Greetings. And welcome to Lumen Technologies Third Quarter 2022 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Wednesday, November, 2022. It is now my pleasure to turn the conference over to Mike McCormack, Senior Vice President, Investor Relations. Please go ahead.

Thank you, France. And good afternoon, everybody, and thank you for joining us to the Lumen Technologies third quarter 2022 earnings call. Joining me on the call today are Jeff Storey, President and Chief Executive Officer; and Chris Stansbury, Executive Vice President and Chief Financial Officer. Before we begin, I need to call your attention to our Safe Harbor statement on slide two of our third quarter 2022 presentation, which notes that this conference call may include forward-looking statements subject to certain risks and uncertainties. All forward-looking statements should be considered in conjunction with the cautionary statements on slide two and the risk factors in our SEC filings. We'll be referring to certain non-GAAP financial measures reconciled to the most comparable GAAP measures that can be found in our earnings press release. In addition, certain metrics discussed today exclude costs for special items as detailed in our earnings material, all of which can be found on the Investor Relations section of the Lumen website. With that, I'll turn the call over to Jeff.

Thanks, Mike. Good afternoon, everyone, and thank you for joining us. As you know, this is my last call as Lumen's CEO. I want to begin today's call by welcoming Kate Johnson as our new CEO. Kate starts Monday. I think she is an exceptional leader with strong skills, commitment to customers in a direct pragmatic nature. Within Lumen, we are all excited to have her join the company and have high expectations of the great things she will accomplish. These are obviously very dynamic times in the broader market, in our industry and for our company. And while we have not accomplished all that I would have liked, we have accomplished quite a lot, and I pass the baton to Kate in confidence that the foundation we have built, the dedicated team we have in place and the refreshed energy of new leadership puts Lumen in a great position to deliver on its objectives of driving growth and creating long-term shareholder value. At the outset of this call, I want to say a word about the Lumen team, all of whom have been on a challenging, yet exciting journey during the five years since Lumen was formed following the acquisition of Level three. In my final days as CEO, I want to tell you and our employees, how extraordinarily proud I am of our team. I've seen them rise to every challenge with confidence, pride and commitment to each other and our customers. The first example is certainly their response to COVID. They attacked the challenges with tenacity and determination. Throughout the pandemic, we had 10,000 or so employees that continue to work from home, safely doing their jobs, and 10,000 more that we were now with just a few days' notice. Together and within the first few weeks,…

Thank you, Jeff, and good afternoon, everyone. I want to start by recognizing Jeff for the significant contributions he has made to Lumen and its predecessor companies. As Jeff mentioned, since the Level three merger in 2017, we have reduced debt by approximately $16 billion, sold our LatAm business for about nine times EBITDA, sold our ILEC business for approximately 5.5 times EBITDA and announced today that we have entered into an exclusive arrangement for the proposed sale of our EMEA business to Colt for $1.8 billion. This represents a very attractive multiple of approximately 11 times EBITDA, and most importantly, Jeff has positioned our company well as we drive to profitable revenue growth. Jeff, I know I speak for the entire Lumen family when I say, thank you. This year marks one of great progress in transforming our business. During 2022, we completed both the LATAM and our much larger ILEC divestitures. As our teams honor the foundation created and experience has learned over the years under Jeff's leadership, we are excited to have Kate join the team in just a few days. She brings tremendous leadership skills and deep technology experiences to help drive Lumen on the next step of our journey. As you think about portfolio optimization, it is an ongoing process that the Board evaluates regularly. Our goal is to maximize shareholder value, highlighted by the EMEA announcement today, and we will continue to evaluate future portfolio-related opportunities. As you know, Kate joins us on Monday, and she will develop her thoughts related to any needs within our portfolio of products and assets, as well as any products or assets that she may deem nonstrategic. Moving on to reporting, we're sharing a few new items this quarter, including a view of direct margin by our new…

Thank you. [Operator Instructions] And our first question will be from the line of Philip Cusick with JPMorgan. Please go ahead.

Hi, guys. Thanks very much and Jeff, listen, it's been a long time across a couple of companies, and I want to thank you for all your help for the years. It's been great. I thought -- if we could just talk a little bit about CapEx and the fiber build and what's holding this back a little bit. And there's been other companies that have talked about building out of region and targeted yield a little bit in Arizona. What's your potential to accelerate from here? And do you feel any need to? And then second, just sort of a follow-up. Chris, does it make sense to give, for those of us who aren't very good at math, a pretty specific range on what your EBITDA guidance implies for the fourth quarter, just to make sure everybody is on the same page? Thanks very much.

Thanks, Philip. I'll take the first one, and then Chris can add to it, you can take the second question. If you look at our fiber enablement, we're not doing it as fast as we want to do. So let me lead with that. We're not doing it as fast as we want to be deploying new enablement. There are a lot of things that go into that supply chain constraints, labor shortages, inflationary pressures and those types of things. And we'll continue to work through those. So I'm not terribly worried about it, but we'll work through them. As far as people coming in, in some small part of the market and selecting just that market to go build, that's going to happen. That's going to happen, and we've done it in other people's market ourselves. And so we see that as just another competitor in those markets. What we need to do is make sure that we build a great product, a great experience, have the multi gig capabilities that we've talked about, have the all-digital interaction that we want. And then we go at a pace that's aggressive and appropriate for the market.

Yeah. Phil, and on the fourth quarter, for the year, we've held our guidance on EBITDA. We are near the lower end at this point, just given some of the inflationary pressures that we're working through. So, that pretty much gives you the fourth quarter given the year-to-date results.

Thanks guys. Thanks again, Jeff.

Thank you. Thanks for your comment, Phil.

Our next question is from Simon Flannery with Morgan Stanley. Please go ahead.

Hi, guys. It's Diego [ph] filling in for Simon. Thank you for taking the question. First, can you kind of talk about how you're thinking about the pacing on the buyback program and anything that would change that cadence? And then on enterprise buying trends, we've heard some softening of demand, people kind of rationalizing on things like AWS. Can you talk about what you're seeing on customer buying trends on that enterprise front? Thank you.

Sure. Let me take the buyback question first and then I'll come back to the other one. Look, we won't get into the specifics of timing, but we'll be opportunistic and make sure that we take good advantage of it. I'll tell you that the Board is engaged in this process, and we have a structured and thought through approach to how to go about it. And we'll follow that structured approach. But we'll be opportunistic and not get too specific about our timing on things. And then with respect to buying patterns, we said in the second quarter call that we were seeing slowing decision-making. I don't think the environment has changed very much since then. We don't see an increase in our win-loss ratio or a decrease, I should say, in our win-loss. So it's not that we're losing deals to somebody else. We just don't see people making those decisions as quickly as possible. And we don't see a particular increase in our cancels. So it's not like the deals are going away. And so we're - it's kind of the same environment that we saw in the second quarter. But it is a choppy environment for our enterprise customers, and we do see them slowing the approval process that they have to go through to get new business to us.

Great. Thank you.

Sure.

Our next question is from Batya Levi with UBS. Please go ahead.

Great. Thank you. Yes. I also wish you all the best in your next chapter. I do want to go back to the new capital allocation strategy. I think there was a debate out there if you would completely eliminate the dividend or just lower. Can you just go with the decision-making process maybe and sort of provide your view on the complete elimination is that a function of your view of more challenging trends ahead? Or is it something different? And maybe just a follow-up on the fiber CapEx side. Can you just go over what your expectation would be on the remaining 22 million homes? What percent could get a fiber overbuild over time? Thank you.

Yeah. I'll take the first question. Can I add to it, of course your, can take the second question about what percentage of our 22 million homes passed and that's the right number, and that will have a fiber overbuild. Batya, thank you, first of all. And we look, we - our Board goes through a very thoughtful process. I've told you before that we regularly review our capital allocation strategy in the context of the current environment, in the context of current circumstances, and we obviously considered should we eliminate the dividend or keep some sort of small dividend in place. And the answer was to eliminate it, that we believe right now at these stock prices, it's better to return value to shareholders through a share repurchase program than it is through some small token dividend that's out there. So that was the process that we went through. We also said, and I mentioned this in the prepared remarks -- but we also said when we announced the Apollo transaction for our 20-state ILEC business that when we closed that business, we would re-evaluate and look at our dividend policy and look at our capital allocation policy and make decisions based on the environment and the conditions at that time. And so, it's not a sign that there's any greater weakness or inability to fund our business. It's just we don't think that's the best way to return value to shareholders. And as part of our assessment coming out of the Apollo transaction, we just believe that it's better to buy back shares.

Batya, on your second question, no, I don't think this changes the goal. This is obviously a multiyear project. We're doing everything we can, as Jeff mentioned earlier, to go as fast as we can. Obviously, there is some near term headwinds. But at this point, I don't think that changes our goal in terms of where we want to go or what we think we can do. It's really about all hands on deck right now to see what we can do given permitting and labor issues to get as many enablement’s in the ground as we can, as fast as we can.

Got it. Thank you.

Our next question is from David Barden with Bank of America. Please go ahead.

Hi, guys. Thanks. Appreciate. And Jeff, it's been a long time. So thank you for being a partner in this whole process. And I'm looking forward to meeting Kate and her joining, and I'm sure she's listening. A couple of questions. First would be on the $1.8 billion Europe sale. Structured as a put option, a little strange, why that structure, it felt like maybe it was because we wanted to have all this stuff announced at the same time and we just needed to get something on paper? And also, could you share what the taxes on that transaction you'll look like? And then second, just to follow-up on that question regarding the stock buyback, with the big tax book coming in the first part of next year, are we to imagine that there's going to be a constant conversation about, well, what does the debt market look like? And where is our stock price? And do we want to lever up, while we're paying taxes to buy back stock? Like how is that going to look that conversation? And I guess we could, my last one is -- and I apologize for asking this question, but look, the fiber revenues in Mass Markets are 3.7% of total revenue. And yet there's this massive interest in spending billions of dollars over many years and fighting the supply chain to get that whole thing rolled out. Why was that decision taken rather than, let's just run that business for cash? Let's take that cash, invest it in the other 96% of our company, make that better and recognize that maybe we shouldn't be in the copper fiber upgrade business at the margin. Like how did that conversation go, sorry. Thanks.

Okay. First of all, let me take your - the put options seems strange and was it some sort of just to get these things announced at the same time. It may seem strange for purchases in the US or sales of businesses in the US, it's not strange for sales of businesses in other countries. And it's part of the - we have a process that we have to go through to get regulatory approval. The put option - put structure is part of that, makes it easier for the company to make sure that we're complying with the rules and regulations and the jurisdictions in which we operate. So there's nothing strange about it. For the details, I'd refer you to the 8-K. But this is - if you look at other businesses that have done similar transactions, it's a fairly common structure in certain markets in Europe. Chris, why don't you take the middle two and then I'll come back to fiber.

Yeah. So the tax question, and I think I heard you correctly, the combined tax impact we said is between $900 million and $1 billion that would be due next April. And that includes the taxes for both of the divested businesses so far. As it relates to how we'll manage the buybacks versus leverage, I mean, look, I really view those things as dynamic that we have to look at in relation to each other given the point in time, right? So we have to look at what our cash performance looks like in any given quarter. We've got to look at where the debt markets and our leverage are. We've got to look at the buying opportunity in the equity markets. Obviously, in the near term, that buying opportunity, I think, will be strong, but it's not a linear process that we stick to. It's a dynamic process, and we will manage it accordingly to make sure that we're doing the best job possible for our stakeholders. So that's really how we'll look at it going forward.

And I'll try to give a little bit of color, David, on your last question about fiber revenues and how we should be investing that money. If you look -- I don't remember the timing, three or four years ago, we took a hard look at should we be in the consumer fiber business? Should we be in the consumer copper business. And candidly, coming out of that analysis, we decided the thing that we should do is manage it for cash in the markets where that makes sense and invest in fiber in the markets where that makes sense. And we decided that the markets where it makes sense to invest in fiber are growth markets. And I don't want to leave anybody off the list, but look at Denver and Minneapolis and Seattle and all the communities that make up those markets, we've got some great growth markets within the 16 remaining states that we operate in. And so we've decided that those are good markets for us to invest in fiber in. And then we've decided that there's some that we should just sell that somebody else can do better with those assets than we will do. And that's where Brightspeed -- how Brightspeed was created. We think they'll do a great job. They will invest in those markets. It will be good for those markets. It will be good for their investors and their owners. And so we'll – there is a little bit of the answer is all of the above, all the suggestions that you would take. And that's also to leave open the door that will change our mind on how best to do these things going forward. And we're always open to whatever structure makes most sense for our shareholder return. And we look at these decisions, not as static decisions made once and never revisited, but the decisions that we are very committed to, that we are focused on executing against, but open to other things if they make more sense for us.

Again Jeff, thank you.\

And thank you, Dave. It's been a long - it has been a long time.

Yeah, Jeff.

Thanks, David. France, next question please.

Our next question is from Frank Louthan with Raymond James. Please go ahead.

Great. Thank you. And thanks for all the help over the years, Jeff. So with what's left, when you sell all this, where does this leave you with regard to top line growth? And when do you think you can deliver sustained top line growth in the future? Thanks.

Hey Frank, it's Chris. I'll take that one. I think when you look at our growth buckets, I mean my main focus obviously is doing what we can to get the growth bucket growing faster sooner. We've obviously got a process around Harvest and Nurture that I think certainly in the Harvest bucket is starting to show results. But realistically, I still think we're two to three years away from total growth just given the size of those buckets. But the growth bucket is the focus, and I think starting with what we have, with what Jeff leaves us with, and certainly, Kate's experience, that's where the focus will be as we go forward, and I feel good about it.

And just to add, - go ahead.

No, go ahead.

Just to add, I feel very excited to have Kate come in. I think that the Lumen team has done a great job transitioning us from a telco to a technology company, interfacing with our customers differently, building the platform that is tightly coupled to the infrastructure, to the fiber that we have and building a platform for Kate and the Lumen team going forward to sell and accelerate the growth in ancillary services and things around our edge cloud, things around security, collaboration, orchestration, all of those. And so, I'm still very excited about our ability to add growth to that platform.

Well, that's great. I look forward to meeting as well. I guess, just a quick follow-up. Will the split between the Grow, Nurture and Harvest materially change with the sale of the EMEA business on any one of those buckets have - you have more or less exposure to?

Yeah. The operations of our company doesn't change with the sale of EMEA. I don't think either any of those buckets have any strong particular exposure. Do you, Chris?

No. I don't think it's going to skew things dramatically one way or the other.

Yeah. And it won't change the way we operate the rest of the company either.

Okay. Great. Thank you very much.

France, we've got time to take one more question.

Very good. Our next question is from Nick Del Deo with MoffettNathanson. Please go ahead.

Hi. Thanks for taking my questions. Jeff, I want to echo everyone else's comments, and congratulate on all your accomplishments and a well-deserved retirement.

Thank you, Nick. And you have the last question on my last earnings call, so no pleasure in my career. So, I'm looking forward to it.

All right. A lot of pressure to deliver on that. I guess, first on the cost cutting or cost transformations. As you noted, over the past year, you've been a bit hamstrung given the resources you've dedicated to getting the Apollo and LatAm deals over the finish line. You talked about getting that engine up and running. What sort of cadence should we expect in terms of getting that back up to 100%? And will the resources devoted to getting the EMEA deal over the finish line way on your ability to do that?

So let me take the second one first and then Chris you can take the first one. No, the EMEA deal will not weigh on our ability. If you look at Brightspeed and if you look at Cirion [ph] those are much more stand-ups of new businesses being spun out, and this one is more of an acquisition by an existing business of our business. And so I don't - and that's one of the key value drivers for us, frankly. I don't think it will be as complicated. I don't think it will be as expensive on the Lumen side of things.

Yeah. I totally agree with that. And as it relates to our ability to get back to some of the cost-saving initiatives, I think it will take us a year or two to get back to full run rate, but we're starting with that now. And as we go forward, we're going to be looking for ways to drive more automation and simplicity in our processes internally. And that's where we're going to be focusing.

Okay. Well...

Go ahead, Nick.

The last thing I wanted to ask about was sales compensation, which is something that you've been talking about a bit over the last several months, emphasizing growth categories, deemphasizing the Harvest categories in terms of how people get compensated. How do you implement those changes and ensure that the base of Harvest revenue doesn't fall at an undue pace while those changes are put into place? I guess, stated differently, what sort of incentives do you put in place to ensure that people maintain that?

Yeah, I won't get into specifics, obviously, because, again, things aren't fully finalized yet. But I think the key point is that our Harvest bucket is really not a product that gets sold very much at all anymore. So you look at where the bulk of the sales exist today, it is in the growth categories in the Nurture category. So it's really how you incent behavior within those. Now separately, we do have a customer success organization that works very hard on things like rerates, making sure that we're moving customers up the stack from older tech to newer tech, and that's a separate compensation system. So that's how we manage the flow of products from old to new, and we also just manage the overall decline of those assets. So there is a structured process around that in terms of how people are comped.

Okay. Okay. Great. Thank you, Chris.

All right. I'd like to say thank you all. I've worked with all of you for a long time and I appreciated the relationship. And so I want to close by saying how extremely proud I am of the Lumen team and what they've built. I'll miss engaging with all of you on these quarterly calls and the various conferences that I attend. I think I leave behind the company that has a very strong foundation and is poised for a return to profitable growth. So I'm excited for that. I'm excited for Lumen. I'm excited for its employees and stakeholders as Kate's leadership will further strengthen what we've built over the past several years. So with that, I'd like to say thank you for the time that we've had together with -- and your interest in Lumen, and thank you for joining the call today.

Thank you. We would like to thank everyone for your participation and for using Lumen Conference Service today. This does conclude the conference call. We ask that you please disconnect your lines. Have a great day, everyone.