Lumen Technologies, Inc.

Greetings and welcome to the Lumens Technologies first quarter 2021 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 presentation. If at any time during the conference you need to reach an operator, please press star 0. As a reminder, this conference is being recorded online. Wednesday, May 5th, 2021. It is my pleasure to turn the conference over to Mark Stoutenberg from Investor Relations. Please go ahead, sir.

Thank you, France. Good afternoon, everyone, and thank you for joining us for the Lumen Technologies first quarter 2021 earnings call. Joining me today on the call, 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 1Q 2021 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 costs for special items as detailed in our earnings materials, 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.

Hello, everyone, and thank you for joining today's call. I'm going to take a few minutes at the outset to share my perspective on the quarter and some of the key value drivers I see, not only in our business, but also with respect to our capital allocation and inorganic strategies. After that, I'll ask Neil to walk you through the details of the quarter and key drivers for the remainder of 2021. Then we'll open it up for your questions. Before diving into our results for the quarter, I want to discuss a few points coming out of our investor day in April. I hope those of you who were able to join us gained a better understanding of the markets, products, and services we believe will drive our future growth, as well as a sense of our conviction that we have the right assets, people, investment plans, and execution strategies to grow both revenue and shareholder value over time. The path we reviewed during our analyst day is pretty straightforward. We are combining one of the world's best fiber infrastructures, our deep global interconnections to eyeball networks, and our increasingly robust Lumen platform to build the infrastructure necessary to support a full range of fourth industrial revolution applications and use cases, including artificial intelligence, machine learning, augmented reality, iot and unified communications as of today more than 85 percent of u.s enterprises are within five milliseconds latency of our edge cloud facilities we are well on our way to reach our end of the year goal of 95 percent of u.s enterprises our fiber enabled edge infrastructure together with our embedded security capabilities and adaptive networking services allows Lumen to deliver a differentiated solution set for expanding market opportunities. We are excited about the growing market for these services and our ability to meet those demands. For those who were unable to join our Investor Day, I invite you to go to our website to review the information we share. I'm personally bullish on our approach. It leverages our greatest, most unique asset, one of the world's largest and most powerful fiber-based networks, to drive growth in both core fiber-based network services as well as adjacent services such as security and edge computing that are greatly enhanced by our fiber network. The demand for these services is growing, and we're investing into and are well-positioned to grow with that market. I believe it is a compelling thesis. At the same time, I understand our business needs to deliver top-line revenue improvement today. While we delivered strong EBITDA and free cash flow in the first quarter, the revenue results don't yet meet our expectations. Neil will go into details, but I want you to hear directly from me that we are not satisfied and are focused on growth. As we've mentioned on previous calls, COVID-related lengthening in sales cycles across both public and business sectors continues to create near-term revenue uncertainty. For example, public sector sales at the end of 4Q20 and the first couple of months of 1Q21 were light. We are market share takers in the public sector, and government slowdowns have created fewer opportunities to win new awards. This especially affects the one-time revenue we often see at the beginning of new contracts, which typically includes professional services, equipment sales, and installation charges. Similarly, the state, local, and education customers have naturally focused all of their resources on COVID response. We believe the pause in these sectors will prove to be simply one of timing. While we all began to learn about COVID in the first quarter of 2020, the nature of our business and sales cycles makes the effect of COVID more of a 2021 event for us. As we see the U.S. beginning to come out of the pandemic, we expect to see improvement in the second half of the year. I offer you these details to provide color on the quarter, not to rationalize results. We are very focused on revenue and expect to accelerate growth where we invest. But thus far, our growth is not at the pace required to overcome the declines in voice and legacy data services. We have the assets, the products, the people and processes in place to drive higher levels of revenue growth, and now it comes down to execution. Beyond revenue, we are continuing to do a lot of great work to improve the fundamentals of our business and to drive long-term growth. We have continued to expand the reach, the power and reliability of our world-class fiber infrastructure. Our fiber network is at the core of who we are and is the engine that will drive both our and our customers' success. It is among the best in the world, and we make it better every day. Our Lumen platform allows enterprise customers to seamlessly deploy the connectivity, the infrastructure, and the applications they need to transform their businesses to the new realities of the fourth IR. We have enabled key products and partnerships that drive full-service solutions for our customers and integrate the network within their cloud applications. We have begun to deploy the automation and customer experience that will define our future. Across our business, these changes have driven both higher levels of customer satisfaction and enabled us to maintain strong EBITDA margins. These initiatives are ongoing and I believe demonstrate we're doing the things required to drive long-term growth in revenue, EBITDA, free cash flow, and shareholder value. I'm proud of this work and believe it will define our future success. As I said earlier, though, we have a strong sense of urgency to accelerate top-line growth. We are seeing positive results in our customer interactions and early success with our Edge Cloud efforts. As an example, our SAP alliance has led to the onboarding of major VAR customers on the Lumen platform. VARs like our customer, Christine, Rather than hear my views, though, I thought I'd just share an exact quote from the customer. Through the entire process, we've been impressed with the Lumen offering. Their insight into our business demands and the quality of their team resulted in a packaged offering that targets the key challenges facing value-added resellers in our market space. Obviously, I like to hear customer quotes like this, but I also want to point out that this is the exact intent of our entire Lumen platform. We understand the focus on near-term revenue, but believe too singular a focus on that topic overshadows the many other positives in our business. I'm not going to belabor this point. We shared with you our view of the sum of the parts of our business last year, That information is still on our website, and I would encourage you to give it another look. I think that the simple and straightforward analysis speaks for itself, and the market value for assets such as ours continues to support that basic view. The market cap less than five times the midpoint of our free cash flow guidance and our current EBITDA multiple does not reflect our extensive cyber infrastructure or the growth potential we highlighted in our analyst day. Moreover, we have a strong balance sheet enabled by our due leveraging initiatives. Given our conviction around our growth initiatives and our equity evaluation, I'd like to share a few thoughts on capital allocation. Of course, our first capital allocation priority is to make the investments required to drive healthy growth and returns within our core business. These investments are not linear from one quarter to another, and we expect 2021 capital investment will accelerate from first quarter levels. I am confident we are investing in an appropriate level to support our growth, expand our fiber network, and enable the systems and programs that will continue to drive higher levels of sales, customer satisfaction, and operating efficiency. We are committed to investing in growth. Beyond investing in the business, We're also very focused on our dividend as a key element of our capital allocation strategy. We still get the occasional question or comment about the sustainability of or our commitment to our dividend. Frankly, this puzzles me. As I'm sure you can appreciate, it's difficult for any company to make completely unqualified statements about their capital allocation policy, including dividends, and we're no different. That said, I think we've been clear that we look at our current dividend level as both an appropriate capital allocation approach and an important proof point about our confidence in the future of our business. And with the current payout ratio in the 30s as a percentage of free cash flow, I think the question about sustainability answers itself. We believe the dividend is an important element in our delivery of value to shareholders and that the current level of dividend is supported by sustainable payout ratios. You know, too, we've been focused on strengthening our balance sheet and reducing our interest expense. And we've done a lot of good work in this space. Since announcing the deleveraging plan, we've reduced $4 billion in debt, refinanced more than $20 billion, improved our maturity profile, and reduced cash interest expense by almost $600 million per year. This obviously enhances the financial position of the company and is very beneficial to our free cash flow profile. We did what we said we were going to do here, and there is no question in my mind that it was the right thing to do to sustain long-term value. In terms of interest cost savings, coverage ratios, and credit profile, we have largely achieved the outcomes we targeted with our deleveraging plan. We are maintaining our debt to EBITDA target range and expect to get there over time with a combination of EBITDA growth and debt pay down. Our cash flow profile and balance sheet improvements give us the flexibility to reassess our capital allocation after investing in the business and supporting the dividend. Given our conviction around our sum of the parts analysis, fiber asset valuations, and our business plans, we believe our shares trade at a significant discount to their true value. As we continue to progress toward our leveraged targets, this naturally leads to discussions with the board about share buybacks. We've made no decisions and are not making any specific announcements, but it is certainly part of our discussion. Finally, I'd like to talk about our approach to inorganic opportunities to grow or unlock value. You've heard me say before that we are constantly evaluating alternatives to enhance shareholder value and are open-minded, including divestitures. I know you hear that phrase from virtually every CEO and that it can just sound like CEO talk, and I understand that point of view, but I want to be clear that we are actively looking at selling non-core assets to unlock value in our business, further accelerate deleveraging, and implement potential buyback programs. That said, we have been and will remain disciplined. We have confidence in our future and don't feel compelled to undertake any specific transaction. If we find transactions that are positive to shareholders, we won't hesitate to move forward. Let me summarize before I pass it over to Neil. We understand we must improve our revenue trajectory. We are focused and unflinching in our assessment of what we must do to drive that change. It does not happen overnight in a business such as ours, but we know it must improve. At the same time, I have strong personal conviction that we are doing the things required to position Lumen for the future. We are expanding the reach and capacity of our already powerful fiber network We are improving our product set, transforming our customer experience, and reducing our cost of delivery. And again, I will highlight that we have a strong cash flow profile and an improved balance sheet that allows us to invest in the future of our business. While we reposition ourselves for long-term growth via the Lumen platform for enterprises and Quantum Fiber for mass markets, we will also continue to maintain the discipline required for us to deliver value to our equity holders, not only through growth, but also through inorganic options, the return of capital through dividends, the ongoing reduction of leverage, and should we decide it is a better way to allocate capital, the possibility of share buybacks. With that, I'll turn the call over to Neil to review some of the details from the quarter. Neil.