Lumen Technologies, Inc.

Third quarter 2023 earnings call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. At that time, if you have 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 Tuesday, October 31st, 2023. I would now like to turn the conference over to Mike McCormack, Senior Vice President, Investor Relations. Please go ahead.

Thanks, Circe. Good afternoon, everyone, and thank you for joining Lumen Technologies' third quarter 2023 earnings call. On the call today are Kate Johnson, President and Chief Executive Officer, Chris Stansbury, Executive Vice President and Chief Financial Officer, and Rahul Modi, our treasurer. Before we begin, I need to call your attention to our Safe Harbor statement on slide two of our third quarter 2023 presentation which notes that this conference call may include forward-looking statements subject to certain risks and uncertainties. All forward-looking statements should be considered in conjunction with the cautionary statements on slide 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 which can be found in our earnings press release. In addition, certain metrics discussed today exclude costs for special items as detailed in our earnings materials which can be found on the investor relations section of the Lumen website. With that, I'll turn it over to Kate.

Thanks, Mike. Good afternoon, everybody. I'm excited to share a summary of the material progress we've made in our efforts to reposition Lumen for growth. I'll start with some major structural accomplishments. First, we've made significant progress in simplifying Lumen with two divestitures. We expect to close the sale of our EMEA business to Colt tomorrow, November 1st, earlier than planned. This transaction will generate approximately $1.5 billion in net after-tax proceeds, which we anticipate will be used for debt reduction. Second, two weeks ago, we announced the sale of the majority of our CDN contracts, a transaction that will enable us to continue to focus our resources on businesses where we can differentiate ourselves in the market at scale. Next, the balance sheet. We successfully reached a broad agreement with creditors that holds over $7 billion of the outstanding debt of the company and its subsidiaries. The transaction will extend a large portion of our debt maturities and remove questions regarding the company's compliance with its debt covenants. The creditor group will also provide $1.2 billion of new financing. The closing of the transaction is subject to the satisfaction of certain conditions, including completing work with our banks to extend our revolver and term loan A, and getting approval from other creditors as needed. In addition to restructuring the balance sheet, we've made the difficult decision to reshape and right-size Lumen for Growth. We're taking immediate actions, which will result in about 4% fewer people inside the company. This reorg, along with additional optimization initiatives, will generate annualized savings of approximately $300 million. As you might expect, this is a difficult but necessary decision given the revenue pressure we felt from the noise in the market regarding our creditor discussions as well as global macroeconomic pressures. These proactive steps to address our balance sheet and lower our cost base will reduce the noise, it will improve our agility and efficiency, and it will enable us to better compete in the markets we serve. Now I'd like to talk about some of the operational improvements we're seeing in our business segment. As we've shared, we have a three-pronged strategy to transform this business. One, secure the base. Two, drive commercial excellence. And three, innovate for growth. And we're making progress against all three. Securing the base boils down to five things. Minimizing disconnects, maximizing installations, driving increased usage, renewing customer contracts, and migrating our customers to newer technologies. If we get these five things right, we reduce churn. So let me share this quarter's sequential performance for these five metrics in our North America large enterprise and mid-market sales channels. We saw a 4% reduction in disconnects, a 9% increase in installs, a 5% increase in usage, a 4% increase in VPN customer renewals, and a 21% increase in voice migration. With heavy use of data and analytics to understand customer behavior and an agile approach, We created a win formula to address churn and delivered improved business revenue performance this quarter. Obviously, a lot more work to do here, but we do see a path to success. Let's look at driving commercial excellence. This is about sales execution that ultimately yields growth. Simply put, there's just two ways to grow. You either sell to net new customers or you sell more product and services to existing ones. we're making progress against both of these growth vectors. First, we added more than 2,500 new logo customers so far this year across large enterprise, mid-markets, and public sector segments, despite the headwinds I described earlier. Year over year, we've seen 47% more grow products sold to existing customers, or 16% normalized for a large deal that I'll talk about in just a moment. Finally, We achieved 14% higher seller productivity year over year, a very impressive metric given how many new sellers we have. A big part of driving commercial excellence is going after net new markets. For example, we see huge potential in the digital inclusion market, which presents an opportunity for Lumen to help states bring reliable broadband connectivity to unserved and underserved markets. We won our first large multi-year deal in this space, representing over $400 million of revenue when the state of California chose Lumen as a key strategic partner. We're now bringing the same commercial framework for public-private partnerships to other states as they seek to bridge the digital divide. All right, the third prong of our business strategy, innovating for growth. This is all about bringing net new capabilities like network as a service, or NAS, to the market and gaining access to new profit pools. We've made great progress driving adoption of our first NAS offering called Lumen Internet On Demand. This new digital capability is now generally available and has light house customers in 13 industries including healthcare, technology, insurance, retail, manufacturing, and public sector to name a few. In addition to selling NAS directly to customers, Lumen is also leveraging our partner ecosystem to drive scale. Customers can buy Lumen Internet on demand through 136 enabled data centers in 10 different markets across North America through our great partners Digital Realty and Equinix. Our NAS product roadmap is industry defining. So we'll be adding, soon we'll be adding API capability to allow customers to activate NAS in their own business applications. Then we'll layer in security with DDoS. and then we'll offer dynamic bandwidth capability for ultimate usage flexibility. Now, together with our Edge Fabric and ExaSwitch, Lumen NAS is setting the table for a new market category for the modern communication infrastructure platform, one that optimizes application performance across hybrid architectures, the on-prem, at the edge, and multi-cloud, and one that makes room for rapidly changing network needs as Gen AI becomes mainstream. We are cloudifying telecom. It's going to be disruptive to the industry, and we are playing to win. All right. Turning to mass markets, we had strong growth in quantum fiber enablements where our construction factory is operating well. Now, that said, our subscriber ads this quarter were below our expectations. During the quarter, we took significant steps to improve operations as we combined CenturyLink fiber with quantum fiber. Maryann D' merging all inventory and field tech systems into one and vastly improved order to install commitments. Maryann D' While we believe these operational activities, coupled with lower move activity dampen subscriber ads this quarter, we do know that we need to do better selling and penetrating existing built. Maryann D' Therefore, as we face a more constrained capital environment ahead will prioritize sales and marketing investments over enablement growth. While we will still build at a healthy pace, we should see greater penetration rates and a higher return on capital spent in mass markets. All right, to wrap up, I've often spoken about rebuilding Lumen starting with our people. We've been hard at work doing that for the past 12 months, and I'm proud to share that during the third quarter, Lumen was recognized by US News and World Report as one of the 2024 best places to work in telecom. It's our first time being named to the list. And I think it demonstrates the power of creating a culture that enables change. Transformation is messy business. And despite extremely challenging headwinds, we've made big and important structural changes to the company. And equally important, we've made significant measurable operational improvements. There's lots more to do, but we're confident in our strategy to pivot Lumen towards stabilization and growth. And with that, I'll turn the call over to Chris.