Lumen Technologies, Inc.

Greetings and welcome to Lumen Technologies' fourth quarter 2020 earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. If you have a question, please press the 1 followed by the 4 on your telephone at any time during the conference. If at any time during the conference you need to reach an operator, please press star 0 and an operator will assist you. As a reminder, this conference is being recorded today, Wednesday, February 10th, 2021. It is now my pleasure to turn the conference over to Valerie Finberg, Vice President, Investor Relations. Please go ahead, Valerie.

Thank you, France. Good afternoon, everyone, and thank you for joining us for the Lumen Technologies fourth quarter 2020 earnings call. Joining me on the call today are Jeff Story, President and Chief Executive Officer, and Neil Dev, 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 4Q20 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 will 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 transformation costs and other special items as detailed in our earnings materials, all of which can be found on the investor relations section of the Lumen website. Finally, we are announcing changes to our reporting categories, beginning with first quarter 2021 reporting. These changes can be found in our earnings presentation and press release with additional details and performer reporting for prior periods in the earnings supplement on our IR website. With that, I'll turn the call over to Jeff.

Thanks, Valerie, and thank you, everyone, for joining us today. On today's call, I'll provide a summary of 2020 and an overview of our growth priorities for 2021. Neil will then review our fourth quarter financial results guide you through our new reporting structure, and provide our outlook for 2021. After that, we will take your questions. We delivered solid execution in 2020 as our employees quickly pivoted to a new operating environment and empowered our customers to meet their own rapidly changing environments. It was a challenging year for our customers and our employees, but 2020 also highlighted the power, flexibility, and scalability of our fiber-based offerings and the agility of our employees, I'm exceptionally proud of the team's performance during difficult times. I'd like to cover a few highlights from the year, and this is on slide four in the presentation. For the last three years, you've heard me talk about the integration of Level 3 and the digital transformation of our company. Many of our efforts have culminated last fall with the introduction of the Lumen platform. I'll discuss the details in a moment, But for now, we'll say that we see the launch of the platform as a key milestone, and I'm excited about the growth it can enable. The primary purpose of digital transformation is to improve the customer experience. But when done right, improving customer experience also enables cost savings. Our results reflect the dual benefit of our transformation efforts. In 2019, we announced $800 million to $1 billion in cost improvements, associated with our transformation initiatives. Through a combination of digitalization, simplification, and other transformation programs, we achieved $830 million in savings as of the fourth quarter of 2020, a year ahead of our original schedule. The benefits of that work are seen in the fact that we grew both adjusted EBITDA and adjusted EBITDA margin in the fourth quarter. to enable more efficient digital interactions also drove improvement in our net promoter scores, particularly in those areas where we have invested for growth in fiber-based services for enterprise and consumers. You can also see the benefit of the better customer experience in our improving revenue trajectory, which is up 150 basis points compared to 2019. While I know we have more to do, I'm encouraged by that improvement. We are turning to growth in those parts of the business in which we are investing and are managing our declining businesses with discipline, focused on preserving the free cash flow they generate. Our foundation for future growth comes from our investments in the Lumen Edge cloud infrastructure, expanding fiber for enterprises, and deploying new in-building technology for greater security, service resilience, and speed of delivery. and increasing the number of Gigabit-enabled consumer customers. In 2020, we added 400,000 homes passed to our Fiber to the Home footprint. We now reach more than 2.4 million homes and are very excited about the digital customer experience we are providing through our Quantum Fiber brand. We also continue to pay down debt and refinance maturities, reducing interest expense and strengthening our balance sheet. Lastly, We've expanded our commitment to ESG initiatives and recently issued our first sustainability-linked bond. Additionally, over the last year, we increased our focus on diversity and inclusion, adding a number of new programs, naming a chief diversity officer to spearhead our efforts, and expanding the leadership team's accountability and engagement in our diversity and inclusion goals. We remain committed to continually improving our approach to ESG, and I encourage you to review our annual ESG report. Looking forward, we believe the launch of the Lumen platform sets a strong foundation for growth. Slide five gives you a sense of how we view the progression of the business. Over the last several years, we've been focused on integrating, transforming, and operationalizing the capabilities we bring to markets. With much of that work behind us, 2021 is about revenue growth and expanding adoption of our platform. More customers in more areas accessing more services in a seamless, automated, and real-time basis is the vision for the Lumen platform. Of course, given the pandemic and macroeconomic implications, uncertainties remain in 2021, and we're keeping an eye on that, but we are excited about the coming year. We feel good about our sales funnel and customer engagement for both IGAM and enterprise. But we do see lengthening sales cycles as companies continue to evaluate their new infrastructure needs. Turning to slide six, the onset of the fourth industrial revolution creates market demands for more capacity, more distributed computing resources, lower latency, and higher resilience than ever before. Lumen and the Lumen platform are purpose built to meet those needs. I'll start at the bottom of the slide with the physical infrastructure layer. This physical infrastructure is obviously a foundational requirement for everything driving our economy today. I believe Lumen has the best local and long-haul fiber infrastructure in the world. Let me touch on a few points as to what that means for our customers. First of all, we connect customers in more than 180,000 on-net buildings directly to our infrastructure with secure and reliable fiber. We have deep and robust interconnection and peering facilities to the world's eyeball networks and ISPs, acquiring and distributing traffic to and from millions of endpoints. We have direct fiber connectivity to cloud service providers, hyperscalers, and more than 2,200 global data centers with tremendously scalable capacity. Over our global fiber network, We operate one of the world's largest Internet backbones and carry a significant portion of the Earth's Internet traffic each and every day. The role we play in enabling the global Internet uniquely positions our Black Lotus Labs team to quickly gain visibility and insight into emerging cyber threats, which we then use to secure and protect our customers' networks and applications. As the team likes to say, we see more so we can stop more. In a nutshell, the Lumen platform has the scale, security, ubiquity, and resilience necessary to meet the needs of the Fourth Industrial Revolution. Moving up one layer in the slide, Lumen Dynamic Connections is the result of recognizing that our customers needed software-based agility to consume and interact with our infrastructure. We meet this need by utilizing software-defined networking to allow customers to consume on the fly everything from basic network connectivity to more advanced services like SD-WAN, HYPER-WAN, and HYPER-DDOS. With this network-as-a-service approach, our customers can add capacity and reconfigure destinations for that capacity as needed, enabling instantaneous consumption of additional network services. This contrasts with the old model of interacting with a salesperson, scheduling the service delivery timeline, and rolling trucks. Our platform approach not only improves the velocity with which customers can respond to their application needs, but also the velocity we experience in capturing and converting opportunity to revenue. Moving beyond the dynamic network, the next layer highlights the capabilities of the Lumen hybrid cloud. Access to multiple clouds over an agile, seamless, and secure communications fabric is as critical to our customers as the physical layer network connectivity. They operate in dynamic environments that require the ability to adapt to the daily, minute-by-minute, or even second-by-second shifting of their workloads from one compute resource to another. The Lumen hybrid cloud, combined with our dynamic connections capability, allows customers to locate compute resources in their on-premises data centers, Lumen private and public cloud offerings, or within one of the major cloud service providers, all with full control. The thousands of SaaS providers are a specific use case. The Lumen hybrid cloud capabilities allow them to leverage our peering networks and our own ISP to enhance their application performance by locating compute resources in our edge cloud facilities and bypassing much of the best efforts internet. You saw an example of this with our recent SAP announcement. SAP is working with Lumen to take advantage of these capabilities and other aspects of our platform to improve their customer experience, reduce their costs, and enhance their service offerings. I've discussed the Lumen edge initiatives on previous calls. As of today, we have fully enabled edge facilities covering roughly 60% of US enterprise locations within five milliseconds of latency. Combining our unique fiber capabilities with our widespread edge infrastructure, by year end, we expect to have more than 95% of US enterprises within that same latency performance. We believe the Lumen Edge Cloud offers a compelling solution for many of our customers' latency sensitive applications and are encouraged that it will contribute to our improving revenue trends as it is more fully deployed and adopted. The final layer, the Lumen Orchestrator, is the set of software tools that orchestrate all of these capabilities to give our customers greater control, a simpler operating model, and a lower cost of ownership in an increasingly complex environment. We recently announced a partnership with VMware, which combines their orchestration capabilities and secure work-from-anywhere solutions with an increasingly dynamic, robust, and automated Lumen platform. We're excited about this partnership and expect to work with VMware to bring new services to market through our joint innovation lab initiatives. Both SAP and VMware are tremendous companies. We look forward to these relationships and believe they can be an important part of driving growth for Lumen. We expect to announce additional strategic relationships in the coming months. I'll now take a moment to walk you through our 2021 priorities outlined on slide eight. The first priority is to drive growth over the Lumen platform. Simply put, the Lumen platform combines the control, flexibility, latency, and performance of on-premises solutions with the efficiency, economics, and simplicity of cloud-based solutions. We will continue to expand the digital marketplace we've developed and the products and services available to customers. To that end, we anticipate new products like Luminege Bare Metal, Luminege Private Cloud, Luminege VN, and an expansion of locations where customers can leverage the Lumen capabilities to enhance their applications with low latency. Together, these capabilities are unique to Lumen and would be difficult to replicate. Let me give you a couple of examples to tie this all together. We're working with a major auto company on their autonomous vehicle program, helping them train their machine learning systems by building an accelerated data access network that decreases data transfer times between the metro areas they are testing with their headquarters. We're also working with a financial services company to update their computing architecture to meet exacting specifications for performance with financial counterparties around the world. We're managing the computing and storage infrastructure, along with the network connectivity to their broad digital distribution footprint for market data. The benefit to the customer is the standardization of centralized computing for efficiency and flexibility and simplifying their long-term digital distribution across the software-defined network. Our second priority is to improve the penetration of our robust product portfolio on our existing assets. Over the last few years, we have invested in adding new on-net buildings, deploying the latest in fiber technology in our long-haul network, and expanding our fiber-to-the-home footprint. We have begun to grow where those investments have been made, but we believe we can do better. In short, as customers return a portion of their workforce to the office, we are well positioned to provide their work-from-anywhere solutions. As employees and students continue to work and learn remotely, we are excited about our symmetrical broadband solutions for the home, increasing our customer base, and gaining wallet share with existing customers is a key priority for 2021. Our third priority is our ongoing transformation to make it easier and easier for customers to consume our services and for our employees to support them. Expanding our digital marketplace and increasing the number of digital interactions are key goals. We believe this allows Lumen to continue to improve the velocity at which we move from opportunity to revenue, and further enables our ability to improve customer experience and reduce operating costs. Fourth is the continuation of our balanced approach to capital allocation. We remain committed to our capital allocation strategy to create shareholder value through investment and growth, returning value to shareholders through our dividend, and reducing debt. Neil will provide the details, but we believe the changes we are making in our reporting categories properly reflect the evolution of our products and services and our focus on growth. We hope these changes will provide better visibility into how we are performing where we are investing for growth, as well as how we're doing in managing voice and other declining businesses for cash. I'll wrap up by saying that I'm encouraged by the progress we've made and fully focused on the work that lies ahead. We leave 2020 with improving revenue trends, better EBITDA margins, and a strengthened balance sheet. I believe we have demonstrated that we can take out costs to meet the pressure of legacy revenue loss. Going forward, we will continue to implement customer-centric operational improvements, but our future isn't about EBITDA stability through cost management. Rather, it is about EBITDA growth driven by revenue growth. I believe the Lumen platform is the right solution for our customers and will help us drive revenue, customer experience, and ongoing operating efficiencies. We are excited about the opportunities ahead, but an earnings call doesn't allow us enough time to discuss the numerous programs we have underway. We intend to host a virtual analyst day in late spring. During that event, we will share in greater depth our go-to-market strategies, exciting alliances, and new solutions we bring to the market. Stay tuned for the detailed information about this event, and I look forward to providing you additional insight on our roadmap for future growth. With that, I'll turn it over to Neil.