to focus on its business customers, where it sees significant potential growth.
But the future looks healthier from a financial perspective, especially from 2026 when the company expects to start reporting adjusted EBITDA growth. CEO Kate Johnson has not only rescued the company from potentially going out of business since she took the helm in late 2022 but set the company on what looks like a potentially lucrative path. She spoke extensively about the company’s plans during Lumen’s webcast.
She noted that the company improved its financial position following its debt restructuring process and “established Lumen as the trusted network for AI, inking $8.5bn in closed sales with big tech companies like Microsoft, AWS, Google, and Meta, among others. These deals helped us strengthen our free cash flow and enable us to self-fund our transformation. We continue to be in deep discussions with several customers to build new routes, and we’re going to provide more detail on those deals as it makes sense to do so.”
She also highlighted the progress made with the operator’s “unified network architecture, enabling 85% of new Ethernet and IP data service sales in major metro markets. This is the long-overdue integration of our four network architectures and has already started delivering benefits. The unified network not only enables NaaS [network as a service] and other more advanced digital services, but in some cases, it reduces our average time to deliver by more than 12 days and reduces implementation costs by as much as 50%.”
Three clear priorities
For 2025, Johnson said the company has “three clear priorities – driving operational excellence, building the backbone for AI and cloudifying telecom. Each of these priorities has detailed plans to deliver more customer, shareholder, and employee value in 2025 and beyond.”
In terms of building the “backbone for AI”, Johnson noted that Lumen has begun construction “on the backlog of work generated from the $8.5bn in PCF [private connectivity fabric] sales, and it’s going really well. We are increasing two variables at the same time: Capacity and utilisation… Because we see a significant increase in demand for our network infrastructure across both the hyperscaler and enterprise market segments, we’re driving network expansion in several ways. We’re building new routes funded by our customers, often multi-tenant, with great economics. We’re partnering with Corning to use their latest fibre innovations, allowing us to get as much as four times more capacity from existing and new routes. And we’re leveraging photonics innovation for up to two times greater fibre efficiency. If you add all that up, our total network capacity has the potential to go from 12 million total intercity fibre miles in 2022 to 47 million miles by 2028, giving us unmatched room for growth for network services. And I’m not even including our 22 million metro miles in that number.”
The CEO continued: “The second aspect of our plan to drive improved shareholder return is all about utilisation of our assets… we’re going to increase the overall utilisation of our network from 57% to 70%. This is because the hyperscalers are leasing [what was] once empty conduit, and they’re funding new builds, while enterprises are upgrading their networks dramatically. In fact, we saw a nearly 50% increase in 100 Gbit/s and 400 Gbit/s wavelength sales across large enterprise and mid-markets in 2024 alone. We’re closely monitoring customer demand signals, and we’ll continue to make important capital investments in key major metros to capture this traffic growth. In summary, the growth lever of building the backbone for AI represents a huge accretive opportunity for this company. We’re not only driving the strongest utilisation of our network assets in the history of the company, we have unmatched capacity for growth at exactly the right time.”
Cloudifying telecom
In terms of “cloudifying telecom”, Lumen is “building a digital layer on top of our physical network to help us deliver friction-free, high-performing digital network experiences”. Johnson described this as an “intelligent digital network fabric that enables CIOs to be successful in a multicloud, AI-first world… enterprise CIOs need to move workloads between locations, on-prem, at the edge, and multicloud. And it needs to be cost-efficient and friction-free. But it’s not, for two reasons. First, legacy networks were not built for a multicloud world. So, enterprises were forced to use carrier-neutral facilities to access the cloud connectivity market, driving growth in costly and inefficient cross connects. Second, most traditional telecom companies aren’t building a platform for digital dynamic frictionless customer experiences. Now, Lumen is fixing all of that, using ourselves as [the initial] customer” in order to support its Mass Markets consumer broadband services.
“We plan to bring this lower-cost, higher-performing architecture to our customers in late 2025… We’re creating an innovative networking ecosystem that will bring new value to enterprise CIOs in today’s multicloud, AI-first world. And this will give Lumen access to a net new total available market that we estimate to be at least $15bn. We have the right assets, the right vision, the right team at exactly the right time, and that’s why we’re bullish on our pivot to growth.”
Johnson is confident about Lumen’s ability to execute a complete turnaround in the company’s fortunes and it seems the operator’s investors are too, as Lumen’s share price is up by more than 9% to $5.50 in early trading following the earnings report and webcast: In the past year, the share price has risen by more than 290%, which reflects stockholders’ confidence in how Johnson is running the company.
But, of course, Lumen isn’t the only company looking to capitalise on the AI and datacentre boom: One of its main rivals, Zayo, is also investing in its network to meet increasing demand, as we reported recently.
Johnson is well aware of this and was keen to differentiate Lumen from its rivals during the webcast. “Our network has unmatched coverage. It has unique routes. And we’ve invested heavily in the fibre solutions that, frankly, our competition hasn’t. So, we’re in the right places with the amount of capacity and the performance that everybody expects, but that’s just the infrastructure talking. I think what’s differentiating is the platform on top. And that’s becoming more and more interesting to, frankly, all of our customer segments as we’re able to present them with a network fabric that gives them access to all the capabilities no matter where they are. So, we’re pretty pumped about our position,” she noted.