Lumen Technologies, Inc.

Greetings and welcome to Lumens Technologies' second quarter 2022 earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. At that time, if you would like to register for a question, please press the 1 followed by the 4 on your telephone. 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 Wednesday, August 3rd, 2022. It is now my pleasure to turn the conference over to Mike McCormack, Senior Vice President, Investor Relations. Please go ahead, sir.

Thank you, France. Good afternoon, everyone, and thanks for joining us for the Lumen Technologies second quarter 2022 earnings call. Joining me on the call today are Jeff Story, 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 second 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 will be referring to certain non-GAAP financial measures reconciled to the most comparable GAAP measures that can be found in our earnings pressure lease. 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. Before turning the call over to Jeff, please be aware that we will not be able to discuss our active cash tender offers for certain of our outstanding debt securities. These tender offers are expected to expire later this week. With that, I'll turn the call over to Jeff.

Thanks, Mike. Good afternoon, everyone, and thank you for joining us. On today's call, I'll provide some thoughts on our second quarter results as well as our plans for the second half of the year. Chris will discuss the second quarter in more detail, and we'll reserve time after Chris's remarks for your questions. I want to begin today's call by thanking our team for the hard work in closing the LATAM divestiture to Stone Peak. We are excited for the team at Sirion, but we'll certainly miss our LATAM friends and colleagues. Our ongoing partnership will allow us to continue working with this extremely talented team. We're also looking forward to the upcoming close of our ILAC transaction with Apollo. We are working hard toward an early fourth quarter close. Combined, these transactions streamline our focus on the most strategic opportunities for Lumen, which we believe will drive significant long-term shareholder value. Chris will provide more detail on our new business product group formation and what that will mean on a go-forward basis. But I can tell you that our teams are energized by a clear focus on managing products by lifecycle. Our reinvigorated approach to product lifecycle management will help customers transition to go-forward technologies and allow Lumen to maximize the contributions of more mature offerings, all helping to drive our number one priority, profitable growth. Our quantum fiber build is ramping. with second quarter enablements more than doubling since the fourth quarter of last year. And we expect further acceleration in the second half of 2022 and into 2023. Permitting processes for our quantum fiber builds haven't improved as much as we would like, and we see supply chain challenges across our business. We have not changed our target of a million or so enablements by year end. Beyond accelerating fiber enablement, we're also excited to announce the launch of our multi-gig quantum fiber offerings, which I'll discuss shortly. Although not yet where we want to be, we remain encouraged by our trends, with our second quarter revenue performance improving both sequentially and year over year. We saw strength in areas where we are investing to grow, such as security, cloud, IP products, wavelengths, and fiber broadband, offset by anticipated declines in TDM, voice, and others. As we look toward the second half of the year, we see the same macroeconomic pressures as everyone else. We are actively managing through supply chain constraints, which have caused some installation delays, but our strong relationships with our suppliers are proving invaluable in a challenging environment. We are also not immune to the inflation impacting all industries, and we did see increased pressure in the second quarter. We believe the critical nature of our service offerings makes them more durable as our customers grapple with what the current economic uncertainty means for their businesses. Customers are certainly being more thoughtful in buying decisions, but we are not seeing any meaningful change in customer cancellations. Those of you who have followed us know we often see opportunities to win new business with new technologies during economic downturns. Fundamentally, we believe these risks are temporary in nature, and do not impact our long-term strategy or opportunity. Inflation-driven cost increases, particularly labor costs, put pressure on our full-year EBITDA guidance. However, we are amplifying our cost management strategies to offset this impact and are maintaining our full-year EBITDA guidance based on our current expectations for performance in the second half of the year. We continue to execute on our transformation plan and remain focused on driving efficiencies in our business that will both improve our customer experience and help sustain operating margins as legacy services decline. The pace of these efforts has certainly been affected by the work required to prepare for the Stone Peak and Apollo transactions. But as we complete these transactions, we believe we have meaningful opportunities to continue driving automation, simplicity, and efficiency into our delivery model. Just as Lumen is seeking to drive automation, simplicity and efficiency in our business, our customers are also pursuing their own digital transformations. I want to spend a little time today discussing Lumen's enterprise segment and the unique capabilities we bring to support our customers in those efforts. As we all know, today's enterprise customers operate in a very dynamic data environment. Everything is now a connected device and enterprises generate enormous amounts of data from a seemingly endless number of sources. To innovate and to keep pace with their own market, enterprises need next generation data-intensive applications to quickly acquire, analyze, and to act on that data. All the while, there's never-growing threat landscape. Whether it's augmented reality, cloud-based gaming, artificial intelligence, or machine learning, the use cases driving today's enterprises are predicated on the availability of highly secure, large bandwidth connectivity and low latency to their data-intensive applications. These applications run in a hybrid compute and store environment where orchestrating centralized cloud, remote data center, edge cloud, and on-premises resources is increasingly important. The fiber-rich Lumen platform delivers on these needs by offering a massively scalable and resilient architecture that together with the service solutions we provide help customers as they continue to innovate and deploy the next generation applications today's markets demand. On the key point of latency, and I've mentioned this before, the Lumen platform can serve 97% of U.S. enterprises within five milliseconds of latency in an increasingly all-digital way with APIs and machine-to-machine interfaces. We believe this sub-five millisecond proximity of our compute and storage edge cloud provides enterprises alternatives to move workloads where they can be optimized for efficiency and cost. Let me give you a couple specific examples of how our capabilities are winning large retail enterprise and public sector contracts. On the enterprise side, we're helping global supermarket chains transition to store of the future models across thousands of U.S. locations. We are leveraging our extensive network assets, along with our network design and consulting expertise, to deliver these complex solutions, including private cloud, MPLS, SD-WAN, LTE backup, fixed wireless, and a host of security services with both on-site implementation and day-two management. Of course, this is just an example within one of the many enterprise verticals we serve. In public sector, we've announced several recent wins, including the U.S. Postal Service, the USDA, and the U.S. Customs and Border Protection Agency. These solutions encompass a wide range of products, such as edge computing, zero-trust networking, unified communications, hybrid VPN and SD-WAN, as well as managed network services as these agencies modernize their infrastructure and their capability to deliver services to U.S. citizens. While at the same time, they secure and protect critical data and infrastructure against destructive individual and state actors. Our strategic wins, together with broader market demand and the capabilities of the Lumen platform, give us confidence that we are well positioned in our enterprise segment. These larger customer wins, coupled with the improving mid-market sales, provide both near-term and long-term revenue opportunities as we drive toward growth. Moving to mass markets, we are excited to update you on our progress with quantum fiber, which is the critical growth engine for this segment. As I mentioned earlier, in just two quarters, we have doubled our pace of new quantum enablements with further acceleration coming. Our net promoter score remains above 50, demonstrating the quality of our products and the easy-to-use nature of our all-digital experience. You may have seen our exciting announcement this morning The texture we've developed and the network we are deploying enables multi-gigabit services. In select areas, we now offer a 3 gigabit per second, $150 per month solution, and an 8 gigabit per second, $300 per month solution. The vast majority of our new builds will have this capability. Beyond the superior speed, our quantum fiber experience provides symmetric service, which is critical for the future applications and use cases. We believe these products are industry leading and deliver an incredible value to our customers. And in fact, we've already begun taking orders. While it's early in the adoption phase of this type of capacity, we know where bandwidth demand is going and we've developed our architecture well ahead of the curve and are prepared for ever increasing demand for higher speeds and greater capacity. These multi gig offers will enable future consumer and small business use cases such as VR, AR gaming, work and learn from home, ultra high definition video streaming, and other high bandwidth services. The investments we are making in quantum fiber are building long life assets with the capacity to meet current demand and the ability to meet future demand for fast symmetrical capacity. Coupled with the all-digital experience and excellent customer experience we provide, we expect quantum fiber to deliver significant returns for our shareholders well into the future. We believe we have a very large and ripe opportunity to grow our mass markets broadband business through our quantum investment. And with very low market share currently in our copper footprint, we have the ability to grow our embedded base of broadband customers by taking market share. We expect to accelerate taking share as we ramp our enablements and deploy best-in-class add-on capabilities such as network security, Wi-Fi, and the multi-gig offerings we announced today. We believe profitable revenue growth is a principal long-term driver of shareholder returns, and we continue putting the right assets to work to drive toward that goal. Our new business reporting categories provide clearer line of sight into our efforts to drive revenue growth, enhance profitability, and generate sustainable free cash flow. As we invest the capital required to execute on our growth plans, we are also returning cash to shareholders through our dividend while remaining committed to a healthy balance sheet. With that, I'll turn the call over to Chris to discuss our second quarter results in more detail. Chris?