Greetings and welcome to Lumen Technologies Fourth Quarter 2023 Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded on Tuesday, February 6th, 2024. I would now like to turn our conference over to Mike McCormack, Senior Vice President, Investor Relations. Please go ahead.

Thank you, Aaron. Good afternoon, everyone, and thank you for joining Lumen Technologies' Fourth Quarter 2023 Earnings Call. On the call today are Kate Johnson, 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 2 of our fourth quarter 2023 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 2, and the risk factors in our SEC filings. We will be referring to certain non-GAAP financial measures reconciled to the most comparable GAAP measures, which can be found in our earnings press release. In addition, certain metrics discussed today exclude costs for special items as detailed in our earnings materials, which can be found on the Investor Relations section of the Lumen website. With that, I'll turn over to Kate.

Thanks Mike. Good afternoon, everyone, and thanks for joining us today. I'm excited to provide an update on the significant progress we're making on Lumen's business transformation. A year ago, I shared that 2023 was a reset year for this company with new mission and vision, a new executive team, and a newly redesigned culture. And importantly, we aspired to restore confidence in Lumen, not only with improved financial results, but with execution excellence that delivers on our commitments. We outlined big, multiyear strategic priorities, including strengthening our balance sheet, executing our key programs to turn the core business around by 2025 and igniting new growth by delivering disruptive innovations that help our customers solve their next-gen networking needs. And now, I'm pleased to report that we both delivered on our 2023 EBITDA and free cash flow guidance, and we made material progress on our strategic priorities. I'll start with the balance sheet. As we announced in late January, we entered into an agreement with a significant number of our creditors that clears the path for our turnaround. The deal extends most of our debt maturities to 2029 and beyond, injects $1.325 billion of net new financing into the business and gives us access to a new approximately $1 billion revolving credit facility to support our operations. It's a strong indication of the confidence of our bondholders and the broader debt markets that they have in our strategy, and it allows us to focus our energy on executing our business transformation. All right, so how is the pivoted growth going? While we have a lot of work left to do, we're seeing progress, as evidenced by our North American business performance compared to other industry competitors. While two large legacy telco companies saw Q4 revenue declines in their business wireline…

Thanks Kate, and good afternoon, everyone. Kate spoke about our progress and how we are disrupting an industry ripe for change as Lumen transforms into the leading digital enterprise solutions provider. She also spoke of our success in reaching agreement on an amended TSA with a broadened group of creditors to extend our debt maturities. On our Q2 earnings call, we said we viewed the formation of the creditor group as an opportunity to address a large part of the capital structure in a very efficient way, and the amended agreement we announced in January accomplishes that. The amended TSA has support from a broadened group of creditors, and when finalized, will address approximately $9 billion of outstanding indebtedness, including more than 77% of debt maturing through 2027. The TSA transactions will extend debt maturities to primarily 2029 and beyond, provide $1.325 billion of new money, and provide access to a new approximately $1 billion revolver. This agreement and the broad support for it speaks to the confidence our banks and creditors have in our plan and provides Lumen ample runway to execute on our business turnaround. In short, our capital structure is no longer a limiting factor in our transformation. We expect to complete the transactions contemplated by the TSA in the first quarter subject to the satisfaction of limited remaining closing conditions. Before covering our fourth quarter results, I'd like to take a moment to discuss some changes to our 2024 financial reporting to enhance comparability with prior periods and better align with how we manage the business. First, we are updating our business sales channel reporting by breaking out a new international and other channel, including CDN. Secondly, given the sale of substantially all of our CDN contracts during the fourth quarter of '23, we are updating…

Aaron, we're ready for questions.

[Operator Instructions] And our first question for today comes from the line of Simon Flannery with Morgan Stanley. Your line is live.

Great. Thank you very much, and good evening. Thanks for all the color. I was wondering if you could just help us with the updated trajectory of revenues through the quarter. I think in the past you've talked about a second half acceleration after some first half noise. You didn't really talk to that during your prepared remarks, so any updates there would be great. And then, thanks for the color on Q1 OpEx. How should we think about some of the OpEx savings from some of the severance and other actions that you've recently been taking? How does that flow through the quarters in 2024? Thank you.

Yeah, Simon, on the revenue side, we would expect the Public Sector implementation and the conversion from sales to revenue to accelerate as we move through the year. And to Kate's point, we continue to see improvement in the other channels as well. But mid-markets, we expect to continue to improve over the course of the year as well. Obviously, wholesale can be a little more choppy, so that's a harder one to predict. As it relates to OpEx, most of the savings that related to the action we took last year will be realized this year, and I would expect that to be fairly even quarter-to-quarter. It's a full-year impact.

Great. And just on that Public Sector, I mean to what extent was the Q4 number, including, I don't know, CPE sales or other things that may not recur next quarter?

So we did say that other product revenue impacted the fourth quarter and that's the bulk of it. I would say that our commentary around our confidence in Public Sector really relates to the revenue recognition associated with the installs from those big deals we announced over the last 12 months to 18 months.

Great. Thanks a lot.

Thanks, Simon. Next questioner.

Thanks for your question. Our next question comes from the line of Batya Levi with UBS. Your line is live.

Great. Thank you. On the enterprise trends, earlier you had mentioned that you were concerned about some of the upcoming maturities and the conversations with enterprises were kind of on a hold. Can you provide more color on maybe recent conversations with some of those larger clients and how the sales funnel is shaping up? And maybe just another follow-up on the, on 1Q, can you quantify the seasonal expenses we should think about for the first quarter? And lastly, taxes, how should we think about tax range if bonus depreciation or other credits are extended? Thank you.

Thanks, Batya. I'll handle the debt one and give the other two pieces to Chris. The clarity of having this TSA updated and amended is -- has been great for our customer conversations. It basically shifts the maturities to '29. It provides the ability to focus on you know our transformation efforts and have conversations with customers without that question. And so, we've really been relishing that. You know our pipeline and conversations with customers are, you know, positive and growing, and a lot of that has to do with the sales excellence that we've put in place in terms of supporting our people with world-class platforms and you know driving AI for sales productivity and things like that. So I think we're in a good spot. Chris?

Yeah. And on taxes, our guidance, we gave, a cash tax amount that we feel is the best way to look at it. Obviously, with the one-time expenses and special charges associated with the debt transaction, the impact from an ETR standpoint on net income can be really sensitive. So that's why we chose to guide the cash tax amount. As it relates to legislation, again, we're really pleased with the momentum around that. We would expect that if everything was enacted that's out there, the benefit to us could be in the $300 million to $400 million range on an annual basis, but we'll have to wait and see.

All right. Thank you.

Thank you.

Thanks, Batya. Next question, please, Aaron.

Our next question comes from the line of David Barton with Bank of America. Your line is live.

Hey, guys. Thanks so much for taking the questions. I guess, two if I could. The first would be, just Chris, you know how you could maybe put some guardrails around how a successful TSA conclusion would impact the free cash flow guidance outlook that you're presenting here today, which does not appear to have it in there? And the second question would be, and sorry to go back to the Public Sector, but given that this is kind of the tip of the iceberg of the growth turnaround, you know, third quarter to fourth quarter it was up $30 million, third quarter to fourth quarter it was up another $50 million, most of -- all of that was attributed to kind of one-time items. Where -- when you say it's going to be the first to return to growth, from what number should we assume that growth begins? Thank you.

Yeah. So I'll answer the last part first. Again, you're right, we did -- we have said over the last couple of quarters there were some one-time benefits that have repeated themselves and certainly helped us. But as we look into the year from here forward, David, we should continue to see growth in Public Sector as the installs around those big contracts build their pace. So we do expect Public Sector revenue to be increasing as we go forward from here. And as it relates to the free cash flow guidance, it does include all of the TSA costs, so successful closure means closing in Q1, and we've got line-of-sight to doing that, we'll certainly give more commentary around that as that gets finalized. But it is contemplated, and I think part of the confusion may be that included in that free cash flow guidance is the $700 million tax refund impact that hit in Q1.

Right. Those are the offsetting forces. Perfect. All right. That's all helpful. Thank you, Chris.

Yeah.

Thanks, David. Next question, please.

Our next question is from the line of Michael Rollins with Citi. Michael your line is live.

Thanks and good afternoon. A couple of questions. The first one is, if we go back to the Analyst Day slides from a few months back, the EBITDA guidance range is lower at $4.1 billion to $4.3 billion versus the $4.3 billion to $4.6 billion. Can you remind us of just some of the influences and some of the developments that got you to the current range? And then, can you also give us an update on how the revenue range should look, after all this time, I think it was originally at 13.6 to 14.1 for 2024? Thanks.

Yeah. So a few things. So what's changed versus Investor Day. Obviously the EMEA sale, the CDN sale, and last but not least, just the impact of the debt discussions and that overhang in our business. We were pretty clear, I think, on the Q2 and Q3 calls that customers were concerned and certainly the size of the '27 debt tower and our ability to execute the turnaround in time to refinance that, particularly the Lumen debt and that was of a particular concern. So we adjusted for that and with the negotiations behind us, we see positive momentum there. As it relates to revenue, we're not guiding revenue at this point, and I would say that's conscious because the revenue piece is going to be choppy as we go forward, and we want to be really transparent about that. It's hard to predict what totals will do. It's easier to predict channel by channel that when we expect to see a turnaround, but to try to give that with some level of confidence at this point is just a little too early. So we've chosen to stick to EBITDA where we obviously have more levers to pull and more control around that.

And then just the second. In the past you've talked about the opportunities to proactively churn some of the legacy revenue and convert that into the strategic revenue. Can you share maybe some additional details or developments or there's some numbers where you're able to show the financial benefit of being able to migrate customers more quickly to fresher strategic services?

So a couple of things. There's, number one, using AI to reach out to customers in a programmatic fashion at scale to drive productivity of the outbound calling that we do is the first step. And so, we've made a lot of progress there, putting the platform together. Number two, taking a migration factory approach, so for each legacy platform that customers are on, understanding the behavior signals that drive likelihood to churn and approaching them in cohorts and then meeting them where they are in terms of you know what they have and the best solution that we can migrate them too, and doing as much of that in an automated fashion as possible. All of that is the chassis that we built in '23. Now we're starting to -- and in Q4 we had you know some pretty significant progress, numbers we don't report on, but in terms of doing the reach outs and making progress with migrations, et cetera. So we'll continue to monitor it and as we get to a place of growth and stability and productivity of those teams in a way that we can share, we certainly will.

Thanks.

Thanks, Mike. Next questioner.

Next question is from the line of Eric Luebchow with Wells Fargo. Your line is live.

Great. Appreciate it. Maybe you could touch on mid-market a little bit. I know that's been a big focus of the company in terms of new salespeople and new logo generation. I mean, when do you think, is that more of a 2025 story when we start to see the revenue line really turn in that segment? And then secondly, maybe you could just touch on your interest in additional asset sales or divestitures as you look out, I think you've been pretty open about the consumer or mass markets business potentially making sense, being separate from the Enterprise segment. Is that something that you would actively evaluate? Thank you.

So starting with mid-markets, this is actually the first market segment, customer segment that we stood up, you know, our squads, our scrum teams to go after. And that's everybody from sales, marketing, customer success, IT operations, you know, finance, billing, et cetera. All kind of circling around the customer segment to say, what are the offerings that we need, you know, what's the price we need to win, what does the marketplace look like, you know, how do we swarm them and cover the markets, both direct and indirect, because that's, you know, we want to continue to leverage our ecosystems for more feet on the street from a sales perspective. And all of that work happened in '23. What's most remarkable about that is, it set the tone and context for how we then do turnarounds in the other segments, because we got this learning mojo thing happening where, you know, the teams are meeting with daily stand-ups and weekly stand-ups and reporting back on the challenges that they were experiencing and then using an agile methodology, whether it's building a piece of IT functionality or it's working with the product team to say we need these net new capabilities, or, you know, the marketing team to say, how can we do, you know, better account-based marketing, et cetera. And that method of working, you know, across functions with no silos in an agile, you know, rapid fashion has set the context for basically how we treat all the other segments. So that's thing one. Thing two is, you know, internally, there's a bit of a camaraderie and healthy competition. And I call my mid-markets teams the sandbaggers, because basically, you know, they're always coming in a little bit better than they say they're going to, and I think they're starting to get their chops. And so, you know, we're excited by our improvement in productivity, we're excited about our improvement in sales and revenue et cetera. I think what we'd like to do next and where you'll see us sort of, you know, target the guns is on the ecosystem side making sure that we have a platform that is partner-friendly so we can drive sales productivity indirect, because we all know that that's what we need for total coverage. So you want to handle the other one?

Yeah, I mean, and on asset sales, we'll obviously continue to evaluate the entire portfolio. What I would say specifically about the mass markets business is really a few things. One, that's an enormously valuable asset and we know that. And that's why we're continuing to invest at the pace that we're at right now in getting more fiber in the ground and pushing really hard to drive subscriber growth. That said, we've been very public about saying that's a space where consolidation is necessary and we will not be the consolidators. So and I think you've seen in the last few days some noise in the industry as people are, I think, taking more active positions around what happens next with that sector. So we're going to keep our heads down, continue to focus on execution and building out the value of that asset and we'll evaluate as we go.

All right. Thank you.

Thanks, Eric. Next questioner.

Our next question is from the line of Nick Del Deo with MoffettNathanson. Your line is live.

Hey, thanks for taking my questions. I've got two guidance related ones for Chris. The first one on CapEx. So it looks like your midpoint for CapEx this year is $2.8 billion, it was about $3 billion in '23 ex-EMEA, your fiber-to-the-home passings are about the same in '24 versus '23. So it seems like the CapEx for everything else is ticking down some. I was just wondering if you could talk a little bit about what's behind that reduction assuming that observation is correct?

It's really driven by our continued focus on efficiency. And so, we continue to push on both OpEx as well as CapEx, and we will continue to do so. But it's not -- don't view it as a signal of us pulling back anywhere. We are investing aggressively, and we'll continue to invest aggressively in both Enterprise and mass markets as well as just the broader simplification of Lumen as we go forward, there's an enormous amount of effort that's taking place in particular this year around financial systems as well as operations that will dramatically improve the customer experience.

Okay. So you'd say you're getting a similar bang for your, or more of a CapEx bang for your buck this year than last year, and that kind of explains it?

That's right.

Okay. And then second on cash taxes, it looks like cash taxes paid excluding the refund are going to be in the $400 million to $500 million, which is a pretty big number. I guess barring any change in the tax code, is this a reasonable starting point to think about for the next few years or is probably the debt transactions or other things kind of throwing it off?

Yeah, I don't want to try to estimate what '25 is right now. We're obviously not doing guidance there. You know, as I said earlier, we gave the guidance, the cash tax guidance we gave this year just because of the sensitivity in net income with all the other special charges hitting this year. I will give you a little bit here though on the interest, because I think it's important. I think the cash interest in '25 will not be materially different than it is in '24. And the key thing there is just for your modeling is while we don't have a full year impact under the TSA in '24, at the execution of the TSA, we do basically have to pull forward interest expense. So when we look at it, that variable is going to be roughly the same, '24 and '25. I think that -- I'll give you that much on '25.

Okay. I guess maybe I'll phrase it differently. Are there kind of one-time tax items that we should bear in mind that are baked into that guidance?

Yeah. No, not materially, no.

Okay. Thank you, Chris.

Thanks, Nick. Next questioner.

Our next question is from the line of Greg Williams from TD Cowen. Your line is live.

Great. Thanks for taking my questions. Chris, I realize you know you typically guide EBITDA in that $200 million range, and I'm just wondering if there's any particular puts and takes to consider what's driving that range this year, I know you mentioned some levers that you can pull. And then the second question is just on the ABS debt markets, if you're looking at that in the year, now that you've got the clean runway from the TSA, and maybe you can leverage some of these fiber homes? Thanks.

Yeah, we'll continue to look at the capital structure and for ways to make it more efficient forward. So we're not done. That was a big one, but we're not done. I am sorry, repeat the first part of the question.

Just the EBITDA range, if there's any puts and takes to consider, and levers to pull?

Yeah, no, we just -- we felt that the plus or minus you know $100 million was the way to go. The comment that I made earlier on just the levers we have, obviously, we're doing a number of things, right? The primary objective is to get revenue growing as we shift aggressively from kind of legacy services to digital service offerings. But at the same time, we are fixing the internal workings of Lumen, I mean, multiple billing systems, multiple GLs, inventory, frankly, a really poor customer experience and Kate spoke to some of the progress we're making there. So as those things get fixed, that obviously gives us the opportunity to drive more efficiency in addition to a better customer experience. And that also has EBITDA effect. So the EBITDA, we get the double benefit, obviously, of the revenue as well as those efficiency plays.

That's helpful. Thank you.

Thanks, Greg. Next question, please.

We have another question from the line of Frank Louthan with Raymond James. Your line is live.

Great. Thank you. Just wanted to go to Slide 6 and the different opportunities you have there. Can you characterize that as what sort of potential revenue that is? Is that a multi-billion-dollar opportunity for Lumen? How should we think about that? And then you mentioned something on the recognition of the revenues for the Public Sector business. Is there some sort of timing difference in the cash flow of some of those that we should be aware of? Thanks.

Why don't you hit the cash flow and I'll do the --

Yeah. So really on the Public Sector, Frank, that's the longest kind of sale to install interval of anything we sell. They're big complex deals. Obviously, we're working with government agencies, and they've got to go through their processes and that takes time. So you can have a 12 to an 18 month lag, as I mentioned, until that starts to get recognized in revenue. As it relates to the cash flows around that, it will increase as time goes on, because obviously the pace of the installs increase, but --

It's a book-to-bill difference is what you're talking about, not a cash recognition difference.

Exactly. And they're just massive contracts.

Yeah, okay.

So, yeah. But I'll turn it back to Kate for the first part of your question.

Sure. On page six, just for everybody's edification here, it's the Lumen digital platform, and we have the portfolio outlined with a totally digital customer experience wrapped around two important things. The first is our network, our core network services, because none of these digital services are relevant without total integration into the network, customers are demanding left to right, top to bottom integration, quick, secure, effortless. It needs to be exactly that in order to be relevant in the digital economy. And I think you can look to other companies that have some of these digital services and they don't have the fiber network and they just can't get the economics and they can't get the customer service right. So we're kind of excited about it. There are four core capabilities that we have right now for Lumen digital. We're just getting started, as I said. The ones that we have here represent a total available market of around $40 billion, but I think that's actually understating it, because we have a couple of really interesting opportunities emerging that we'll talk about as we get a little bit closer to shaping them. Think of it this way, NaaS is cloudifying telco. It's digital everything, any port, any service, anytime, anywhere. ExaSwitch is the Center of Connectivity. Fast pass into the cloud, any cloud, and across cloud, the edge is becoming more and more germane, especially with a totally digital network and high-capacity switching, because users are everywhere. And the expectation is that I'm going to process all of that data that's generated at the speed of thought, and so proximity really matters. And then the last thing is security, and we have huge muscle here that's totally under commercialized. So we're excited about the future. And right now, we're just kind of calling it a very big opportunity for net new profit pools, which is going to really help our growth curve.

All right. Great. Thank you.

Thanks, Frank. I think we have time for just one more question, Aaron.

Perfect. We have one final question here for today that is from the line of Jonathan Chaplin with New Street. Your line is live.

Thanks. Thanks for squeezing me in, guys. Actually, two very quick ones. So, Chris, given that it may make sense at some point to separate mass markets out, could you give us a sense for the EBITDA that you're generating in that business today? And then maybe a more conceptual question for you guys, as you sort of run through the trends in the business, which seem to be improving in a lot of areas, and it seems like you're taking share in the core segments that you're focused on and you're struggling against the sort of industry backdrop, that's just really tough. It strikes me that the business segment, in aggregate is just fragmented, and that's part of the problem. And I'm wondering if there's a consolidation opportunity there and whether you'd be a consolidator or whether a big consolidation transaction would just give you exposure to revenue streams that you're looking to move away from? Thank you.

Yeah. So I'll take the second part of the question. It's an interesting one, for sure. And I think you should think of us as seeing huge opportunity in the business segment by providing digital services that are integrated into the network and getting smarter and smarter about how we can take advantage of these really complex environments, hybrid cloud, multi-cloud, GenAI, et cetera. We have not only the right team, as I've talked about, we've got a world-class network, which I've talked about, and we've already got a head start with a lot of intellectual property protected by patents that sort of uniquely positions us to take advantage of this. That's where our focus is. We're maniacally focused on delivering value to customers and obsessing about their needs, because that's how we grow as fast as possible. If there are opportunities to integrate, you know, vertically or horizontally, as time goes on, we will strategically look at every single one of those, as is our fiduciary responsibility, and as they make sense, we'll go after them.

All right.

Okay. And on that, on the EBITDA, you know, we don't guide to that. It is in our filings. So I think that that's where I would point you to in terms of the splits between mass markets and enterprise. But as it relates to, you know, a potential split of the businesses, what I really want to emphasize is, we're not looking to fire sale any assets. We're investing in good assets to make them great. And that's our focus first and foremost, because that's how we see the path to maximizing value as we go forward. So definitely on the radar screen, but we've got a really dedicated group of people who are very focused on the Quantum Fiber build-out and the great customer experience that it brings, and we're going to continue on that path.

Great to hear. Thanks, guys.

Thanks, Jonathan.

Thank you.

Aaron, with that, we're going to end the call.

Thank you. Ladies and gentlemen, this will conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line. Have a great day, everyone. We'll see you next time.