Financial Performance Overview

Lumen, a leading telecommunications company, has released its financial report for the first quarter of 2025. The report highlights both the challenges and opportunities the company is facing in the current business environment.

The report notes that increasing business and geopolitical uncertainty, new tariffs, supply constraints, and inflationary pressures could significantly impact Lumen’s financial results in various ways. These macroeconomic factors could increase expenses, decrease revenues, delay network expansion plans, slow customer decision-making, or otherwise interfere with the company’s ability to deliver products and services.

Revenue Trends

Lumen categorizes its revenue into several key areas:

Total operating revenue decreased by $170 million (12%) in Q1 2025 compared to Q1 2024. The decreases were primarily due to:

• Fewer Mass Market customers for lower-speed copper broadband services
• Continued loss of copper-based Mass Market voice customers
• Fewer Mass Market subscribers for fiber services, as customers migrated to Lumen’s Quantum Fiber offerings
• Declines in legacy voice and private line services for Business customers
• Decreases in Ethernet services
• Lower direct legacy telecommunications services and employee shared services provided to affiliates, partially offset by increased fiber broadband and Ethernet services to affiliates

Operating Expenses

Lumen’s operating expenses decreased by 7% in Q1 2025 compared to Q1 2024, driven by the following factors:

• Cost of services and products (excluding depreciation/amortization) decreased by 4%, primarily due to lower employee-related expenses.
• Selling, general, and administrative expenses decreased by 19%, mainly due to lower bad debt expense, employee-related costs, and external commissions.
• Operating expenses for affiliates decreased by 13%, primarily from lower network services purchased, allocated employee/professional services, and direct telecommunications services.
• Depreciation expense increased by 5% due to net growth in depreciable assets, while amortization expense decreased by 38% due to a net decrease in amortizable assets.

Other Financial Metrics

• Interest expense increased by 16% due to lower capitalized interest, partially offset by a decrease in the average interest rate.
• Interest income from affiliates, net, increased significantly due to a higher average receivable from affiliates.
• Income tax expense decreased by 21%, with an effective tax rate of 25.8% in Q1 2025 compared to 26.3% in Q1 2024.

Liquidity and Capital Resources

As a wholly-owned subsidiary of Lumen Technologies, Lumen’s liquidity and capital resources are closely tied to its parent company. Key points:

• Lumen has cash management and loan arrangements with Lumen Technologies and its affiliates, including lines of credit, affiliate obligations, capital contributions, and dividends.
• Lumen’s future liquidity needs are expected to be met through cash from operating activities, amounts due from Lumen Technologies, debt refinancing, and potential capital contributions/loans from Lumen Technologies.
• Lumen’s capital expenditures continue to focus on enhancing network efficiency, supporting new services, and expanding its fiber network, including the Quantum Fiber buildout.
• As of March 31, 2025, Lumen had approximately $2 billion in outstanding debt, with $237 million due within the next 12 months.
• Lumen may issue debt securities in the future to refinance maturing debt, subject to market conditions and debt covenants.
• Lumen’s credit ratings are Caa2 (Moody’s), B (S&P), and B+ (Fitch), which could impact its access to capital and borrowing costs.
• Lumen has a $3 billion revolving promissory note with Lumen Technologies, with $900 million outstanding as of March 31, 2025.
• Lumen also has a $2 billion revolving promissory note with Lumen Technologies, with no amount outstanding as of March 31, 2025.
• Lumen periodically pays dividends to its parent company, QSC, which reduces its capital resources for debt repayment and other purposes.

Pension and Post-Retirement Obligations

Lumen Technologies has significant obligations related to its defined benefit pension plans and post-retirement benefit plans, which could impact Lumen. Key points:

• At December 31, 2024, the accounting unfunded status of Lumen’s qualified and non-qualified defined benefit pension plans and qualified post-retirement benefit plans was approximately $645 million and $1.7 billion, respectively.
• A substantial portion of Lumen’s active and retired employees participate in Lumen’s qualified pension plan and post-retirement benefit plans.
• Lumen does not expect any required contributions to the qualified pension plan in 2025, but the amount of required contributions in 2026 and beyond will depend on various factors.
• Lumen’s post-retirement health care and life insurance benefits plans are unfunded and paid by Lumen Technologies with available cash.
• Lumen has an agreement to settle outstanding pension and post-retirement affiliate obligations with its former parent company, QCII, over a 30-year term, with expected payments of $48 million in 2025.

Regulatory Developments

Lumen is impacted by various federal and state broadband support programs, such as the FCC’s Rural Digital Opportunity Fund (RDOF). While Lumen receives some monthly support payments from these programs, they may also increase competition in newly-served areas.

Risks and Uncertainties

The report highlights several key risks and uncertainties that could materially affect Lumen’s business and financial condition, including:

• Increasing business and geopolitical uncertainty, new tariffs, supply constraints, and inflationary pressures
• Potential deterioration in projected cash flows or market capitalization, or changes to discount rates or market multiples used to determine fair value of reporting units
• Legal proceedings and other contingent liabilities, including those related to lead-sheathed copper cables in the network
• Lumen Technologies’ involvement in legal proceedings that could impact Lumen as a wholly-owned subsidiary

In conclusion, Lumen’s financial report for Q1 2025 reflects both the challenges and opportunities the company is facing. While revenue and profitability have declined, the company is working to manage costs and adapt to the evolving market and regulatory environment. Lumen’s liquidity and capital resources remain closely tied to its parent company, Lumen Technologies, which also faces significant pension and post-retirement obligations. Navigating these complexities will be crucial for Lumen’s future success.