August 2024

Lumen Technologies, Inc. (LUMN)

AI-N’t Gonna Fix This Mess

We are short shares of Lumen Technologies, a $26bn telecommunications company trying to

spin how AI will fuel the dramatic turnaround of a secularly declining business saddled with
$19bn of debt. In recent weeks, a mixture of buzzy headlines, misplaced retail investor
enthusiasm, and short covering has sent a previously moribund stock soaring 400%. Incredibly,
Lumen, a company with a long history of disappointing investors and which just reported
EBITDA down -13%, is now trading in line with telecom peers with healthy growth outlooks,
lower leverage, and attractive dividends. We understand the allure of trying to find the next great
AI play, but at these levels, an investment in Lumen lacks more than just artificial intelligence.

Lumen’s recently announced $5bn in Private Connectivity Fabric deals isn’t about AI, it’s a
desperate bid to raise cash amid deteriorating revenues and growing liquidity concerns. Lumen
will net only ~$800m from these deals in the next few years. Longer-term, the contracts provide
a meager ~$21m / year in recurring profit for operations and maintenance. While any infusion of
cash is admittedly positive for a company that would otherwise bleed out, the deals do not solve
Lumen’s fundamental growth and balance sheet problems. Awarding $5 in share gains to what
we estimate is only $1.18/share in total value, from Lumen’s role as general contractor on a
massive construction project, is just silly.

Lumen has identified $7bn in additional “sales opportunities” but customers in this tranche are
not leading technology firms like Microsoft with ambitions to sell AI tools and platforms. Rather,
they are enterprises in healthcare, retail, financial services, etc. Hyperscalers and other large
technology companies are building out remote datacenter footprints and need to purchase new
connectivity infrastructure at scale. None of that applies to bureaucratic, regulated healthcare
companies and banks, which are only beginning to explore what AI might mean for their
businesses and will lean on cloud providers for their needs for the foreseeable future. By
Lumen’s own admission, discussions with these institutions are in an early phase, and we
believe will take long to close and face rising competition.

The deal announcement (timed conveniently the day before weak 2Q earnings) distracted
investors from underlying business trends which showed further deterioration across nearly
every key category. Core Business segment revenue fell -8.6%, the worst in company history.
Business segment products the company has targeted for growth actually fell -1.1% in 2Q, while
legacy product declines continue to spiral downward due to post-pandemic workplace
restructurings. Despite considerable investment in new product development and sales force
productivity, former executives we interviewed stated Lumen’s software applications remain
uncompetitive against those of leading tech competitors. Consequently, we view Lumen’s
strategy of trying to become more than a dumb pipe and transitioning customers from legacy
products to more modern cloud-based services as flawed and the company will continue to fail
at stabilizing the business.

AI is an exciting technology and there are many compelling ways to invest in this powerful
theme. A rapidly shrinking wireline telecom with inferior software and a history of
underdelivering on growth is not one of them. The new deals provide near-term cash but then
what? We expect AI deal hype will fade to dismal legacy telco reality, leaving the company’s
share price much like its fiber – buried in the ground.
Disclaimer: As of the publication date of this report, Kerrisdale Capital Management, LLC and its affiliates
(collectively, “Kerrisdale”), have short positions in shares of Lumen Technologies, Inc. (“LUMN” or “the
Company”). Kerrisdale stands to realize gains in the event the price of LUMN shares decrease. Following
publication, the Authors may transact in the securities of the Company. All expressions of opinion are subject to
change without notice, and the Authors do not undertake to update this report or any information herein. Please
read our full legal disclaimer at the end of this report.
 Table of Contents
EXECUTIVE SUMMARY ............................................................................................................................ 3
COMPANY OVERVIEW ............................................................................................................................. 4
Recent Developments .................................................................................................................................................. 5
Accelerating Revenue Declines: Not Just a Legacy Problem ..................................................................... 6
Growth is Fundamentally Challenged .................................................................................................................... 8
CUSTOM NETWORKS ECONOMICS 101 .............................................................................................. 9
What Does $5bn in PCF Contracts Really Mean for Lumen? ...................................................................10
$7BN IN “SALES OPPORTUNITIES” .................................................................................................... 12
SPINNING AN AI STORY ........................................................................................................................ 13
Doubling Intercity Fiber is Not a New Plan ........................................................................................................13
Reserving Corning Capacity is Marketing Hype, Optical Fiber is Not Scarce ....................................13
VALUATION .............................................................................................................................................. 14
CONCLUSION .......................................................................................................................................... 14
APPENDIX I: 2024E GUIDANCE UPDATE ........................................................................................... 15
APPENDIX II: MASS MARKETS STRATEGIC OPTIONS ................................................................... 16
APPENDIX III: DCF ANALYSIS .............................................................................................................. 17
APPENDIX IV: TRADING COMPARABLES ......................................................................................... 18
FULL LEGAL DISCLAIMER.................................................................................................................... 19

Kerrisdale Capital Management, LLC | Tel: 212.792.7999 | Email: [email protected]

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Executive Summary
Don’t buy the AI hype. Lumen has used a string of buzzy headlines to portray the rise of AI as
key to resurrecting the company’s dimming turnaround hopes but it’s really just a transparent
attempt to glom onto the hottest theme in the market. Lumen’s core revenues are deteriorating
at an accelerating rate and the recent increase in full-year free cash flow guidance merely
reflects the timing benefit of prepayments for construction spending that is forthcoming. To
bolster liquidity, Lumen has agreed to lengthy, complex, and capital-intensive projects, which
will net the company much needed near-term cash, but do little to address declining recurring
revenue and a daunting debt maturity profile.

$5bn in custom networks is only slightly over $1 per share of value. Investors who believe
$5bn in announced Custom Networks contracts is a game changer worthy of a $6+ increase in
share price are mistaken. Lumen is effectively a general contractor on a $4.5bn construction
project of which we estimate $3.7bn will be spent on capex, opex, and taxes. After the project is
complete, the recurring revenue portion (operations and maintenance) will amount to ~$21m in
EBITDA / year based on our calculations, less than 1% of the company’s current EBITDA. The
CEO of a Lumen competitor stated it has turned down the opportunity to bid on hyperscaler
deals because of the risks and low returns involved.

$7bn in AI “sales opportunities” is a pipedream. Customers in the $7bn of potential sales

opportunities tranche are wholly different from Microsoft and the hyperscalers included in the
$5bn of announced custom networks contracts. Microsoft is in the business of selling AI tools
and hosting AI service providers. They have built large AI cloud datacenters in increasingly
remote locations to source sufficient power. These companies have a unique need (and ability)
to purchase massive amounts of fiber infrastructure. $7bn of potential sales are based on
preliminary discussions with a wholly different customer set – large, bureaucratic enterprises in
healthcare, retail, and financial services. We believe the majority of these enterprises are using
cloud-provided AI tools to streamline certain internal processes. For the next several years,
these companies will continue to lean on cloud providers for AI use cases and winning new
business from upgrading of colocation/on-prem facilities will be gradual and highly competitive.

Revenue in key sales channels and categories is deteriorating. Investors distracted by

recent headlines are ignoring concerning trends within the Business segment that extend
beyond just dying legacy products. Business segment revenue (excluding volatile, low margin
Other revenues) fell -8.6% in 2Q24. The ironically named “Grow” category of Business revenues
shrank -1.1% in 2Q24. Management has suggested revenue stability will not happen until 2027
at the earliest. According to a former executive, Lumen’s security (ex. DDoS), UC&C and edge
cloud services are simply uncompetitive against leading pureplay tech companies and the
company’s strategy of “migrating customers up the stack” will continue to face headwinds.

The pop in shares is overdone. Nearing 7.0x EV/EBITDA, shares of Lumen are now valued in
line with Verizon and AT&T despite far worse revenue/EBITDA outlooks, a highly levered
balance sheet, and zero prospects of shareholder returns. The setup after this move is
precarious. We believe management will continue to be tight-lipped on the financial details of
signed contracts and new deals will be slow to materialize. 2024E free cash flow guidance was
raised due to the timing benefit of cash prepayments, but now the company must execute and
spend that capital. Management has already downgraded 2025E EBITDA expectations and we
think investors should remain skeptical of a meaningful rebound in 2026E.

Kerrisdale Capital Management, LLC | Tel: 212.792.7999 | Email: [email protected]

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Company Overview
Capitalization and Financial Summary
$ Millions, Balances as of June 30, 2024 Financial Summary ($ mm)
LUMN share price $6.00 Fiscal year end Dec 31, 2023A 2024E 2025E 2026E 2027E

Common shares 1,017 Revenue by segment (ex. Custom Networks) (1)

Market capitalization $6,101 Business $11,583 $10,247 $9,783 $9,411 $9,183
Growth y/y -11% -12% -5% -4% -2%
Cash and cash equivalents 1,495 Mass market 2,974 2,732 2,522 2,393 2,320
Growth y/y -33% -8% -8% -5% -3%
Qwest Corp Sr. Notes 1,986 Total revenue $14,557 $12,979 $12,306 $11,804 $11,503
Qwest Capital Funding Sr. Notes 192 Growth y/y -17% -11% -5% -4% -3%
Subtotal Qwest Corp. Debt 2,178
Cost of products and service 7,144 6,403 5,907 5,540 5,407
Level 3 Financing TL B 12 Margin 49% 49% 48% 47% 47%
Level 3 Financing TL B-1 1,199 SG&A 3,310 2,987 2,830 2,715 2,646
Level 3 Financing TL B-2 1,199 Margin 23% 23% 23% 23% 23%
Level 3 Financing First Lien Notes 2,921
Level 3 Financing Second Lien Notes 2,229 Adjusted EBITDA (ex. special items) 4,628 4,008 3,719 3,699 3,551
Level 3 Financing Sr. Secured Notes 925 Growth y/y -33% -13% -7% -1% -4%
Level 3 Financing Sr. Notes 1,711
Level 3 Finanicng Unsecured Notes 154 Cash flow from operations (reported) 2,160 3,202 2,416 2,355 2,444
Subtotal Level 3 Financing Debt 10,350 Capex (3,100) (2,806) (2,620) (2,608) (2,485)
Levered free cash flow (FCF) (940) 396 (204) (253) (41)
Lumen Technologies TL A 368
Lumen Technologies TL B 57 Custom networks (2)
Lumen Technologies TL B-1 1,621 Cash prepayments 1,260 2,000 800 440
Lumen Technologies TL B-2 1,621 Less:
Lumen Technologies Superpriority Notes 812 Opex (200) (200) (175) (90)
Lumen Technologies Sr. Notes 2,037 Capex (400) (1,250) (650) (360)
Subtotal Lumen Technologies debt 6,516 Cash taxes 0 (112) (178) (71)
Net change in PCF cash flow 660 438 (203) (81)
Total LUMN consolidated debt $19,044
Finance lease and other 270 PF consolidated
Total net debt $17,819 Adjusted EBITDA 3,808 3,519 3,524 3,461
Capex 3,206 3,870 3,258 2,845
Benefit plan obligations (post-tax) 1,925 Free cash flow $1,056 $234 ($456) ($122)
Total enterprise value $25,845
Key Metrics
'24E net leverage (incl. finance lease) 4.5x EV / adj. EBITDA 6.8x 7.3x 7.3x 7.5x
Net leverage 4.5x 4.8x 4.9x 5.1x

Source: Kerrisdale analysis. Historical financials per Lumen SEC filings, earnings press releases, and 2Q24
trending schedules.
1. Kerrisdale projections excluding newly announced Custom Networks division. 2024E adjusted EBITDA,
capex, and free cash flow based on company-provided initial guidance adjusted for $100m of lower cash
interest and $190m from asset sales as disclosed in 2Q24 results and earnings call.
2. Kerrisdale projection for Custom Networks and impact of announced $5bn in Private Connectivity Fabric
contract value. Consistent with the company’s presentation, we assume 90% of the total contract value to
be received over the next 3-4 years ($4.5bn) to support front-end loaded construction capex and
incremental opex (see: PFC Deal Economics section for more detail). According to Lumen, capex will be
“meaningful “and timing will be “lumpy.” 2024E PF consolidated EBITDA, capex, and free cash flow are
in line with ranges provided by the company in its updated 2024 financial outlook included in 2Q24 results
(see: Appendix I).

Headquartered in Monroe, Louisiana, Lumen Technologies is a telecommunications company

that offers a broad array of facilities-based products and services. Revenue from global
enterprise and public sector customers are reported in the Business segment (80% of total
revenue). Lumen’s domestic residential/small business revenues are reported within the Mass
Market segment (20% of total revenue).

Lumen was formed in 2017 through the merger of CenturyLink (a roll-up of rural local exchange
carriers including CenturyTel, Embarq, and Qwest Communications) and Level 3
Communications (a Tier 1 internet backbone operator which provided enterprise-focused

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network, VoIP, cloud, and data center services). Lumen’s network infrastructure is extensive
and includes both copper and fiber optic cables. Lumen’s fiber network (owned and leased)
spans 350k miles of fiber optic plant, 6m intercity fiber miles, and is connected to approximately
170k buildings. President and CEO Kate Johnson joined the company in 2022. From 2017-2021
Johnson was President of Microsoft US. Lumen’s CRO and CMO are also former Microsoft
executives.

Lumen’s financial profile is characterized by declining revenue, margin pressure,

declining/negative free cash flow (absent asset sales and other 1x items), and high leverage
(‘24E net leverage of 4.5x including finance leases). Normalized total revenue (excluding Other)
fell -8.5% y/y in 2Q24. Management has suggested revenue stability is unlikely until at least
2027. In 2Q24, adjusted EBITDA declined -15% y/y organic (~18% reported). Management
anticipates EBITDA will decline further in 2025 due to costs associated with the new Custom
Networks division before rebounding in 2026E.

Recent Developments
On July 24th Lumen announced a new partnership with Microsoft to “power the future of AI” by
strengthening connectivity between Microsoft’s datacenters using Lumen’s Private Connectivity
Fabric infrastructure. A week later, Lumen put out another release announcing a supply
agreement with Corning for 10% of its fiber optic cable capacity to support data center AI
demands and that the company will more than double its intercity network miles to unlock AI for
cloud data centers. Finally, on August 5th (the day before 2Q earnings) Lumen announced the
creation of a new Custom Networks division to manage $5bn in newly secured Private
Connectivity Fabric (PCF) business driven by AI connectivity needs. The release also goes on
to mention active discussions with customers to secure another $7bn in “sales opportunities.”

The PCF deals provide an upfront infusion of cash to address ~$1.3bn in maturities over the
next three years (see debt maturity profile below). Prepayments toward construction projects
embedded in the deal led the company to raise 2024E FCF guidance, but this is a timing-related
working capital benefit. At ~$3.8-$4.0bn in EBITDA, ~$1.25bn in cash interest expense, and
$2.5-$3.0bn in capex, before additional cash tax and pension obligations, Lumen’s underlying
operations exist in an impaired breakeven/negative free cash flow state.

The cumulative impact of these announcements helped send shares from ~$1.50 to over $7 in
the span of a couple weeks, driven by what we view as misplaced AI excitement, poor retail
investor understanding of the true cash impact of PCF deals, and aggressive short covering
from investors positioned for Lumen’s death rather than the extension of a sudden lifeline.
According to a bulge bracket analyst who covers Lumen, the company did not expect the level
of stock reaction to its deal announcements.

To counter ongoing pressures on profitability, during 2Q earnings Lumen also announced a 3-

year $1bn cost takeout program focused on rationalizing its product portfolio and reducing the
number of order management (24) and billing (17) systems – byproducts of the numerous
acquisitions folded into the company over the years. Incredibly, Lumen still maintains order
entry systems from Level 3, CenturyLink, US West and Global Crossing (acquired by Level 3 13
years ago). The new cost takeout program strikes us as standard operations for a declining
business. We think wireline companies under secular pressures wake up every day looking to
cut costs and Lumen has continually engaged in restructurings (such as the sale of its
international operations and CDN business) and layoffs to reduce expense and improve
efficiency.

Kerrisdale Capital Management, LLC | Tel: 212.792.7999 | Email: [email protected]

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A word search for “billing” in Lumen’s earnings transcripts returns discussions of initiatives to fix
and consolidate systems for billing, back office, network inventory and order entry going back
years. We believe management is correct in its desire to finally address these legacy problems,
which, based on conversations with former Lumen executives, cause frustration among sales
teams and frequently impact customer service. That said, we think there is a reason previous
management regimes kept putting off rationalizing these systems, due to the costs, challenges,
and potential disruption caused by trying to modernize and streamline these systems. Veteran
investors in the space know billing system integrations in particular are risky exercises, which
even when carefully planned has contributed to the demise of levered wireline companies.

Debt Maturity Profile ($bn)

$8.0
$7.5

$7.0

$6.2
$6.0

$5.0

$4.0

$3.0
$2.3
$1.3bn
$2.0

$1.2
$1.0 $0.8
$0.6
$0.4
$0.2
$0.0
2025 2026 2027 2028 2029 2030 2031 2031+

Source: Kerrisdale analysis, Lumen 2Q24 trending schedules.

Accelerating Revenue Declines: Not Just a Legacy Problem

Contrary to management’s claim during recent earnings that “Lumen’s enterprise operational
turnaround is progressing well,” normalized Business segment revenue (excluding Other) fell
-8.6% y/y in 2Q24, the worst in company history. Revenue within the largest sales channel,
Large Enterprise, fell -6.9%, also the worst in company history.

As typical with traditional wireline operators, Lumen operates a mixture of legacy products and
more advanced, growth-oriented offerings. Within Mass Markets, this split is driven by high-
speed broadband services provided to homes and small businesses using fiber-based network
infrastructure (branded Quantum Fiber) versus lower speed data and voice carried by copper.
Within the larger and more strategically important Business segment, Lumen has assigned
products and services to 4 groups based on their respective outlooks:

1. “Grow” (41% of Business). Both infrastructure and software products anticipated to grow
including SD WAN, security solutions, IP transit, laid but unlit optical fiber known as
“dark fiber”, wavelengths, and unified communications and collaboration or UC&C (VoIP,

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 messaging, video conferencing).
2. “Nurture” (29% of Business). Mature offerings such as: VPN, point-to-point and
multipoint ethernet connections.
3. “Harvest” (22% of Business). Legacy services that are acknowledged as going away and
managed for cash flow: traditional TDM voice services (local, toll-free, long distance) and
private line services.
4. Other revenue (8% of Business). Primarily low-margin equipment sales, legacy data
hosting services.

Management has historically blamed lackluster revenue performance on legacy streams of

revenue, noting how declines “have accelerated to some extent, [masking] progress
unfortunately in the near term” but that understates the extent of current Business segment
difficulties. Trying to outrun worsening declines in Nurture (-12% y/y) and Harvest (-16% y/y) is
unquestionably challenging, but these trends are secular and at least directionally consistent
with management (and investor) expectations.

The more pressing concern for investors should be that despite investing in new product
development and supposedly improving sales force productivity, the Grow category is no longer
growing. And the problem is getting worse. On a normalized basis (excluding divestitures and
post-closing adjustments), the so-called “Grow” category shrank -1.1% y/y in 2Q24 (versus
-0.5% last quarter), a deceleration of nearly 700bps since present management took the reins in
late 2022.

Grow(ing) Problem - Business Segment by Product Category

10%

5%

0%
1Q23 2Q23 3Q23 4Q23 1Q24 2Q24
-5%

-10%

-15%

-20%

Grow Nurture Harvest

Source: Kerrisdale analysis, Lumen 2Q24 trending schedules.

Weakening performance is not isolated to a single sales channel. “Grow” category revenue
within Large Enterprise, the single largest sales channel, went negative in 2Q24, falling -0.9%
y/y versus +1.4% in the prior quarter. “Grow” products within Wholesale (the 2nd largest sales
channel) fell -5% y/y.

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 Large Enterprise in Decline

12.0%

10.0%

8.0%

6.0%

4.0%

2.0%

0.0%
1Q23 2Q23 3Q23 4Q23 1Q24 2Q24
-2.0%

-4.0%

-6.0%

-8.0%

-10.0%

Large Enterprise Mid-Market Wholesale

Source: Kerrisdale analysis, Lumen 2Q24 trending schedules.

Growth is Fundamentally Challenged

One of the touted benefits of the announced PCF deals was that the improved liquidity buys
time for turnaround efforts to bear fruit and drive revenue stability. We have heard arguments
from sell-side analysts that this “option value” potentially justifies gains in the stock that have far
exceeded the intrinsic cash value of the deals themselves (we discuss our calculations behind
this cash value shortly). This view is flawed and fails to appreciate the extent to which Lumen is
fundamentally growth-challenged.

We think three main factors have contributed to faltering performance within Large Enterprise
and “Grow” products across the company. First, as described by AT&T earlier this year, legacy
declines are accelerating due to businesses transitioning to “mobile and cloud-based services at
an accelerated rate as post-pandemic workplace restructuring takes hold.”

Second, despite the company stating that “significant” customer concerns over Lumen’s liquidity
and financial future have abated, “noise” in the marketplace created by balance sheet
restructuring efforts from last year still appear to be having an effect on inbound call volume.

The final factor is the most serious and structural. Based on multiple conversations with former
Lumen executives, “Grow” is not living up to its namesake because the company lacks
competitive “up the stack” applications. Recall, within “Grow” is a mixture of both infrastructure
(wavelengths, dark fiber, dedicated internet access (“DIA”)) and applications (SD WAN, cloud,
UC&C, etc.). One former senior sales executive pegged infrastructure-related products as well
north of 50% of the revenue in this category and growing modestly. The worsening trends in
reported “Grow” revenue are therefore driven by increasingly weak sales of software
applications. This runs directly counter to Lumen’s growth strategy of “digitiz[ing] our physical
network”, “cloudifying telecom” and transforming Lumen from a telco into “techco.”

Kerrisdale Capital Management, LLC | Tel: 212.792.7999 | Email: [email protected]

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According to the executives, despite significant investment in SG&A and R&D, Lumen’s
internally developed software solutions are inferior versus offerings from leading tech
companies who possess larger R&D budgets and innovate at a faster pace.

To retain customer contract values and compete successfully, Lumen has turned to partnering
with players like Zoom, Palo Alto, Fortinet, and Cisco Webex, reselling their products at a mark-
up (~20-30% in most cases). Remarkably, even a core networking application such as SD
WAN, a product which in theory embodies Lumen’s strategy of being a more software defined
network, is a product Lumen resells from VMware, Versa Networks, and Cisco.

Revenue stability can only materialize if “Grow” reverses recent trends and reaccelerates, but
this appears unlikely. Given its balance sheet, Lumen is not in position to make sizable
increases in investment necessary to develop compelling new software applications. Reselling
3rd party solutions as a middleman helps prop up total contract values at renewal, but at a lower
margin (Lumen pays for the underlying 3rd party product, clipping only the surcharge). The
reliance on 3rd party products also exposes the company to the enterprise sales forces of
partners who then look to poach customers from Lumen and sell products directly when
contracts are up for renewal.

While wavelengths and dark fiber are likely infrastructure bright spots, DIA is suffering the
consequences of strategic decisions made in recent years. Selling EMEA and LatAm operations
succeeded in simplifying operations and raising cash but hurt the company’s once differentiated
customer value proposition of being a global end-to-end network operator (which appears to be
why Lumen has lost its status as a Leader for Network Services, Global in the latest Gartner
analysis). Lumen is not even on the Gartner grid for Managed Network Service. Now as a solely
national player, Lumen’s on-net footprint of 170k fiber-lit buildings pales in comparison with
850k business buildings for AT&T, and trails Verizon, Spectrum Enterprises (300k), and
Comcast, impacting Lumen’s ability to compete when trying to provide internet services to
customers with multi-location needs.

We think investors who believe a few hundred million in cash liquidity provides enough runway
to address these significant structural issues fail to grasp the severity of the growth problem.
Notably absent from the PCF deals is mention of an agreement to sell any “up the stack”
enterprise services. We argue $5bn in custom networks contracts is a defensive “back to
basics” maneuver – an acknowledgement that Lumen’s ambition to turn more into a cloudified
“techco” isn’t gaining traction and its core business remains selling dumb pipes.

Custom Networks Economics 101

“The $5bn deal is about funding, not AI growth”

— Bank of America Global Research, August 8, 2024

“Lumen actually regretted selling fiber to us. I had conversations with two previous
CEOs who both said they enabled us to compete with them and they wish they
had never sold us fiber…For the past 20 years, Lumen has been very reluctant to
sell fiber. I think now, based on their liquidity profile, they are selling that.”

— Dave Schaeffer, CEO Cogent Communications, Oppenheimer Technology,

Internet, and Communications Conference, August 12, 2024

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The lack of financial detail included in the PCF deal announcements (and, according to a bulge
bracket analyst who covers Lumen, the company’s reluctance to provide granularity on key
items) has contributed to confusion in the market as to the deals’ true cash flow significance.
The increase in Lumen’s 2024 free cash flow outlook in 2Q results reflects prepayments for
costs earmarked for future years – the working capital benefit of receiving cash ahead of when
capex and opex in conjunction with a multi-year construction project must later be spent. This is
why when Lumen updated its guidance, adjusted EBITDA was lowered to reflect incremental
costs associated with the new venture, while the benefit of upfront cash prepayments was
captured in an increase in cash provided by operating activities (see: Appendix I).

Lumen has not disclosed the exact prepayment amount for the $5bn in contracts (neither for
2024 nor in aggregate) but based on the company’s change in FCF outlook guidance and the
management comments regarding the upfront nature of cash paid in advance of construction,
we estimate ~$1.3bn will be received in 2H24E.

Implied 2H24E PCF Prepayment

Change
at Current Outlook Previous Outlook
Midpoint Low High Low High
Adjusted EBITDA (250) 3,900 4,000 4,100 4,300

Net cash interest 100 1,150 1,250 1,250 1,350

(1)
Custom networks 190

Capex (400) 3,100 3,300 2,700 2,900

Implied 2H24E PCF prepayment 1,260

Change in FCF 900 100 300 1,000 1,200

Source: Kerrisdale analysis, Lumen 2Q24 earnings press release.

1. FCF outlook boosted by $190m after-tax from asset sale per 2Q24 earnings call.

What Does $5bn in PCF Contracts Really Mean for Lumen?

PCF is a “fabric” or bundle of services that includes dark fiber, wavelengths, and various lit
services. Based on management comments on the earnings call and subsequent callbacks it
held with the street, 10 customers are represented by the $5bn of announced contracts and
include hyperscalers, social platforms, and cloud companies. These deals are weighted toward
very large, dark fiber infrastructure with “some of the other things mixed in.” Leasing dark fiber is
done under an IRU arrangement (Indefeasible Rights of Use) with an upfront cash component
for infrastructure and recurring revenue element for ongoing operations and maintenance once
the fiber is in service. IRUs are a featured element in these deals, which is why Lumen provided
a video and presentation reviewing the mechanics and timing of cash prepayments, opex,
capex, etc.

Of the $5bn in contract value, 90% is associated with construction for which Lumen is effectively
being paid as a general contractor. Over the next 3-4 years, “lumpy” capex, opex and cash
taxes (25% effective tax rate) will ramp up to support construction activities. Management has

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10
provided scant detail about the timing or size of cash flows other than that they will be front-
loaded. Given the large pre-payment in 2H24E without a similarly sized increase in capex or any
change in cash taxes, in 2025 we expect there will be a “catch-up” in these cost items which will
drive more muted free cash flow next year. We expect this will drive negative free cash flow in
2026E as costs continue while prepayments begin tailing off (see financial summary and
capitalization on p. 4 of this report). The net result of this multi-billion dollar construction project
is ~$800m in cash value ($0.76/shr).

From an ongoing revenue perspective, only ~10% ($500m) derived from operations and
maintenance will be paid over the life of the IRU with annual CPI escalators starting once the
fiber has been laid. $500m at 85% margins works out to $21m / year in EBITDA over 20 years,
subject to the escalator – meaning the long-term recurring cash benefit of $5bn in PCF
contracts is less than 1% of Lumen’s current annual EBITDA or $0.42/shr.

What Does $5bn in PCF Deals

Really Mean for Lumen?

$ Millions
Total contract value $5,000

Construction Project (90% of contract value) 4,500

O&M (Year 4-20) 500

Less: pre-tax cash costs (3,400)

Total pre-tax cash contribution margin (32%) $1,600

Less: taxes (25%) (400)

Total after-tax cash profit (construction + O&M) (a) $1,200

$ per share $1.18

Net cash profit on construction (a)-(b) $775

$ per share $0.76

O&M Profit (85% margin) (b) $425

$ per share $0.42
Annual EBITDA (20 year IRU) $21

Total 4-year construction project cash costs: $3,725

includes: Capex (80% of pre-tax cash costs) 2,660
includes: Opex (20% of pre-tax cash costs) 665
includes: Taxes (allocated to construction) 400

Source: Kerrisdale analysis, Lumen Form 8-K Ex 99.3 – Modeling Constructs for
Indefeasible Rights of Use, 2Q24 earnings call.

In summary, based on our calculations, $5bn in complex, execution risk-laden, multi-year

construction projects nets only $1.18 per share in value, most of which is non-recurring in
nature. Given the decrepit state of its balance sheet and the funding gap Lumen’s CFO

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referenced repeatedly on the earnings call, it’s easy to see why Bank of America’s telecom
analyst has described the transactions as more about funding than AI growth.

$7bn in “Sales Opportunities”

In addition to $5bn in signed PCF contracts, management indicated it is in discussion with
customers covering $7bn in sales opportunities. On the earnings call, management clarified that
they are still very much in an “early phase” of those talks and do not know the “full scale” of
customer needs or even whether Lumen is in position to satisfy them (which begs the question
as to why they would put the figure in a press release other than to pump the stock). We believe
investors should heavily discount Lumen’s ability to convert a meaningful amount of these sales
discussions into signed contracts before debt maturities once again become problematic in
2028/29.

As Johnson described on the earnings call, this “second tranche” of potential customers is
fundamentally different from those in the $5bn. They are not large hyperscalers or cloud
companies, but rather large enterprise customers in healthcare, retail, and financial services.
This is an important distinction. Microsoft, Meta, and Amazon are in the process of building out
scaled AI-dedicated datacenter footprints to train bespoke LLM models and support potential
customer demand for AI tools and services. In contrast to datacenters built to accommodate e-
commerce or high-frequency trading applications, where low latency is essential, AI training
datacenters need not be situated close to major urban centers. The more pressing challenge is
finding enough available energy to satisfy power-hungry computing needs. With power
availability constrained in Tier 1 datacenter markets (i.e., Northern Virgina), hyperscalers have
built facilities in areas that are relatively remote and historically underserved by fiber
infrastructure such as in rural/suburban Wyoming, Iowa, Mississippi, and Eastern Oregon.
These new remote datacenters are now being connected using dark fiber, representing a
unique new source of cash for a company willing to take on the project to plug a liquidity gap.

None of the preceding applies to the opportunity set Lumen described as existing from large
healthcare companies and financial institutions. Based on our research, these companies are
predominantly using a handful of cloud-based AI use cases to streamline internal operations. To
the extent bandwidth is constrained, there are upgrade paths using existing fiber from multiple
providers. Dark fiber makes little sense for the majority of these customers because of the
upfront capital and ongoing operational support expense. Lumen can sell higher bandwidth
wavelengths to these companies, a service for which it has leading market share, but this is an
increasingly competitive market with Cogent setting aggressive targets of taking 25% market
share over the next few years.

We interviewed an IT director of a Lumen customer in the healthcare space (40,000+

employees, 30+ hospitals) to better understand how $7bn in “sales opportunities” will likely (not)
translate to signed contracts in the medium-term. The director explained how for the next three
years his company would rely on cloud-based AI service providers for use cases such as
contract lifecycle management, diagnostic image scanning, and virtual scribing. He is interested
in purchasing AI-enabled products and buying proven LLMs from hyperscalers, not using
customer data to train bespoke LLMs. Only once use cases become much more sophisticated
and ROIs more clearly defined would his company consider devoting more internal on-
prem/colocation resources to GenAI workloads. His datacenters currently already have enough
dedicated bandwidth for AI workloads for the foreseeable future. If additional capacity was
necessary, it could be easily achieved through upgrading transceivers on existing fiber at little to

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no incremental increase in monthly service cost. We think Lumen is trying to frame $7bn in
sales opportunities as an encore to the $5bn in signed contracts, but deal flow from large non-
tech enterprises will proceed at a much more modest pace, face stiff competition, and be folded
into normal contract renewals.

Spinning an AI Story
“Kate [Lumen CEO Kate Johnson] has painted this picture of the demand for
the fiber as solely tied to AI…that’s not the whole picture, these companies
have been buying fiber IRUs since I first got into Level 3 [many] years ago…it’s
the best marketing effort I’ve seen in a long time from them…Why would you
ever talk about taking down 10% capacity from Corning?...They’re trying to paint
the picture of ‘AI, AI, AI’ and “we’re the best company positioned now for
infrastructure”…believe me, that’s a fantastic f-cking story what they’re doing
right now, but that is not going to solve the overall business balance sheet
the way they need to.” [emphasis added]

— Former senior executive, Lumen and Level 3

The timing and nature of Lumen’s recent press releases creates the impression Lumen is
doubling network capacity, moving to “quickly secure fiber and bandwidth” ahead of competition
(implying supplies are limited), all to capitalize on an AI-driven windfall which will net the
company billions in profit. It’s clever marketing spin and a “fantastic story” but the reality is less
impressive than these announcements imply.

Doubling Intercity Fiber is Not a New Plan

Doubling the amount of intercity fiber miles is framed as a new initiative tied directly to AI which
features prominently in the $5bn in PCF and Corning supply announcements. We think this is a
clever bit of marketing spin because Lumen has had plans to double the amount of intercity fiber
since at least December 2022. Back then, the doubling of fiber miles over the next few years
was described rather mundanely, a move to increase market share that would fold into existing
capital budgets. Johnson mentioned building out an additional 6m in intercity fiber miles in
February 2023 and the initiative was referenced again in Lumen’s June 2023 Investor Day
presentation (p. 28). Never before was AI cited as the driving force behind doubling fiber miles –
only now when AI is all the rage in the market is network expansion framed so dramatically as
needing to add “significant capacity to major cloud data centers racing to stay ahead of AI
workloads…”

Reserving Corning Capacity is Marketing Hype, Optical Fiber is Not

Scarce
Reserving 10% of Corning’s fiber optic capacity for the next two years because the “rise of AI is
driving technology companies to quickly secure fiber and bandwidth before their competition” is
more marketing spin designed to portray Lumen’s actions as suddenly all AI-driven and imply
that sourcing optical fiber is becoming a challenge. Corning’s financial statements and public
comments reveal the latter is certainly not the case. Corning posted $5bn in optical sales in
2022. In the years since, sales have been in a cyclical slump (‘24E consensus revenue
estimates for the Optical division are ~$4.3bn). Corning has said it has the capacity in place to

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service $3bn-$5bn in additional sales (project “Springboard”) over the next three years, without
significant new investment. 10% of capacity, or about $430m per year (confirmed by Corning as
the correct way to size the agreement) is only 1/7th the lower end of what Corning frames as
excess capacity. The supply of fiber from an industry giant like Corning is hardly constrained
(Corning’s stock shrugged off the supply announcement) and ~$430m in fiber purchases within
a Lumen capex budget of nearly $3bn does not strike us as a step-function change from normal
budgeting.

Valuation
Rather than applying a single multiple or DCF for Lumen on a consolidated basis which would
not capture the discrete nature of cash flows (and appropriate discount rates) for the two
business lines, we have opted for a simplified sum-of-parts approach. We value Lumen’s “core”
operations excluding custom networks at ~$16.2bn using a DCF (see: Appendix III). This
represents an implied 4.4x our 2025E EBITDA of $3.7bn (in line to where the company traded
prior to recent AI-related announcements). We value custom networks at $1.2bn to reflect the
undiscounted cash value of $5bn in announced PCF deals.

Our estimate of fair value is $0. We believe Lumen is fundamentally insolvent.

Valuation Analysis - SOP

2025E Implied
EBITDA Mult. EV
Core (DCF) $3,719 4.4x 16,252
Custom networks 1,200
Total enterprise value 17,452

Less: '24E net debt (17,159)

Less: underfunded post-retirement (after tax) (1,925)
Implied equity value (1,632)
/ shares outstanding 1,017

Estimated fair value per share $0.00

Source: Kerrisdale analysis.

Conclusion
A recurring sentiment we encountered when speaking with former Lumen executives and sell-
side coverage analysts was things with the company aren’t always quite what they seem. For
example, to hear management describe the state of Lumen’s enterprise business, one would
think things have never been better – except the company just reported some of the worst
results in its history. Doubling intercity fiber miles features prominently in two recent AI-related
announcements – except this is not a new initiative. $5bn in new business from booming AI-
fueled demand sounds incredible – except it’s more like $800m to dig ditches and pull glass.
Initial soundbites sound enticing, but the story lacks substance upon closer inspection. The
Lumen AI turnaround story is little more than a (fiber) optical illusion.

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Appendix I: 2024E Guidance Update
Lumen 2024E Financial Outlook

Adjusted EBITDA guidance

reduced $200m. Net CFO range
raised to $4,100 - $4,500 from
$2,800 - $3,200 prior to reflect
working capital benefit of PCF
prepayment.

Source: Lumen 2Q24 earnings press release.

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Appendix II: Mass Markets Strategic Options
Lumen has long discussed an interest in exploring strategic options for its Mass Market
consumer business to generate incremental cash. Management has stated a “one-and-done
kind of deal” is less likely than a more piecemeal, market-by-market (i.e., state-by-state)
approach involving a menu of potential structures (outright divestiture, wholesaling fiber, JV).
Lumen’s Quantum Fiber footprint remains underpenetrated (~25% as of 2Q24) and in the near-
term we believe Lumen will wait for a more favorable interest rate environment and continue
investing in the business.

At 7.0x EBITDA (versus ~5.5x EBITDA received in Lumen’s previous ILEC divestiture to Apollo
in 2021 to reflect higher fiber penetration and the 6.25x median of 12 precedent transactions)
we estimate that an outright sale of the business (however unlikely near-term) would likely fetch
net proceeds of ~$6bn. While a transaction along these lines would be slightly deleveraging and
FCF accretive, we struggle to see why pro forma, the company – which would still be
significantly levered, generating little to no FCF, and grappling with secular decline – would
trade at a substantially better multiple than it does presently. We view the level of potential value
creation to be marginal. Any partial or JV-type divestments would be even less catalytic.

Mass Markets Valuation

'24E Mass Markets revenue $2,732

Assumed margin 40%
EBITDA $1,093

Multiple 7.0x

Gross proceeds $7,649

less: taxes (1,377)
Net proceeds $6,272

Lumen Core Current Adjustment Pro forma

EBITDA 3,808 (1,093) 2,715

Cash interest (1,167) 439 (728)
Capex (2,806) 900 (1,906)

FCF (ex. tax refund) (304) 246 (58)

Current net debt 17,819 (6,272) 11,547

Net leverage 4.7x 4.3x

Source: Kerrisdale analysis.

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Appendix III: DCF Analysis
Discounted Cash Flow Analysis (ex. Custom Networks)

Projected
Year 2024 2025 2026 2027 2028 2029 2030 2031 TV

Total Revenue $12,979 $12,306 $11,804 $11,503 $11,267 $11,086 $10,864 $10,647 $10,541
Growth -5% -4% -3% -2% -2% -2% -2% -1%

EBITDA 4,008 3,719 3,699 3,551 3,402 3,320 3,259 3,194 3,131
Margin 31% 30% 31% 31% 30% 30% 30% 30% 30%
Growth -7% -1% -4% -4% -2% -2% -2% -2%

EBIT 1,052 848 926 743 660 644 652 639 601

NOPAT $1,052 $848 $926 $743 $660 $644 $652 $639 $601
Add: D&A 2,956 2,871 2,773 2,808 2,742 2,676 2,607 2,555 2,530
Less: Capex (2,806) (2,620) (2,608) (2,485) (2,383) (2,329) (2,282) (2,236) (2,214)
Add: Other $1,021 $430 ($302) $12 $0 $0 $0 $0 $0
Unlevered Free Cash Flow $2,223 $1,528 $788 $1,078 1,018 991 978 958 917

Discounted Value of Unlevered FCF 2,124 1,333 628 784 676 601 541 484 423

Interest Expense (Net) (1,167) (1,294) (1,244) (1,201) (1,201) (1,200) (1,199) (1,198) (1,197)
Levered FCF $1,056 $234 ($456) ($122) ($182) ($208) ($221) ($240) ($280)

Terminal EBITDA 3,131 WACC Assumptions

Terminal multiple 6.0x
Terminal value $18,784 Risk Free Rate 3.50%
Equity Risk Premium 8.5%
Equity Beta 0.93
Discounted terminal value 8,660 Equity Cost of Capital 8.2%
Discounted value of interim UFCF 7,593 Equity Capitalization 25%
Implied enterprise value 16,252

Less: YE2024 net debt ($17,159) Cost of Debt 10.0%

Less: underfunded post-retirement (after tax) (1,925) Debt Capitlization 75%
Implied equity value (2,832) WACC 9.5%
/ FDSO 1,017

Estimated fair value per share $0.00

Source: Kerrisdale analysis.

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Appendix IV: Trading Comparables
Telco Trading Comparables
EV / EBITDA '25E Growth
Mkt. Cap. TEV 2024E 2025E Div. Yield Sales EBITDA Net Lev.
Verizon $171,559 $343,474 7.0x 6.9x 6.5% 1.8% 1.9% 3.4x
AT&T Inc. $139,282 $299,981 6.7x 6.5x 5.7% 1.6% 2.5% 3.0x
Frontier Comm. $7,168 $17,220 7.7x 7.3x NA 1.7% 5.5% 4.9x

Mean 7.1x 6.9x 6% 2% 3% 4.0x

Median 7.0x 6.9x 6% 2% 3% 4.0x

Lumen Technologies $6,101 $25,845 6.8x 7.3x NA -5.2% -7.6% 4.5x

Source: Bloomberg consensus. Lumen estimates per Kerrisdale forecast.

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Full Legal Disclaimer
As of the publication date of this report, Kerrisdale Capital Management LLC and its
affiliates (collectively "Kerrisdale") have short positions in the stock of Lumen
Technologies, Inc. (the “Covered Issuer”). In addition, others that contributed research
to this report and others that we have shared our research with (collectively with
Kerrisdale, the “Authors”) likewise may have short positions in the stock of the Covered
Issuer. The Authors stand to realize gains in the event that the price of the stock
decreases.

This report is not a recommendation to short or sell shares of any company, including
the Covered Issuer, and is only a discussion of why Kerrisdale is short the Covered
Issuer. We are not your financial advisor and we do not owe a fiduciary duty to you. We
don’t recommend that you do anything whatsoever – we don’t even know who you are.

Following publication of the report, the Authors will transact in the securities of the
Covered Issuer. The Authors may buy or short shares of the Covered Issuer and other
securities covered herein subsequent to publication. The Authors will continue to
transact in the Covered Issuers’ securities for an indefinite period, and such position(s)
may be long, short, or neutral at any time hereafter regardless of the Authors’ initial
position(s) and views as stated in this report. Kerrisdale will not update this report to
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All content in this report represents the opinions of Kerrisdale. The Authors have
obtained all information herein from sources they believe to be accurate and reliable.
However, such information is presented “as is,” without warranty of any kind – whether
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results obtained from its use. All expressions of opinion are subject to change without
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This document is for informational purposes only. It is not intended as an official

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The information included in this document is based upon selected public market data
and reflects prevailing conditions and the Authors’ views as of this date, all of which are
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This report discusses estimated fair values of securities and companies, utilizing
valuation methodologies. Such estimated fair values are not price targets and the
Authors will not hold securities until such estimated fair values are reached. The
Authors may change their estimates of fair values at any time in the future without
updating this report or disclosing the new fair values publicly. The Authors will also
transact in the securities of the Covered Issuer and any companies covered herein for

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many reasons that have nothing to do with the Authors’ estimates of the securities’ fair
values. The estimated fair values only represent a best efforts estimate of the potential
fundamental valuation of a specific security, and is not expressed as, or implied as,
assessments of the quality of a security, a summary of past performance, or an
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Any investment involves substantial risks, including, but not limited to, pricing volatility,
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This document does not in any way constitute an offer or solicitation of an offer to buy or
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Authors reserve the rights for their affiliates, officers, and employees to hold cash or
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original publication date of this document, investors should assume that the Authors are
short shares of the Covered Issuer and stand to potentially realize gains in the event
that the market valuation of the company’s common equity is lower than prior to the
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The Authors shall have no obligation to inform any investor or viewer of this report about
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Kerrisdale does not provide investment advice to the readers of its reports. You
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companies, and commodities discussed in this document and develop a stand-alone
judgment of the relevant markets prior to making any investment decision.

You agree that any dispute between you and Kerrisdale or the Authors arising from or
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out of or related to this report or related material must be filed within one (1) year after
the occurrence of the alleged harm that gave rise to such claim or cause of action, or
such claim or cause of action be forever barred.

On July 26, 2024, the Securities and Exchange Commission (“SEC”) brought a
complaint against Andrew Left, who runs Citron Research. In that complaint, the SEC
effectively alleged that (i) by making public communications arguing that certain
securities are longs or shorts, and (ii) then very soon after those communications were
made public, trading in the opposite direction of those communications (selling a
security that he expressed was a long, or buying to cover a short position in a security
that he expressed was a short), that Left was committing securities fraud.

Prior to this complaint, Kerrisdale’s understanding of securities law was that by not
releasing false or misleading information in one’s communications and by disclosing to
the public that one is long or short a given security, and therefore biased, that there
needed to be no restrictions on one’s trading of the covered security. Furthermore, as
can be seen in the disclaimers above, Kerrisdale discloses that it will transact in the
securities covered herein following any communication (i.e. we will buy or sell the
security post publication), and may be long, short or neutral at any time after any
communication. Kerrisdale also discloses that it is not making any recommendations to
anyone to do any transactions whatsoever with regard to a security – we are only
explaining why we are long or short a stock, at a given point of time.

But, in light of this complaint, and following its logic, perhaps it would help investors to
just assume the following: assume we have shorted lots and lots of the stock of the
Covered Issuer immediately prior to publication, and assume we will buy lots and lots of
the stock of the Covered Issuer to cover our short position immediately subsequent to
publication.

To us, providing a hypothetical but potentially inaccurate trading intention, upon each
communication of opinion about a security, doesn’t make much sense. Rather, we think
the longstanding standard of disclosing our directional bias, and avoiding false or
misleading information in our fundamental arguments, is the appropriate standard, as

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opposed to communicating to readers a future trading intention that may not turn out to
be accurate. But the SEC complaint implies that we may know how we will trade a
security subsequent to publication, and that if the trading involves closing out a lot of the
position shortly after publication, then we’d be committing securities fraud if investors
didn’t know that. Certainly, we assume that we can’t be expected to provide trading
updates on each trade subsequent to publication as we make them, which seems like
quite an unreasonable demand of us for expressing our own views on why we ourselves
are long or short a stock (to reiterate, we are not making a recommendation – do your
own research and make your own opinion). So in the absence of second-by-second
trading updates and so that investors don’t feel wronged that we may close out of a lot
of a position very quickly after publishing, just assume that that is exactly what we’ll do.
Then, you won’t be, er, defrauded. Or something like that.

Furthermore, the complaint also indicated that it was securities fraud when Left
communicated price targets, but closed parts or all of his positions well before these
price targets were reached. We also communicate prices that we think some securities
are worth, in our reports. They’re not “price targets”. The market can stay irrational far
longer than one can stay solvent and thus Kerrisdale doesn’t target any price in its
reports. Rather, we estimate a security’s or company’s “fair value”, using some
valuation methodologies. For instance, we believe that certain stocks are worth zero, as
in $0.00. Worthless. But Kerrisdale has never held a short until it reaches $0.00. The
fair value of a stock may be $0.00 in our opinion but the prices at which we target
covering the short position will vary based on a wide variety of reasons, many of which
are not fundamental in nature and most of which relate to Kerrisdale trying to fulfill its
fiduciary duties to its client accounts. Again, note that we’re not recommending readers
of our communications to buy, sell, short or otherwise transact in any securities; we are
just explaining our own reasons for having a long or short position in a given security.
Given that no recommendations are being made (we’re not your financial advisor, let
alone even know who you are), we are certainly not recommending that you, or anyone,
hold a security until our estimated fair value of the security is reached. But, again
following the logic of the complaint, it seems that we should ask you to please assume
that we will buy to cover shares of the Covered Issuer long before any estimate of fair
value of the share price that we discuss in the report is reached. So please assume
that, apparently.

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