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spk05: Greetings and welcome to the Lumen Technologies fourth 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 have a question, please press the one followed by the four on your telephone. If at any time during the conference you need to reach an operator, please press star zero. As a reminder, this conference is being recorded Tuesday, February 7th, 2023. I would now like to turn the conference over to Mike McCormack, Senior Vice President, Investor Relations. Please go ahead.
spk08: Thank you and good afternoon, everyone. And thank you for joining us for the Lumen Technologies fourth quarter 2022 earnings call. Joining me 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 two of our fourth 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 SEC filings. We will be referring to certain non-GAAP financial measures reconciled to the most comparable GAAP measures that can be found on 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 Kate.
spk04: Thanks, Mike. Good afternoon, everyone, and thanks for joining us today. In a few minutes, Chris will cover our fourth quarter results and discuss 2023 outlook measures. Let me begin by saying how excited I am to be here at Lumen during such a pivotal time in our company's history. I have a passion for leading businesses through the challenging world of digital transformation. It's what I've been doing for a few decades, and it's where I feel most comfortable. And while it's only been three months since I joined Lumen, I already feel at home. I've had the opportunity to get to know many of our employees, customers, and partners, and I've spent time understanding our business processes, our proprietary gifts, and our go-to-market capabilities. I can tell you that I see a very significant opportunity for Lumen and its stakeholders. Now, that said, there's hard work ahead for our team as we make significant changes to how we serve our customers and how we execute for better financial results. 2023 will be a year of rapid change for Lumen as we execute on our plans and pivot towards growth. As with any successful transformation, it's essential to get the right talent, and I am delighted to report the addition of three seasoned technology executives to the Lumen team. Sean Chotai has been appointed Executive Vice President of Product and Technology running our newly integrated product development and IT organizations. Ashley Haynes Gaspar has been appointed Lumen's Executive Vice President and Customer Experience Officer, running our marketing functions as well as customer success. And Jay Barrows has been appointed Executive Vice President of Enterprise and Public Sector Sales. With the addition of these three executives to the team, we infuse deep digital transformation leadership, product development and innovation muscle, marketing and customer lifecycle thought leadership, and enterprise selling expertise, all essential components of our transformation. Now with the team in place, we're ready to execute our plan. Clarity is an existential priority for any company seeking to transform. As such, over the past three months, we've spent considerable time with employees, customers, and partners drafting and rolling out a crystal clear strategic plan what we're calling inside the company the Lumen North Star. In short, our North Star defines who we are, who we serve, our proprietary gifts that yield a competitive advantage, our targeted success metrics, and of course, our aspirational culture. This important plan provides clarity to the Lumen team and our stakeholders on our path to growth. It starts with our mission to digitally connect people, data, and applications quickly, securely, and effortlessly. The first part, connecting people, data, and apps, that's our core DNA and positions our world-class network as the crown jewel of our portfolio. The three words at the end of that mission statement, quickly, securely, and effortlessly, that's really what our customers are demanding as we solve their core problems, such as delivering cost-effective operations securing their data and apps, innovating for their customers, and helping their employees thrive. It's where we have the most amount of work to do, and it's the underpinning of our investment and operating plans. A big part of our North Star plan is a detailed economic model that provides some sensitivity analysis around our grow, nurture, and harvest revenue categories. This work has informed our plans to disrupt negative growth trends in our legacy businesses and bolstered our intention to innovate for growth as a result of this work we've established five core priorities for lumen. Our first priority is to develop company wide customer obsession lumen is the product of many mergers and, as such. We've been forced to drive operational efficiency to ensure we achieve the synergies and the value intended from combining these entities. Now, that takes a fair amount of looking inward, and we've built thick muscle memory doing this. Our path to growth lies in solving customer problems and helping them deliver on their desired business outcomes, and that requires looking outward first. Reorienting our people to focus on understanding customer problems and shaping our core intellectual property in connectivity, security, and edge cloud to solve those problems will be a material mindset shift. As with any mindset shift, this will take time and practice. It will require deep skills building, a significant part of our culture development priority, which I'll talk about shortly. But more than just a mindset shift, delivering on our desire to become a customer-obsessed company requires innovating and investing for growth, our second core priority. As such, we are reshaping our organizational structure by combining our product development teams with our IT teams for greater speed and agility. We're centralizing marketing for tighter alignment to the customer lifecycle, and we're installing what we call a growth operating system to build the muscle inside of Lumen that enables us to innovate new products that delight customers and drive shareholder returns. Our innovation focus will be to create and monetize capabilities that enhance the value and commercial potential of our work. Now, I think it's worth spending a minute on this concept of growth operating system. Lumen's been focused on driving operational efficiency, as I said, in our scaled businesses. But to grow, we need to become great at innovating and establishing new to big businesses. We want our teams to act like entrepreneurs, collaborating with our customers and the Lumen teams to solve problems that our customers experience. And at the same time, much like in the VC world, we will foster this innovation in an environment with important guardrails, including a growth board, executive sponsorship, and co-founder teams to ensure we're pursuing and maximizing the value of high potential projects. This means performing extensive testing with our customer base, bailing fast on many concepts, but recognizing the high potential of others and quickly allocating capital accordingly to maximize growth. This is a critical motion as we pivot to an outside-in mindset. And while I just shared our intention to develop net new capabilities that enhance the value of our network, I also want to emphasize that we will continue to invest in our world-class network. We just won't stop innovating here, and we'll continue to invest in our fiber infrastructure to meet the demands of our sophisticated customer base who are dealing with complex business problems, coupled with a workforce that now demands remote work flexibility in the post-pandemic world. We recently announced our major network expansion plan to drive 6 million additional intercity fiber miles to our already expansive network by 2026. As we execute and pivot towards growth, our third core priority will be to ensure we have the complete go-to-market capability in place to enable us to compete in today's technology market. We believe Lumen will benefit significantly from incremental investment in our marketing and field-facing teams to properly cover the market and capitalize on near-term opportunities in growing spaces like security and edge cloud. We will therefore inject OPEX and CAPEX to ensure that Lumen can serve two distinct groups requiring unique approaches. The first group includes large customers in the public sector, large enterprise, and upper mid-market channels. These organizations offer or require extensive, intricate, and customized solutions. And to serve this group, we aim to offer scalable solutions with a higher level of personal engagement and a robust set of managed service offerings. The second group includes customers in the consumer SMB and lower mid-market channels. This group tends to prefer a less hands-on approach and often utilizes self-service options. To serve this group, we'll offer a simplified product selection with a user-friendly digital platform for easy ordering and seamless interactions. Our goal is to remove any obstacles for them by offering straightforward solutions that can easily be accessed and managed securely and digitally. To support our first three priorities of developing customer obsession, innovating and investing for growth, and building a reliable execution engine, we're going to lean heavily into the fourth to radically simplify our company. Simplification will come in two major forms. First, we'll focus on doing fewer things better. That means shutting down subscale or non-accretive businesses, which includes no longer selling products or services that don't directly enhance our value to customers or benefit Lumen and its shareholders. We will ensure all resources are aligned to promote the programs and projects that support our mission to digitally connect people, data, and apps quickly, securely, and effortlessly. The second form of simplification will come as we build the digital enterprise, consolidating systems and modernizing our IT infrastructure to support effortless employee and customer digital experiences. These two forms of simplification will help us optimize for cost and growth simultaneously. Our fifth and extremely important core priority at Lumen will be to further develop our culture. We know that the cultural common denominators of companies that successfully transform in the digital era include Clarity, customer obsession, courage, and a growth mindset. At Lumen, straight from the top, we're committing to clarity in everything we do. And I hope my comments today have reflected that commitment. The remaining common denominators won't come in the form of an edict or a mandate. We will invest in and train our employees to develop the skills required to change. That wraps up the high-level summary of how we plan to transform Lumen to pivot to growth. We need to do a lot of things, some basic and some quite complex, to position ourselves to take advantage of the opportunity that lies before us. We will continue to move with great speed, but also very thoughtfully and collaboratively, leveraging our customer and partner relationships to guide us. The team is coming together with formidable energy, and I'm really looking forward to sharing more of our story with you as the year progresses. Before we move on to our discussion of results and the 2023 outlook, It's important that I talk about a couple of items as we enter 2023. First, on EBITDA and CapEx, we're leaning into our growth and optimization priorities, and Chris will provide financial details of these initiatives shortly. We believe these investments are critical to position Lumen for strong execution and scalable, sustainable growth, and we expect revenue and EBITDA stability in less than two years. Second, let's talk about our quantum pacing. As we said previously, we hit the pause button during the fourth quarter. Now, to be frank, it was more of a stop button than a pause button, which impacted our quantum metrics for the quarter. That said, the evaluation we undertook was absolutely critical to position quantum for long-term success. By focusing on all metrics and not just the location enablement goal, we've established a higher IRR more predictable long-term outcome for this exciting project. A natural outcome of our assessment of quantum is a more focused build target where we're able to achieve proper returns for shareholders. We believe the overall quantum enablement opportunity is 8 to 10 million locations. The engine is revving back up and we're aggressively working to ramp our build activities in 2023. And to that end, We made an important change during the fourth quarter to separate our operational activities like planning, engineering, and all field operations between mass markets and business. Maxine Moreau, our president of mass markets, now has top-to-bottom operational and P&L responsibilities. This is a significant change internally that I expect will improve our quantum deployment pacing, but it will take time to reach scale. My expectation is that later this year, you'll see significant improvement in our execution on enablements. And with that, I will turn the call over to Chris to discuss our fourth quarter results. Chris?
spk01: Thank you, Kate, and good afternoon, everyone. To start, I hope you had a chance to review the 8K we filed on January 27th, which provides modified financial information back to first quarter of 21, removing the impact of the ILEC and LATAM businesses, as well as the impact of the CAF II programs. The AK also outlined the new business sales channel reporting structure for 2023 reporting, which collapsed IGAM into large enterprise and pulled public sector out of large enterprise. This provides better alignment with how we manage these channels internally and should provide for more clarity when modeling our company. Let me move on to discuss some macro thoughts. Later in my remarks, I will address our outlook for full year 2023, but near term, we continue to face macro headwinds. Supply chains remain strained, with labor as the key headwind, and we are all facing the impacts of inflation. In addition, we are actively working to offset disenergies resulting from the divestiture of our 20-state ILAC business, as well as our LATAM business. But those headwinds are likely to persist through this year. Despite these near-term pressures, this is an exciting time for Lumen and our team. Kate has energized our company, and we are positioning Lumen to win. This will require internal systems and process investments to solidify our platform, pivot to a position of playing offense, and enable us to grow. I will discuss the impact of these investments later in my remarks. With that, I will move to the financial summary of our fourth quarter results. I will be referencing results on a modified basis, which aligns with the 8K disclosures mentioned earlier and removes the impact of the divested businesses that closed during 2022, as well as the impact of the CAF2 program. Overall business revenue declined approximately 4.2% year-over-year and 0.3% sequentially on a constant currency basis and after adjusting for the sale of our correctional facilities business in the prior year period. Mass markets revenue declined 7.6% year-over-year and 2.8% sequentially. We reported adjusted EBITDA of $1.393 billion in the fourth quarter and generated a 36.7% margin. Our free cash flow was $126 million in the fourth quarter. After paying all taxes owed on the 2022 business divestitures, we reduced estimated net debt by approximately $10 billion during 2022. And during the quarter, we repurchased 33 million shares of common stock for $200 million. Moving to a more detailed look at revenue, I will be referencing all revenue growth metrics on a modified adjusted basis where applicable to remove the impacts of foreign exchange and the correctional facilities business sale in the fourth quarter of 2021. On that basis, our fourth quarter total revenue declined 5% year over year to $3.8 billion. This is the last quarter for which year over year comparisons are impacted by the sale of the correctional facilities business. The benefit related to the correctional facilities business was about $3 million in the fourth quarter of 21, while the impact of FX year over year was a headwind of approximately $20 million. Within our two key segments, business revenue declined 4.2% year over year to $3.005 billion, and mass markets revenue declined 7.6% year over year to $795 million. Within our enterprise channels, which is our business segment excluding wholesale, revenue declined 5.9% year over year, Our exposure to legacy voice revenue continues to improve within enterprise channels, dropping 141 basis points year over year, and now represents less than 12% of enterprise channel revenue. Large enterprise revenue declined 2.5% year over year. As I previously noted in the new reporting we will be providing starting this quarter, we've collapsed IGAM and large enterprise into the large enterprise channel and have moved public sector to its own channel. Now representing our largest enterprise channel, large enterprise had improved revenue trends both year over year and sequentially and was our strongest performing enterprise channel. Public sector revenue declined 13.8%. We've had significant wins in this channel, and we expect to see improving trends as the year progresses. We also had a contract in this channel expire last quarter, which is impacting the year over year comparisons by 176 basis points. On a sequential basis, public sector revenue declined 0.9%. Mid-market revenue declined 6.6% year-over-year, with VPN and voice the most significant headwinds. Wholesale revenue grew 0.5% year-over-year. This is a channel that will likely decline over time and one we manage for cash. As I move to our business product lifecycle reporting, I will be referencing percentage changes on the same modified adjusted basis I referenced earlier. As Kate mentioned, our North Star plan incorporates a detailed economic model with plans to disrupt legacy declines and help us innovate for growth. Grow products revenue grew 2.5% year-over-year in the fourth quarter. We saw strength in Waze, security services, and unified communications. Grow now represents over 36% of our business segment, up from 34% in the prior year period, and carried an approximate 84% direct margin this quarter. For added color, Grow products represented the majority of our enterprise sales in the fourth quarter, which will continue to improve our mix of revenue going forward. I would note that Grow revenue was negatively impacted by approximately 100 basis points related to a public sector contract that expired. This will continue to impact our Grow comparisons through the first half of 23. A key focus going forward will be to accelerate the growth of the Grow portfolio. This will take some time, but we believe we have real opportunity here with our outside-in focus that Kate mentioned earlier. Nurture products revenue declined 7.5% year-over-year in the fourth quarter. The decline was driven by VPN and Ethernet, and Nurture now represents about 31% of our business segment and carried an approximate 68% direct margin this quarter. We are making good progress on our Nurture strategy and our efforts to migrate this revenue back into grow products. Harvest products revenue declined 8.3% year-over-year in the fourth quarter. Our Harvest team continues to work hard to manage to a lower rate of decline within this product set, which is helping to extend the life of these products. In addition, as with our nurture products, we are managing customers back to grow and nurture products. Harvest now represents approximately 26% of our business segment and carried an approximate 76% direct margin this quarter. Other products revenue declined 6.4% year-over-year in the fourth quarter. Our other product revenue tends to experience fluctuations due to the largely non-recurring nature of these products. Moving on to mass markets, as I mentioned earlier, total mass markets revenue declined 7.6% year-over-year and 2.8% sequentially. Our mass markets fiber broadband revenue grew by over 18% year over year, and in the fourth quarter represented approximately 19% of mass markets revenue. Our exposure to legacy voice and other services revenue has improved by 320 basis points year over year. As Kate discussed, we have made significant changes in how we are approaching the quantum fiber opportunity. This was a thoughtful evaluation that will result in a significant improvement in long-term shareholder value. That said, our location and subscriber results were impacted by the pause we had in place through our evaluation. This change in strategy will continue to impact quantum metrics until we get to scale with our new plan, which we expect to occur late this year. During the quarter, total enablements were approximately 97,000, bringing the total enabled locations to over 3.1 million as of December 31st. During the quarter, we added 19,000 quantum fiber customers, and this brings our quantum fiber subscribers to 832,000. Fiber ARPU was stable sequentially at approximately $60, but we've seen accelerating year-over-year growth each quarter during 2022. As of December 31st, our penetration of legacy copper broadband footprint was less than 12%. Quantum fiber penetration stood at approximately 26%. Our quantum fiber 2020 vintage penetration was approximately 29% at the 24 month mark and is now over 30%. Our 2021 vintage was at approximately 17% at the 12 month mark. Our quantum fiber NPS score was greater than positive 50 again this quarter, an indication of the quality value and superior service that quantum fiber delivers. As Kate mentioned, We have recalibrated our addressable footprint to ensure we are generating healthy returns for our shareholders. Based on that recalibration, we are targeting 8 to 10 million locations for the overall build, or roughly 5 to 7 million incremental locations over the next few years. We continue to monitor how the economic environment is impacting our customers, and we have not observed any discernible changes in customer payment patterns. Turning to adjusted EBITDA, for the fourth quarter of 2022, adjusted EBITDA was $1.393 billion, compared to $1.496 billion in the year-ago quarter. As I mentioned earlier, we are seeing cost pressures from inflation in addition to our OPEX investments to drive growth. Special items this quarter totaled $583 million, related primarily to a non-cash loss reported upon the designation of our EMEA business as held for sale and transaction and separation costs partially offset by a gain on the sale of our ILEC 20-state business. Our fourth quarter 2022 EBITDA margin was 36.7%, down slightly from 37.2% in the year-ago period. Capital expenditures for the fourth quarter of 2022 were $833 million. Additionally, in the fourth quarter of 2022, the company generated free cash flow of $126 million. Our reported net debt was $19.5 billion as of December 31st, 2022, and our expected estimated net debt stands at $20.4 billion. Our expected estimated net debt reflects our utilizing cash on hand to settle the tax obligations related to the divestitures we closed in 2022, which totals $900 million to $1 billion. We anticipate paying these taxes during the first half of 2023. Given the investments that Kate identified, we anticipate leverage to rise to between 4 to 4.3 times in the near term. We expect leverage to peak as we approach year-end 2023 and decline thereafter. For the full year 2023, we expect adjusted EBITDA to be in the range of $4.6 to $4.8 billion. When bridging to our full-year adjusted EBITDA guidance, in addition to the CAF II completion and divested business EBITDA, there are a few other drivers to keep in mind. We estimate that our full-year EBITDA will be impacted by approximately $100 million related to incremental inflationary pressures. Combined with dis-synergies, we expect a headwind of between $200 to $250 million this year. We're actively working to mitigate the impact of these dis-synergies. As Kate discussed, over the next couple of years, we will be aggressively investing both OPEX and CAPEX to position ourselves for long-term sustained success. The focus of these investments will be to enable growth, improve customer experience, and simplify how we operate. These investments will include a number of items, such as digitization, ERP, network as a service, and IT simplification. These growth and optimization investments outlined in our EBITDA guidance waterfall chart are expected to total $150 to $200 million. Importantly, we expect our revenue and EBITDA to stabilize as we exit 2024 with growth thereafter. Moving to capital spending, for the full year 2023, we expect total capital expenditures in the range of $2.9 billion to $3.1 billion. Growth and optimization investments totaling $250 to $350 million are included in this guidance. Additionally, we expect to enable an incremental 500,000 quantum locations in 2023 as we emerge from our project re-evaluation. We anticipate a cost per enablement of $1,200 in 2023. Lastly, our capital expenditure guidance includes $35 to $65 million related to rebuilding efforts in the wake of Hurricane Ian last fall. Moving on to free cash flow, we expect to generate free cash flow in the range of $0 to $200 million for the full year 2023. In total, our 2023 free cash flow will be impacted by $435 to $615 million related to our growth and optimization investments, as well as the impact of Hurricane Ian recovery efforts. We do not have any required or planned discretionary pension fund contributions in 2023. Additionally, the cash taxes due on the 2022 sale of the ILAC and LATAM businesses are being paid out of the cash proceeds from those deals and are excluded from our free cash flow guidance. As a reminder, our first quarter typically has seasonally higher expenses related to timing of bonus payments and other prepaid expenses. We expect net cash interest expense in the range of $1.1 to $1.2 billion for 2023. In terms of special items for 2023, we expect a significant ramp up in costs compared to prior years, primarily driven by dedicated third party costs to support transition services for the divestitures. The reimbursement for these services will be an other income with no material net impact to our cash flows. In closing, we are positioning Lumen for growth. We're making tangible progress internally and we're investing in ourselves over the next two years to deliver on our longer term goals. We look forward to sharing our progress with you as we execute on our plans and we'll provide more detail around those plans and expected financial performance at our Investor Day in New York City on the afternoon of Monday, June 5th. So please save that date. More details will follow in the coming months. With that, we are ready for your questions.
spk05: Thank you. If you would like to register a question, please press the one followed by the four on your telephone. you will hear a three-tone prompt to acknowledge your request if your question has been answered and you would like to withdraw your registration please press the one followed by the three and our first question is from the line of simon flannery with morgan stanley please go ahead great thank you very much um kate thanks for all of the uh the positioning of the company and the opportunities
spk00: Help us understand the path to revenue and EBITDA stability. I know we've got the analyst day coming up, but what sort of milestones should we be looking for during 2023 to suggest that things are improving? Do you think there'll be an inflection in the rate of revenue decline, rate of EBITDA decline? How do we get comfortable that you are on this path to turn this around within a couple of years? And then on the fiber side of things, could you just talk a little bit about how the BEAD program fits into your expectations, given your kind of sort of less aggressive posture towards quantum? Is BEAD something that's interesting to you at this moment? Thanks.
spk04: Sure. Thanks, Simon. So first and foremost, 2023 is a reset year. So we talked about new leadership. We talked about a new mission. We talked about new priorities. And it's going to take us some time to get rolling. I think we bring a couple of things to the story that we haven't done before. The first is injecting energy into the growth engine in the form of marketing, in the form of disciplined sales approach at the high end of the market, really an execution focus and mindset with some of the new leaders that I'm bringing in. So I'm excited about that, and I think that we'll get some early traction in the form of things like funnel and pipeline. I think that this story of two-year stabilization is really, you know, as we go into 24, we're going to have sort of the green shoots to show you more explicitly. With respect to your question about BEAD, you know, our projection this year is, our projection for about 8 to 12 million enablements in total doesn't include any BEAD funding. And BEAD is super early. The funds haven't started flowing yet, so we really don't know how that story is going to pan out. But it does represent a potential upside to our story.
spk00: Great. Thanks a lot.
spk05: And our next question is from the line of Philip Cusick from JP Morgan. Please go ahead.
spk12: Hi, thank you. Following up first on the enterprise space, the 150 to 200 million in investment Can you just dig more into that and how much of that is sort of one time in terms of new ERP investment versus ongoing costs? And how should we think about the potential for revenue and EBITDA growth in business over a long period of time? If we go back to the underlying market, is this a growing market or is it a shrinking market that you need to take share in? Thanks very much.
spk04: So great question. Our pivot is about moving from a place of playing defense to offense. I talked about changing mindset to really obsess about customers. That's about finding new problems and addressing them with both our existing capabilities as well as building a capability to address those problems with net new capabilities, either build, buy, or partnering. And if you think about it, Customers are dealing with these giant problems. It's the usual stuff. Cost-effective core operations. How do I get my employees to thrive? How do I secure my data and applications? How do I drive business process improvement? How do I innovate for my customers? But they're doing all of that in the hybrid world, which basically, hybrid meaning working from home or working from the locations that have been in place for years. As all of that changes, the complexity of their networking solution needs is changing as well, and that represents a huge opportunity for us. But I think we all know that we really need to sort of glide up the stack a bit and really lean into both security and edge in order to drive net new growth on top of that core networking solution set that we have. Chris, do you want to add anything to that?
spk01: Yeah. So, hey, Phil. In terms of what the spending is focused on, we talked about it a bit, but we've got to digitize more of what we do end-to-end so that that customer experience is more seamless and self-serve wherever possible. We've got to continue to simplify and really stop doing some things, automate some things, which will allow us to get into the synergies, but makes us easier to do business with. And the ERP is one piece of that. And then beyond that, we've obviously got to invest in things that are going to drive growth, things that would allow us to enable network as a service, for example. So really understanding where the network is so that customers can quickly access it and deploy from there. So that's what's in there, but none of those things will be complete this year. I referenced in my comments that this is probably a two-year journey in terms of spend. As it relates to why we think we can get to revenue and EBITDA stabilization by the end of next year, I want to be really clear. That's based off of the things we have today. So when Kate talked about growth OS, that's extra. That's kind of supercharging the growth down the road. But with what we have today, I think we can very accurately say that from a product and sales standpoint, We were not executing as cleanly as we could have. And there's renewed focus. There's a lot more rigor behind the connectivity between product and our selling efforts. And frankly, there's some low hanging fruit that we can go after. So I'm not going to sit here and tell you that it's fixed by second half of this year. That's why we said by the end of next year. But, uh, I can tell you that, uh, the reason we said that is, uh, we've got line of sight given what we have in house today.
spk12: If I can follow up and forgive me this, this, I don't mean to sound disrespectful at all, but we we've heard from Lumen and the predecessor companies for 12 years about the new changes in plans and how things are going to turn around. And I know you have an analyst day coming up in June and you've only really as a team been together for a little while. Is there anything that's sort of dramatically changing under the hood that can start to give us some faith that this business is really turning as opposed to what feels like another iteration of things that we've heard before?
spk04: Yeah. So I'm here now. And I'm excited to be here now because there's a huge opportunity. And one of the things that I'm bringing to the table is this maniacal focus on execution. And I think that that's a really important shift. I think when you think about the pivot to growth, you need to think about Lumen as a collection of companies that was trying to drive synergy from a bunch of mergers and was inwardly focused on driving operational efficiency. Every dollar of revenue looked good, you know, because as a potential contributor to EBITDA, and every dollar of cost takeout looked good. But there was no anchoring North Star. There was no customer obsession. There was no really focusing on how do we innovate for growth. And we hadn't, you know, been in a position to invest in our go-to-market engine, everything from marketing, you know, to sales and sales support and customer success. And now we are. The capital allocation priorities that we set for the company now enable all of that. And the leaders that I'm bringing in from technology combined with the leaders that are already here at Lumen that really know this business, the combination is going to be incredibly powerful. It's a really exciting time.
spk12: That's helpful. Thank you.
spk09: Thanks, Bill. Next question, please.
spk05: And our next question is from the line of David Barden with Bank of America. Please go ahead.
spk10: Hey, guys. Thank you so much for taking the questions. And Kate, congrats on the new job and welcome to the mosh pit. So I guess I got a few if I could. I guess, Chris, you've been talking about disrupting legacy declines. If you could be more specific about what that really means. And then, Kate, you talked about a priority being radically simplifying. Does that mean that there's more strategic stuff to come, um, in terms of, you know, the, the, the asset base that we're looking at inside Luma today. And I, if I could ask a third and I apologize, um, uh, Chris, with respect to the stock buyback of 200 million in the fourth quarter, um, could you walk us through kind of whose idea that was and, and how you landed on that being the right choice for allocating capital? Thank you.
spk01: Yeah, sure. So, um, The first question really on kind of how we can disrupt the growth trajectory of legacy products. Look, the historical motion I think broadly in telecom is sell things until they die. And hopefully that new thing, you know, you can sell more of that. What is absent from that is a customer lifetime value mindset. And there's this fear of cannibalization. And, you know, I want to be really loud and saying cannibalization is good. Because if you can keep that customer for longer, and you can manage that migration, you're going to be much better off. So what we're talking about is aggressively managing end of life products, moving customers up the stack. So think about legacy voice, right? Think about things like customers who are nearing the end of a VPN contract who don't want to renew, but there's There's IP in waves out there and we can wrap security around it. So more proactively addressing those those migrations. And that's something that hasn't been a key focus. And I think that's some of the low hanging fruit I talked about as it relates to the buyback. Look, it was a big change. And, you know, you and I have had conversations about it. We've had conversations with your peers about it and other investors. It was a tough decision. But it was guided by the fact that the way we solidify Lumen's performance for all of our stakeholders going forward is by getting back to growth. And so cutting the dividend did that. In the near term, we knew that there were index funds and other investors who relied on that dividend to have an ownership position in Lumen. And so we bought back stock around the times that those index funds were rebalancing. to support the stock through those big shifts. And so that was the thinking in terms of how we managed that in the fourth quarter.
spk04: And David, did you want to, you asked a question about simplification. Could you repeat it? I didn't hear some of it.
spk10: Yeah, Kate, the question was, you know, within the confines of the, I think the fourth priority, like radical simplification of the business, I think, you know, the streamlining of processes and that sort of thing, I think is kind of one side of the interpretation what that might look like another side might be you know further astid divestitures um you know other kinds of strategic types of things uh and stones that have not been turned over to date thanks yeah i mean the the two sort of pieces of it as i discussed was going to be understanding how we could do fewer things better i think is what i said and with this
spk04: This mindset around simplification of our product portfolio, we've had a proliferation of SKUs. And when you think about the proliferation of IT systems through all the mergers to support those SKUs, both sides of the equation, simplification of what we sell as well as how we sell it, that's the winning formula. So that was the intention of our remarks. Regarding the overall strategy, I think if you keep coming back to our mission statement to digitally connect people, data, and applications quickly, securely, and effortlessly, anything that we do will strategically map directly to that statement.
spk10: Great. I understand. Thank you so much.
spk09: Thanks, David. Next question, please.
spk05: Our next question is from the line of Greg Williams with Cohen & Co. Please go ahead.
spk07: Great. Thanks for taking my questions and echoing the congrats, Kate. My first question is just on what are the larger puts and takes on the range, $200 million range of your guidance that determines the low end and the high end? And then second question is just on the reduction of your quantum fiber forecast. I believe I heard it's down to 500,000 enablement. What's your comfort level on the fears of third-party overbuilders coming in as you're not building? Is that sort of contemplated in the fact that you've Now reduced your overall, you know, build from 12 million down to eight to 10 million. And those third-party overbuilders is just coming over building in that territory. Thanks.
spk01: Hey, Greg, it's Chris. Um, you know, in terms of the guidance range, you know, I would say that the pieces that I, uh, Spend more time being concerned about are the things, frankly, that are beyond our control. Um, things like the inflationary environment and just the broader macro. So I'd say that's probably the biggest piece of the variability. I can tell you that the guidance is mapped directly back to things like sales quotas and the way we pay people for performance has changed as well. So all of that is designed to drive us to where that guidance is. But it's really around the things beyond our control that move us to between the high and the low. Mike SanClements, As it relates to the quantum piece, I mean I think your points a valid one and that's obviously. Mike SanClements, I think, a risk but and, frankly, I think you can even see it in some of the penetration numbers from 2021. Mike SanClements, I was very concerned about putting fiber in the ground, for the sake of putting fiber in the ground right, we need to make sure that we remain focused on those large metros that we've talked about and that we stop being so focused on a cost per enablement. and on a number of enablements and more around making sure that in those markets that we're serving that customers are going to want our product. And so I think even though this is a little bit painful in the near term, we're seeing really good performance on our planning yield, meaning when we plan a market Mike SanClements, And it goes to engineering and then it comes out of engineering that we've been able to accurately estimate the cost so that we can proceed to construction, rather than having to go back to Mike SanClements, You know, planning all over again. So we're seeing some really good activities internally, but I would much rather have this conversation today than one five years from now, where we hit $1,000 and we hit the 10 million enablements and then you guys are asking me where the annuity stream is on all that fiber. Greg Rutledge, And my own opinion, our opinion is that I think you're going to see that from some of the over builders in markets that are that are building for the sake of building rather than really you know, having a returns mindset around it.
spk09: Greg Rutledge, got it Thank you. Thanks next question, please.
spk05: And our next question is from the line of but yeah levy from ubs please go ahead.
spk06: Great, thank you. It looks like you're expecting another 10% decline in organic EBITDA this year, aside from the impact from the synergies and inflation and higher investment for growth. Can you provide a little bit more color on the drivers for that organic decline? Does that assume maybe worsening top-line trends as we go through the transition, or is it more of a mixed shift where growth is coming from lower-margin services? Thank you.
spk01: Yeah, it's Chris. I think the key thing is, you know, we do have that grow bucket, which is now the largest bucket. It's not growing enough. Okay. And that's really where the focus is. So the reason you see in total organic declines is that we have, you know, harvest and nurture buckets that are declining at high single digit rates. Margin is really not a concern as we move into the grow bucket. We've disclosed that in the presentation. But when you look at our direct margins, it's actually beneficial to us when we move into the grow products. So it's really about managing that migration because we still have roughly two thirds of the business that's declining at very high rates. And how do we supercharge the growth bucket? So the starting, you know, the performance itself isn't where we want it to be, but the starting point is actually pretty strong. We've got a good base there. So I'd say that's one thing. The second thing is obviously we're in a tough macro environment. where everybody's being very thoughtful about the money they spend. So if you think about us doing a reset, we're doing it in a tough environment. So I think both those things combined are really what's driving that.
spk06: Maybe just a quick follow-up. How should we think about the pacing of that EBITDA decline through the year? Is first half the trough because you have the synergies, or is that going to be offset as you ramp up investment for growth?
spk01: look, I don't want to get too scientific around that because we obviously have a lot of variability, for example, in our OpEx quarter to quarter, you know, we have higher OpEx in the summer when it's hotter and we're doing more construction. So there's a lot of moving pieces in there. I would say the most important thing is that revenue number. And I think over time, uh, we would, we would like to be able to show you guys that the decline rate is slowing. And I think that's going to be the first leading indicator that we're on our way to growth. And so I don't want to predict when in the year you start to see that. Again, it's a two-year journey until we get to stabilization. But I'd watch that over time, and I think that's the best way to measure our success.
spk06: Okay. Thank you.
spk09: Thanks, Daja. Next question, please.
spk05: Our next question is from the line of Michael Rollins with Citi. Please go ahead.
spk13: Thanks, good afternoon. I'm curious if you could share a little bit more detail in terms of what's happening currently in the sales cycle in the pipeline. And are you entering 2023 with a better backlog, just given some of the announcements that you've had over the past number of months, you know, particularly in the public sector? And then just one other question on the bridge regarding dis-synergies. Are those dis-synergies isolated to the divestitures? Or do those synergies encapsulate the decision to separate the operations of mass markets from the business segment? Thanks.
spk04: Hey, Mike, this is Kate. So to address your question about what's happening in the enterprise business, the first thing is from a public sector perspective, you're absolutely right. We have a healthy backlog and we're excited about seeing a lot of that convert this year. Our pipeline continues to be steady and strong. And regarding enterprise decision making, I think with the macroeconomic environment, we all see sort of more approvals required for purchases of technology. I think that plays right into the pivot that we're making where we need to be great at pitching our value story and how we can help customers address their most existential problems and help them get through those buying cycles.
spk01: Chris. Yeah. And the, the, the synergies are really around the divestitures. It has nothing to do with, with ops. So, uh, you know, obviously there's, there's corporate overhead that doesn't go away when you sell off big chunks of EBITDA, but there's other efficiencies we can get to internally, uh, if we can automate some more things, uh, going forward. And that's really where the focus is there on the dis synergies. Now I will say that, that as we were talking about the synergies, last year, we actually thought they'd be a little bit higher than where we're calling it for this year, and that's because we've got some other cost savings initiatives going on internally that we think can start to eat away at that. So that's good.
spk13: And one other follow-up. On the net debt leverage, you mentioned it could be 4 to 4.3. Is that the peak through this whole cycle of getting back towards your goal of EBITDA growth, or is Is there the potential for leverage to go even higher before it goes lower?
spk01: Yeah, that is our estimated peak. And quite frankly, that excludes any assumption on the EMEA deal closing, because right now we're assuming that doesn't happen until early next year. So when that closes, obviously those, you know, given where leverage is, we said that we would, from a capital allocation standpoint, focus on growth and then manage leverage and buybacks dynamically. Obviously, with an exit leverage ratio that high, those proceeds would be focused on debt reduction, and that would bring us back down. But operationally, yes, we would expect that that leverage is peak as we exit this year because we're doing, obviously, the spending that doesn't give us all the benefits from that spending until we go forward and then some continued spending next year. But I would not expect it would go above that.
spk09: Thanks. Thanks, Mike. Next question, please.
spk05: And our next question is from the line of Frank Lawson with Raymond James. Please go ahead with your question.
spk03: Great. Thank you. How long do you think it'll take to integrate the IT systems from the past mergers? And will you be integrating or changing any billing systems? That's my first question. The second question When you talk about getting rid of some of the businesses that you mentioned and don't really support the growth, how long will that take given that some of these may still have longer-term contractual obligations or regulatory obligations that may be harder to just eliminate? If you can give us some color on that, that would be great.
spk04: Neither one of these things are overnight stories. With respect to simplifying the IT infrastructure, It's complex. We have a lens towards customer satisfaction, customer experience, and that's driving our prioritization and how we actually do the planning, as well as what's the level of difficulty and how much can we do that will impact things in the short, medium, and long term. So we're right at the planning stages of building the framework to be able to give you more clarity. The second piece of that was, what was the question? Around products.
spk01: and sale of products?
spk04: Oh, the simplified, doing less and doing it better is the focus, obviously. When we talk about businesses that don't accrete to the North Star, whenever we have customers, whenever we have revenue, whenever we have EBITDA, we have to be very thoughtful and use a product lifecycle framework to evaluate how to move these customers to modern technologies, and how to create a great customer experience in doing so where they can get the benefit of more of our capabilities and maybe some of our partners as well. And that framework is something that is new to our teams in terms of taking a disciplined approach to simplifying and narrowing what we do every day. So we're right in the early throes of doing that. We're not going to be turning anything on or off overnight without careful consideration.
spk01: Mike SanClements, Yeah. And Frank, I would only just add one quick thing there because I know you've been at this is game a lot longer than cater I have and that there's been a lot of disaster scenarios with with billing system. So I want to address that head on. Mike SanClements, Part of what we're doing is really determining where we want the endpoint to be because, quite frankly, Mike SanClements, There in some cases, there's going to be no business case for integrating old billing systems if the products. that are supported by those billing systems are maturing out from a product lifecycle standpoint. So in the near term, it's really about simplifying what the customer sees, which may not deal with the front end, and then where we can deal with the front end in a seamless way, we will, or we'll just migrate to the new thing as we build going forward. So it's complicated, as you well know, but we're not blindly running into a billing replacement program. Okay, great.
spk03: Thank you very much.
spk09: Thanks, Greg. Next question.
spk05: And our next question is from the line of Nick DelDeo with SVB Moffitt Nathanson. Please go ahead with your question.
spk14: Hey, thanks for taking my questions. I have one for Kate and one for Chris. You know, Kate, your predecessor, Jeff, used to emphasize profitable growth and free cash flow per share as kind of the financial measures he was most focused on. I saw that profitable growth got a mention in the deck. you know, what other financial metrics are you going to be most focused on? And is there anything you need to do to get the organization aligned around them? And then for Crip, oh, sorry, go ahead.
spk04: No, no, go ahead. Please ask your question.
spk14: Yeah, I was going to say, and then for Chris, you know, with respect to the growth and optimization spending, I think you said it's a two-year journey in terms of spend. Now, I don't want to ask for 2024 guidance, but if we think about that two-year journey, you know, should we expect heavier spending up front? with sort of a tapering over time, or should we think of that as being relatively even over the course of two years?
spk04: I'll jump in first with respect to measurements for success. Look, there are two key measurements for success that we're holding ourselves accountable to in the North Star Plan. The first is the ease of doing business for both employees and customers. And by the way, there's a one-to-one correlation between a great customer experience and a great employee experience. Making it easier for both is a win-win. It also materially influenced our design criteria around bringing product and technology together because the customer experience becomes the product that we're selling. The second main measurement, which I've discussed, is really profitable revenue growth. Now, that said, that's at the highest level. We've spent considerable time mapping the KPIs and the measurements, both financial and operational, to our mission statement to digitally connect people, data, and applications quickly, securely, effortlessly. Those descriptors, quickly, securely, effortlessly, there are literally hundreds of metrics that we're going to be thinking about as we transform operations, as we intensify go-to-market, as we build all of the engines to execute for this company in a reliable way. And we've done so for our business segment, for our mass market segment, and for corporate as well. So it's a complex set. We can shine a little bit more light on that in investor day, but we're not short on KPIs for sure.
spk01: Yeah. And as it relates to the spend profile over the next couple of years, I would assume it's relatively flat from year to year. And really the key thinking behind that, Nick, is there's only so much we can do at once. And I think we're going as fast and as hard as we can. If we could do more now, I would. so that we get to the finish line faster. But from an organizational capacity standpoint, particularly given the fact that we're still providing service agreements to the two divestitures last year, we're working on another big one this year, we've just got to be careful. So I'd assume that next year, from a CapEx standpoint, on those growth initiatives and simplification, it just looks a lot the same as this year.
spk09: Okay. Thank you. Thanks, Nick. Next question, please.
spk05: And our next question is from the line of Eric Luco with Wells Fargo. Please go ahead.
spk11: Thanks for taking the question, and welcome, Kate, to the team. So a question on the nurture bucket. We've seen that declining around 7 or 8 percent the last couple of quarters, and maybe you could help us understand how much of that is due to maybe substitution or cannibalization into other buckets like grow. how much of that you think is maybe more legacy in nature that eventually could turn off and whether there's an opportunity there to maybe turn that trajectory into a better direction if you can price more aggressively like you've done in some of the harvest buckets. Thank you.
spk01: Yeah, I'll take that. So the harvest bucket declines have been aided in part by re-rate activity. So part of what we're doing there is looking at Tad Piper- What can we do on cost. What can we do on managing re rates that the benefits of kind of shifting more into growth, I would say, really haven't started yet. That's Tad Piper- Got a lot more life in it as we've gotten into 2023 so I would say that that's yet to come as it relates to nurture Tad Piper- There's really not been much in the way of re rate activity there. I think that's something we can do and nurtures probably the harder of the two because Mike Valdesia, If you think about something like vpn we have a lot of customers that, like the vpn they have or they've recently signed vpn contracts, because it meets their need today. Mike Valdesia, it's really the the vpn customers that are more at an end of contract and and don't want to continue with that, where we have the opportunity so. Mike Valdesia, we've got to get a little more clarity around what we think those longer term growth rates can look like we have an opinion on that. I think it's a little early to share that, but that's something we would certainly provide some more color on at the investor day.
spk10: Thanks, Greg.
spk09: Thanks, Eric. Jen, we've got time for just one more question.
spk05: Our final question is from the line of Brett Feldman from Goldman Snacks. Please go ahead.
spk02: Thanks for squeezing me in and welcome, Kate. If I go back to the deck and you talk about sort of the updated fiber addressability opportunity to 8 to 10 million locations, when that's complete, that would still represent, I think, a little less than half of the locations that are in your landline footprint at this point in time. How are you thinking about managing the portion of the footprint that's not on the upgrade path? Is there a meaningful amount of revenue and EBITDA coming out of those markets right now? And there's obviously a lot of legacy fixed costs embedded in that area. Is that something you can start taking out now, or is it going to be a little further down the road when you get those savings? Thank you.
spk01: Yeah, I'll take that, Brett. When you look at our existing footprint, we've obviously still got a lot of areas that are rural. And as we've said, our plans for quantum are dense urban areas and major metros. And that remains. We're not going to... be looking to run fiber to lower density areas because the numbers just don't make sense. As it relates to those areas, though, their overall performance has been more stable than the 20 states that we've sold. So the performance there has been good. We will manage that very closely for things like rates and cost as time goes on. But at this point, those are assets that are attractive to us and we'll continue to manage them closely.
spk09: Thank you. Thanks, Brett. I'm going to turn it over to Kate for closing comments.
spk04: So I just want to say thank you for the warm welcome for everybody. Thanks for the great questions. And thanks for joining today. I hope you come away with the same level of excitement that I have for this great business. The investments we're going to make over the next couple of years are the right ones to position us for our very, very bright future. And I look forward to sharing more about the journey with you and all of our goals for the next few years when we host our Investor Day in June. And with that, we'll end the call.
spk05: Thank you, Kate. We would like to thank everyone for your participation and using Lumen conferencing service today. This does conclude the conference call. We ask that you please disconnect your lines. Have a great day, everyone.
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