Lumen Technologies, Inc.

time if you have a question, please press star followed by the number one on your telephone. If at any time during the conference you need to reach an operator, please press star followed by zero on your telephone to get direct attention from there. As a reminder, this conference is being recorded on Tuesday, February 6th, 2024. I would now like to turn our conference over to Mike Cormack, Senior Vice President Investor Relations. Please go ahead.

Thank you, Aaron. Good afternoon, everyone, and thank you for joining Lumen Technologies' fourth quarter 2023 earnings call. On the call today are Kate Johnson, President and Chief Executive Officer, and Chris Stansberry, 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 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 measures assessed 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, everyone, and thanks for joining us today. I'm excited to provide an update on the significant progress we're making on Lumen's business transformation. A year ago, I shared that 2023 was a reset year for this company with a new mission and vision, a new executive team, and a newly redesigned culture. And importantly, we aspired to restore confidence in Lumen not only with improved financial results but with execution excellence that delivers on our commitments. We outlined big multi-year strategic priorities, including strengthening our balance sheet, executing on key programs to turn the core business around by 2025, and igniting new growth by delivering disruptive innovations that help our customers solve their next-gen networking needs. And now I'm pleased to report we both delivered on our 2023 EBITDA and free cash flow guidance and we made material progress on our strategic priorities. I'll start with the balance sheet. As we announced in late January, we entered into an agreement with a significant number of our creditors that clears the path for our turnaround. The deal extends most of our debt maturities to 2029 and beyond, injects $1.325 billion of net new financing into the business and gives us access to a new approximately $1 billion revolving credit facility to support our operations. It's a strong indication of the confidence of our bondholders and the broader debt markets that they have in our strategy, and it allows us to focus our energy on executing our business transformation. All right, so how is the pivoted growth going? While we have a lot of work left to do, we're seeing progress as evidenced by our North American business performance compared to other industry competitors. While two large legacy telco companies saw Q4 revenue declines in their business wireline segment of roughly 8 to 10 percent year over year, Lumen's business Q4 revenue decline was only 3.5 percent year over year, breaking away from the others for the second quarter. We believe our positive peer group performance is due both to our strategy and our turnaround execution. Simply put, Lumen stands alone in how we think about the industry. In today's digital economy, technology environments are complex and multi-layered. Whether it's hybrid or multi-cloud or edge compute or emerging technologies like Gen. AI, businesses need fiber networks with digital services that deliver blazing fast speeds, ultra-low latency, massive capacity for growing data workloads, and proximity to widely distributed users, all in a secure environment. While our competitors harvest their business wireline segments for cash, Lumen is building a fully digital platform to deliver important new capabilities to these customers, and importantly, we're tailoring our -to-market approach to get them there. Let's dig a little deeper into that -to-market execution progress. I'll start with our commercial excellence efforts in the business segment, which is all about driving better sales execution, securing our base of customers, and creating a world-class digital customer experience. In 2023, we tailored our -to-market approach to each customer segment. This focus is allowing us to meet customers where they are and provide unique tailored paths to our modern communication infrastructure, and not surprisingly, it's driving better sales execution. This year, with the North America Enterprise, we added over 3,000 customers and increased new logo sales by 13% sequentially in Q4. Specifically, our public sector segment grew double digits quarter over quarter and year over year in Q4, powering our strong revenue performance. Year over year, we sold 29% more grow products to existing public sector customers in Q4, and we increased seller productivity by 18% for the full year. With this momentum, we expect this segment to be the first to bend the revenue curve back to growth, and we think the market segment will follow suit. Since establishing the dedicated -to-market team for mid-market last June, tenured direct sales productivity increased 26% while we simultaneously grew the sales force by 15%. Importantly, we exited 2023 by outperforming market growth rates and taking share in both SASE and IP. In our large enterprise segment, we're winning business with sophisticated, digitally native companies like Uber, who recently chose Lumen's 400 gig wave service to ensure that they can scale and accelerate their company's growth with greater agility. Okay, let's turn to securing the base. This is all about installs, disconnects, renewals, migrations, and usage. This program is the most challenging part of executing Lumen's turnaround for sure. The good news is we're making progress in mid-markets and large enterprise, shown by our sequential results for the second half. Installations were up 13%, migrations were up 4%, renewals were up 50%, and in Q4, usage was up 3% helping us end the year strong. Now that said, we're just not satisfied, and we'll be focusing on improving performance here in this part of our turnaround using data and analytics and AI to help determine the right action for each customer at the right time. The third piece of commercial excellence is all about customer experience. The Lumen operations and IT teams did a fantastic job building the Digital CX Foundation in 2023, redesigning our processes from order to cash, starting to implement new -the-art systems, and infusing Gen. AI into our service delivery and assurance. While we're still in the initial stages, we're seeing signs of impact. For example, in our North American business pilot, we were able to reduce order processing time by 70% for dedicated internet access, or DIA, one of our highest volume products. And across all products for large enterprise and public sector customers, we're already seeing a 17-point -over-year improvement in net promoter scores based on our process improvement work. Time to talk about innovation. Innovating for growth. As we announced last month, Dr. Satish Lakshmanan joined Lumen as our Chief Product Officer. Satish comes to us from AWS and brings a highly valuable combination of cloud, artificial intelligence, and product development experience that will be an important part of our innovation engine. And just this morning, we announced that Dave Ward is joining Lumen as our Chief Technology Officer. Dave has a long history of successful executive leadership, having served as CTO for Cisco Systems and most recently as the CEO of Packet Fabric, a network as a service provider. Talented visionaries like Satish and Dave are joining because they see the potential for Lumen to innovate, disrupt the industry, and create major value for customers and therefore major value for investors. And I'm delighted to report that we are well on our way. In 2023, Lumen co-created with customers and launched several new digital services that take advantage of our world-class cyber network. Our vision is to empower enterprises to leverage the Lumen digital platform, as we are calling it, enabling customers to digitally consume our secure network services. This innovative platform will help customers build AI-powered applications across on-prem, colo, and cloud environments seamlessly while also simplifying network onboarding and management to save costs. In the latter half of this year, we'll share new reporting for Lumen digital to allow you to better understand our growth trajectory. Let me highlight a few important capabilities in the Lumen digital platform. First is Network as Service, or NAS. We continue to enrich our NAS offering with more capability, and just last week, we announced the availability of two new NAS solutions with private connections. As a recent customer, Element Materials remarked, Lumen's NAS solution was not just timely but transformative. It highlighted the untapped potential of such innovative network solutions. Another Lumen digital breakthrough capability is Exiswitch. Our high-capacity optical switching platform originally conceived for direct inter-cloud peering. It's performing extremely well in the market, and as Microsoft shared, they highly value the Exiswitch platform for the fast and scalable interconnections that it provides, and they're eager and excited to expand Exiswitch to new metros in 2024. Lumen sees Exiswitch as the -to-be must-have solution for any corporation needing simplified, low-latency, high-capacity direct cloud connectivity. Finally, Lumen Security. You may have read in the Washington Post that the Department of Justice announced it had disrupted the Volt Typhoon botnet used by a major Chinese government-backed effort to hack the U.S. critical infrastructure. I'm incredibly proud of our Black Lotus Labs team for identifying this threat and being credited by the DOJ for helping to keep the United States safe. Soon you'll see Black Lotus Labs powering the Lumen digital platform with some highly valuable security services. Now the initial capabilities in the platform give Lumen access to around 40 billion dollars in net new available market, and to be clear, we're just getting started. We're bullish on the impact that markets. We're executing our strategy to deploy capital where we see the greatest opportunities with the goal of continuing to evolve our business across a portfolio of markets, investing wisely and driving fiber market penetration. Some quick notes to share about 2023 in mass markets. We delivered our commitment to grow our fiber network by more than 500,000 locations and intend to maintain that similar robust rate in 2024. While we weren't happy with our net ads performance in 2023 all up, our sales and marketing engine is now gaining momentum as we close the year strongly with record high December sales and we continue to see this pace hold through January. Quantum fiber is the best multi-gig product in the market, and to maintain that status we know that constant innovation is a priority. That's why we made sure we were the first company in the industry to achieve Wi-Fi 7 certification. And finally, quantum fiber customers continue to be delighted as shown by our Q4 net promoter score of plus 64, improving both quarter over quarter and year over year customer satisfaction. One last exciting note, I talked about rebuilding this company from the people up and how important culture change is to supporting our transformation. In just the fourth quarter alone, we won four different culture awards, most notably U.S. News and World Report named Lumen Technologies one of the 2024 best telecom companies to work for. Our culture is helping us attract new talent as well as supporting our current Lumen workforce through a pretty intense time for this company. To sum it up, 2023, we made great progress building Lumen for growth. We believe our strategy is the right one and we're executing well. So our plan is to hold steady on that strategy through 2024. We'll continue to strengthen our balance sheet, we'll drive commercial excellence to return the business to growth by 2025, and we'll co-create innovative new capabilities that delight customers and give Lumen access to being transparent about our wins and our struggles and delivering on our commitments every step of the way. And with that, I'll turn the call over to Chris.

Thanks, Kate, and good afternoon, everyone. Kate spoke about our progress and how we are disrupting an industry ripe for change as Lumen transforms into the leading digital enterprise solutions provider. She also spoke of our success in reaching agreement on an amended TSA with a broadened group of creditors to extend our debt maturities. On our Q2 earnings call, we said we viewed the formation of the creditor group as an opportunity to address a large part of the capital structure in a very efficient way, and the amended agreement we announced in January accomplishes that. The amended TSA has support from a broadened group of creditors and when finalized, will address approximately $9 billion of outstanding indebtedness, including more than 77% of debt maturing through 2027. The TSA transactions will extend debt maturities to primarily 2029 and beyond, provide $1.325 billion of new money, and provide access to a new approximately $1 billion revolver. This agreement and the broad support for it speaks to the confidence our banks and creditors have in our plan and provide Lumen ample runway to execute on our business turnaround. In short, our capital structure is no longer a limiting factor in our transformation. We expect to complete the transactions contemplated by the TSA in the first quarter, subject to the satisfaction of limited remaining closing conditions. Before covering our fourth quarter results, I'd like to take a moment to discuss some changes to our 2024 financial reporting to enhance comparability with the previous quarter. We are updating our business sales channel reporting by breaking out a new international and other channel, including CDN. Secondly, given the sale of substantially all of our CDN contracts during the fourth quarter of 23, we are updating our business product category reporting to move CDN from harvest to other within the international and other channel. And finally, with the sale of our EMEA business and select CDN contracts completed in the fourth quarter of 23, we have updated our financial training schedules to provide the historical contributions of these sales, as well as the associated commercial agreement impacts. Keep in mind, when these impacts are excluded from results, our sequential and -over-year growth rates are substantially better than the reported rates. I'll now discuss the financial summary of our fourth quarter. Our fourth quarter total reported revenue declined .4% -over-year to $3.517 billion. Approximately 39% of the decline was due to the impact of divestitures, commercial agreements, and CDN. Adjusted EBITDA was $1.099 billion in the fourth quarter, with a .2% margin. Free cash flow was $50 million in the fourth quarter. In 2023, we delivered on our expectations for both adjusted EBITDA and free cash flow. Next, I'll review our detailed revenue results for the quarter on a -over-year basis. Within our North America enterprise channels, which is our business segment excluding wholesale and international and other, revenue declined 0.1%. This quarter, we had a public sector benefit in our other product group. As a reminder, our other category tends to fluctuate quarter to quarter, given the nature of these revenue streams. Overall, North America business declined 3.5%. We again significantly outperformed our two largest historical competitors in the fourth quarter. While results can vary in any given quarter, we expect this trend of divergence between performance at Lumen and the legacy business wireline providers to continue to widen over time as we expand our digital service offerings. Large enterprise revenue declined .6% in the quarter. Large enterprise revenue was impacted by lower other product revenue and also the timing of large infrastructure revenue benefiting the year-ago quarter. Our -over-year growth rate with in-grow moderated. We expect continued variability in trends as we drive toward overall stabilization. Now, moving on to mid-markets. Revenue declined 6% -over-year. Mid-markets is a very important channel for us and one where we had lost considerable share prior to our focus investment in this important area. We are leaning into this channel with products and buying tools to make ordering and provisioning more frictionless. As Kate mentioned, we're seeing improved leading indicators and are taking share in both IP and SASE products. This is a channel that we expect will be extremely interested in our NAS offering given the flexibility and ease of provisioning it provides. Public sector revenue grew .8% -over-year. Trends improved, driven primarily by continued strength and growth revenue, moderating declines in nurture and higher other revenue as mentioned earlier. Over the past 12 to 18 months, investors have asked us when we will start to see the benefits of the big contracts signed with the USDA, the U.S. Postal Service, the Department of Defense, and other public sector wins. As our results demonstrate, we are seeing revenue strength in part due to those and other deals ramping as we work diligently to deploy these mission critical services. Given our visibility to sales bookings and the longer install cycles related to the complexity of the solutions we're deploying within public sector, we have high confidence that we'll be the first sales channel to return to sustainable growth. Wholesale revenue declined .2% -over-year. The majority of wholesale represents the balance of trade with other carriers as we negotiate with each other on buy side and sell side arrangements. The historical industry behavior between carriers has been to leverage pricing and rate changes to drive results instead of delivering incremental value to customers. In our opinion, these actions are often to the detriment of the industry's customers and is also generally unhealthy for the industry while also creating volatility in our and others' results. Within wholesale, approximately 39% of our revenue comes from harvest products which declined .9% -over-year in the fourth quarter and contributed to a majority of the .2% decline. Our harvest product revenue will likely continue to decline over time and is an area we will continue to manage for cash. International and other revenue declined .5% -over-year driven by the of our EMEA business and the sale of select CDN contracts in the fourth quarter of 23. Moving to our business product lifecycle reporting, I'll reference results based on our North America enterprise channels which represent our core strategic categories. Grow products revenue increased .7% driven by strength and IP across all enterprise channels, cloud services, and infrastructure product growth particularly within co-location and dark fiber. Grow represented approximately 40% of our North America enterprise revenue and for our total business segment carried an approximate 80% direct margin this quarter. Within nurture and harvest, we continue to expect headwinds in these categories as we take proactive steps to migrate customers to newer technologies. These actions improve our customers' experience and provide an uplift in customer lifetime value for Lumen. As Kate mentioned, we continue to see positive leading indicators that our initiatives are working and it will take some time to be reflected in our results. Nurture products revenue declined .7% -over-year. Pressure within VPN and Ethernet services drove the decline. Nurture represents about 30% of our North America enterprise revenue and for our total business segment carried an approximate 69% direct margin this quarter. Harvest products revenue declined .4% -over-year. Harvest continues to be negatively impacted by declines in TDM-based voice and other legacy services. Now I want to take a minute to discuss harvest in more detail. We have a very tactical approach to our harvest portfolio which contains a mixture of customers that are on net as well as off net. These off net customer contracts carry a much different margin profile and in some cases are margin dilutive. We utilize rerates to manage the margin and in some cases this can result in non-regrettable churn. In other cases, we will seek to migrate customers to our newer grow technologies. Another set of customers within harvest are quite profitable and their needs can be met with existing services. Our data-driven approach drives our product migration and pricing strategies for each of these customers enabling us to optimize our return profile. Harvest represented less than 17% of our North America enterprise revenue in the fourth quarter, an improvement of approximately 200 basis points -over-year. For our total business segment, it carried an approximate 81% direct margin this quarter. Other products revenue grew 31.7%. As I mentioned earlier, public sector showed particular strength in this product set. Now moving on to mass markets, revenue declined .3% -over-year. Our mass markets fiber broadband revenue grew .5% and represented approximately a third of mass markets broadband revenue. Also note that our exposure to legacy voice and other services revenue continues to improve with an approximate 200 basis point reduction -over-year. During the quarter, fiber broadband enabled location ads were 126,000, bringing our total to approximately 3.7 million as of December 31st. As Kate mentioned, we intend to maintain the same 500,000 bill pace this year and during the fourth quarter, we added 20,000 quantum fiber customers and this brings our total to 916,000. Fiber ARPU was flat sequentially and increased on a -over-year basis to approximately $61 in the fourth quarter. At the end of the quarter, our penetration of legacy copper broadband was approximately 10% and our quantum fiber penetration stood at approximately 25%. Our 12-month frozen penetration of our 2022 enablement cohort was 18% at December 31st, while our 24-month frozen penetration of our 2021 enablement cohort was 25%. Turning to adjusted EBITDA, for the fourth quarter of 2023, adjusted EBITDA was $1.099 billion compared to $1.393 billion in the year-ago quarter. The fourth quarter of this year included a net headwind of $13 million related to the divested EMEA business, a net benefit of $3 million from divestiture-related post-closing commercial agreements, and a net headwind of $16 million from the sale of select CDN contracts. These items represent approximately 9% of the -over-year decline. Special items impacting adjusted EBITDA this quarter totaled $211 million. Our fourth quarter of 2023 adjusted EBITDA margin was 31.2%. Capital expenditures for the fourth quarter of 2023 were $821 million, and the company generated free cash flow of $50 million in the fourth quarter. Moving to our financial outlook, for the full year 2024, we expected adjusted EBITDA to be in the range of $4.1 to $4.3 billion. Our EBITDA guidance includes an expected -5% organic decline, a significant and roughly 600 basis point improvement from the organic decline included in our 2023 outlook as our transformation initiatives take hold. Moving to capital spending and our other outlook metrics, for the full year 2024, we expect total capital expenditures in the range of $2.7 to $2.9 billion. We expect to generate free cash flow in the range of $100 million to $300 million for the full year 2024. This includes an approximate $700 million tax refund received during the first quarter of this year. We expect free cash flow to be impacted by higher interest expense related to our new TSA agreement. Based on our initial analysis, we've included an incremental $125 million to $225 million of cash interest in 2024 versus 2023. We do not have any required or planned discretionary pension fund contributions in 2024. In terms of special items for 2024, we continue to expect dedicated third-party costs to support transition services for the divestitures. The reimbursement for these services will be in other income with no material net impact to our cash flows. In addition, in the first quarter of 2024, we expect to recognize meaningful charges related to the negotiation and execution of our TSA agreement. Before we move to Q&A, just a couple of housekeeping items. First, please remember that the first quarter typically has seasonally higher expenses related to the timing of bonus payments and other prepaid expenses. Additionally, while we are happy to discuss the recent TSA announcement in further detail, our focus is now on our business and the financial results as we move forward. Accordingly, we would prefer to be oriented to questions around the business. We're back. Aaron, we're ready for questions.

Ladies and gentlemen, if you would like to register a question, please press the star followed by the number one on your telephone. You will hear a three-tone prompt to acknowledge your request. And if your question has been answered and you would like to withdraw your question, please press star followed by the number one as well. One moment while we gather first question. And our first question for today comes from the line of Simon Flannery with Morgan Stanley. Your line is live.

Great. Thank you very much. And good evening. Thanks for all the color. I was wondering if you could just help us with the updated trajectory of revenues through the quarter. I think in the past, you've talked about a second half acceleration after some first half noise. You didn't really talk to that during your prepared remarks. So any updates there would be great. And then thanks for the color on Q1 OPEX. How should we think about some of the OPEX savings from some of the severance and other actions that you've recently been taking? How does that flow through the quarters in 2024? Thank you.

Yeah, Simon. On the revenue side, we would expect the public sector implementation and the conversion from sales to revenue to accelerate as we move through the year. And to Kate's point, we continue to see improvement in the other channels as well. But mid markets, we expect to continue to improve over the course of the year as well. Obviously wholesale can be a little more choppy. So that's a harder one to predict. As it relates to OPEX, most of the savings that related to the action we took last year will be realized this year. And I would expect that to be fairly even quarter to quarter. It's a full year impact.

Right. And just on that public sector, to what extent was the Q4 number including, I don't know, CPE sales or other things that may not recur next quarter?

So we did say that other product revenue impacted the fourth quarter. And that's the bulk of it. I would say that our commentary around our confidence in public sector really relates to the revenue recognition associated with the installs from those big deals we announced over the last 12 to 18 months.

Great.

Thanks, Mark.

Thanks, Simon. Next question here.

Thanks for your question. Our next question comes from line of Batya Levy with UBS. Your line is live.

Great. Thank you. On the enterprise trends, earlier you had mentioned that you were concerned about some of the upcoming maturities and the conversations with enterprises were kind of on a hold. Can you provide more color on maybe recent conversations with some of those larger clients and how the sales funnel is shaping up? And maybe just another follow-up on one queue. Can you quantify the seasonal expenses we should think about for the first quarter? And lastly, taxes. How should we think about tax range if bonus depreciation or other credits are extended? Thank you.

Thanks, Batya. I'll handle the debt one and give you two pieces to Chris. The clarity of having this TSA updated and amended has been great for our customer conversations. It basically shifts the maturities to 29. It provides the ability to focus on our transformation efforts and have conversations with customers without that question. And so we've been relishing that. Our pipeline and conversations with customers are positive and growing and a lot of that has to do with the sales excellence that we've put in place in terms of supporting our people with world-class platforms and driving AI for sales productivity and things like that. So I think we're in a good spot, Chris.

Yeah, and on taxes, our guidance, we gave a cash tax amount that we feel is the best way to look at it. Obviously with the one-time expenses and special charges associated with the debt transaction, the impact from an ETR standpoint on net income can be really sensitive. So that's why we chose to guide the cash tax amount. As it relates to legislation, again, we're really pleased with the momentum around that. We would expect that if everything was enacted that's out there, that the benefit to us could be in the $300-400 million range on an annual basis, but we'll have to wait and see.

Thank you. Thanks,

Bajaj. Next question, please, Aaron. Our next question comes from the line of David Barton with Bank of America. Your line is

Hey, guys. Thanks so much for taking the questions, I guess. Two, if I could. The first would be just, Chris, how you could maybe put some guardrails around how a successful TSA conclusion would impact the free cash flow guidance outlook that you're presenting here today, which does not appear to have it in there. And the second question would be, and sorry to go back to the public sector, but given that this is kind of the tip of the iceberg of the growth turnaround, third quarter to fourth quarter was up $30 million, third quarter, fourth quarter is up another $50 million. Most of all of that was attributed to kind of one-time items. Where, when you say it's going to be the first to return to growth, from what number should we assume that growth begins? Thank you.

Yeah, so I'll answer the last part first. Again, you're right. We have said over the last couple of quarters there were some one-time benefits that have repeated themselves and certainly helped us. But as we look into the year, from here forward, David, we should continue to see growth in public sector as the installs around those big contracts build their pace. So we do expect public sector revenue to be increasing as we go forward from here. And as it relates to the free cash flow guidance, it does include all of the TSA costs. So successful closure means closing in Q1, and we've got line of sight to doing that. We'll certainly get more commentary around that as that gets finalized. But it is contemplated, and I think part of the confusion may be that included in that free cash flow guidance is the $700 million tax refund impact that hit in Q1.

Right, right. Those are the offsetting forces. Perfect. All right, that's all

helpful. Thank you, Chris.

Yep. Thanks, David. Next question, please.

Our next question is from the line of Michael Rawlins with Citi. Michael, your line's live.

Thanks, and good afternoon. A couple questions. The first one is, if we go back to the analyst day slide from a few months back, the EBITDA guidance range is lower at 401 to 43 versus the 43 to 46. Can you remind us of just some of the influences and some of the developments that got you to the current range? And then can you also give us an update on how the revenue range should look? After all this time, I think it was originally at 13.6 to 14.1 for 2024. Thanks.

Yeah, so a few things. So what's changed versus investor day? Obviously, the EMEA sale, the CDN sale, and last but not least, just the impact of the debt discussions and that overhang in our business. We were pretty clear, I think, on the Q2 and Q3 calls that customers were concerned, and certainly the size of the 27 debt tower and our ability to execute the turnaround in time to refinance that, particularly the Lumen debt in that, was of particular concern. So we adjusted for that, and with the negotiations behind us, we see positive momentum there. As it relates to revenue, we're not guiding revenue at this point, and I would say that's conscious because the revenue piece is going to be choppy as we go forward, and we want to be really transparent about that. It's hard to predict what totals will do. It's easier to predict channel by channel when we expect to see a turnaround, but to try to give that with some level of confidence at this point is just a little too early, so we've chosen to stick to EBIT where we obviously have more levers to pull and more control around that.

Just a second, in the past you've talked about the opportunities to proactively churn some of the legacy revenue and convert that into the strategic revenue. Can you share maybe some additional details or developments? Are there some numbers where you're able to show the financial benefit of being able to migrate customers more quickly to fresher strategic services?

So a couple things. There's number one, using AI to reach out to customers in a programmatic fashion at scale to drive productivity of the step, and so we've made a lot of progress there putting the platform together. Number two, taking a migration factory approach. So for each legacy platform that customers are on, understanding the behavior signals that drive likelihood to churn and approaching them in cohorts and then meeting them where they are in terms of what they have and the best solution we can migrate them to and doing as much of that in an automated fashion as possible. All of that is the chassis that we built in 23. Now we're starting to, and in Q4 we had some pretty significant progress numbers we don't report on, but in terms of doing the reach outs and making progress with migrations, etc. So we'll continue to monitor it and as we get to a place of growth and stability and productivity of those teams in a way that we can share, we certainly will.

Thanks. Thanks Mike. Next question here.

Next question is from the line of Eric Lupechow with Wells Fargo. Your line is live.

Great, appreciate it. Maybe you could touch on mid-market a little bit. I know that's been a big focus of the company in terms of new salespeople and new logo generation. When do you think, is that more of a 2025 story when we start to see the revenue line really turn in that segment? And then secondly, maybe you could just touch on your interest in additional asset sales or divestitures as you look out. I think you've been pretty open about the consumer or mass markets business potentially making sense, being separate from the enterprise segment. Is that something that you would actively evaluate? Thank you.

So starting with mid-markets, this is actually the first market segment, customer segment that we stood up, our squads, our scrum teams to go after. And that's everybody from sales marketing, customer success, IT operations, finance, billing, etc. All kind of circling around the customer segment to say, what are the offerings that we need? What's the price we need to win? What does the marketplace look like? How do we swarm them and cover the markets, both direct and indirect? Because we want to continue to leverage our ecosystems for more feed on the street from a sales perspective. All of that work happened in 23. What's most remarkable about that is it set the tone and context for how we then do turnarounds in the other segments. Because we got this learning mojo happening where the teams were meeting with daily standups and weekly standups and reporting back on the challenges that they were experiencing. And then using an agile methodology, whether it's building a piece of IT functionality, or it's working with the product team to say, we need these net new capabilities, or the marketing team to say, how can we do better account-based marketing, etc. And that method of working across functions with no silos in an agile, rapid fashion has set the context for basically how we treat all the other segments. So that's thing one. Thing two is internally, there's a bit of camaraderie and healthy competition. And I call my mid-market teams as handbaggers. Because basically, they're always coming in a little bit better than they say they're going to. And I think they're starting to get their chops. And so we're excited by our improvement in productivity. We're excited about our improvement in sales and revenue, etc. I think what we'd like to do next and where you'll see us target the guns is on the ecosystem side, making sure that we have a platform that is partner friendly so we can drive sales productivity indirect. Because we all know that that's what we need for total coverage. So you want to handle the other ones? Yeah.

And on asset sales, we'll obviously continue to evaluate the entire portfolio. What I would say specifically about the mass markets business is really a few things. One, that's an enormously valuable asset. And we know that. And that's why we're continuing to invest at the pace that we're at right now in getting more fiber in the ground and pushing really hard to drive subscriber growth. That said, we've been very public about saying that's a space where consolidation is necessary. And we will not be the consolidators. And I think you've seen in the last few days some noise in the industry as people are, I think, taking more active positions around what happens next with that sector. So we're going to keep our heads down, continue to focus on execution and building out the value of that asset. And we'll evaluate as we go. All right. Thank you. Thanks, Eric. Next question, Eric?

Our next question is from a line of Nick DelDio with Moffat Nathanson. Your line is live. Hey, thanks

for taking my questions. I've got two guidance-related ones for Chris. The first one on CapEx. So it looks like your midpoint for CapEx this year is $2.8 billion. It was about $3 billion in 23x and Mia. Your -the-home passings are about the same in 24 versus 23. So it seems like the CapEx for everything else is ticking down some. I was just wondering if you could talk a little bit about what's behind that reduction, assuming that observation is correct.

It's really driven by our continued focus on efficiency. And so we continue to push on both OPEX as well as CapEx. And we will continue to do so. But it's not, don't view it as a signal of pulling back anywhere. We are investing aggressively and will continue to invest aggressively in both enterprise and mass markets, as well as just the broader simplification of Lumen as we go forward. There's an enormous amount of effort that's taking place, in particular this year, around financial systems as well as operations that will dramatically improve the customer experience.

Okay. So you'd say you get a similar bang for your, more of a CapEx bang for your buck this year than last year. And that kind of explains it? That's right. Okay. And then second on cash taxes, it looks like cash taxes paid, excluding the refund, are going to be in the $400-500 million range, which is a pretty big number. I guess barring any change in the tax code, is this a reasonable starting point to think about for the next few years? Or are the debt transactions or other things kind of throwing it off?

Yeah. Yeah. I don't want to try to estimate what 25 is right now. We're obviously not doing guidance there. As I said earlier, we gave the guidance, the cash tax guidance we gave this year just because of the sensitivity and net income with all the other special charges hitting this year. I will give you a little bit here though on the interest because I think it's important. I think the cash interest in 25 will not be materially different than it is in 24. And the key thing there is just for your modeling is while we don't have a full year impact under the TSA in 24, at the execution of the TSA, we do basically have to pull forward interest expense. So when we look at it, that variable is going to be roughly the same 24 and 25. I'll give you that much on 25.

Okay. But I guess maybe I'll phrase it differently. Are there kind of one-time tax items that we should bear in mind that are baked into that guidance?

Yeah. No. Not materially, no.

Okay.

Okay. Thank you, Chris.

Next question,

Aaron. Our next question is from the line of Greg Williams from TD Cohen. Your line is live.

Great. Thanks for taking my questions. Chris, I realize you typically guide EBITDA in that $200 million range, and I'm just wondering if there's any particular puts and takes to consider what's driving that range this year. I know you mentioned some levers that you can pull. And then the second question is just on the ABS debt markets, if you're looking at that in the year now that you've got the clean one way from the TSA and maybe you can leverage some of these fiber homes. Thanks.

Yeah. We'll continue to look at the capital structure and for ways to make it more efficient forward. So we're not done. That was a big one, but we're not done. And sorry, repeat the first part of the question.

Just the EBITDA range, if there's any puts and takes to consider and levers the pull.

Yeah. No. I mean, we just, we felt that the plus or minus $100 million was the way to go. The comment that I made earlier on just the levers we have, obviously we're doing a number of things, right? The primary objective is to get revenue growing as we shift aggressively from kind of legacy services to digital service offerings. But at the same time, we are fixing the internal workings of Lumen. I mean, multiple billing systems, multiple GLs, inventory, frankly, a really poor customer experience. And Kate spoke to some of the progress we're making there. So as those things get fixed, that obviously gives us the opportunity to drive more efficiency in addition to a better customer experience. And that also has EBITDA effects. So the EBITDA, we get the double benefit obviously of the revenue as well as those efficiency plays.

That's helpful. Thank you.

Thanks, Greg. Next question,

please. We have another question from the line of Frank Lowsum with Raymond James. Your line is live.

Great. Great. Thank you. Just wanted to go to slide six and the different opportunities you have there. Can you characterize that as what sort of potential revenue that is? Is that a multi-billion dollar opportunity for Lumen? How should we think about that? And then you may send something on the recognition of the revenues for the public sector business. Is there some sort of timing difference in the cash flow of some of those that we should be aware of? Thanks.

Why

don't you

hit the cash flows and I'll do

the floor. So really on the public sector, Frank, that's the longest kind of sale to install interval of anything we sell. They're big complex deals. Obviously we're working with government agencies and they've got to go through their processes and that takes time. So you can have a 12 to an 18 month lag as I mentioned until that starts to get recognized in revenue. As it relates to the cash flows around that, it will increase as time goes on because obviously the pace of the installs increase. But it's a book to bill

difference is what you were talking about, not a cash recognition difference.

Exactly. And they're just massive. Yeah. But I'll turn it back to Kate for the first part of your question.

Sure. On page six, just for everybody's edification here, it's the Lumen Digital Platform and we have the portfolio outlined with a totally digital customer experience wrapped around two important things. The first is our network, our core network services, because none of these digital services are relevant without total integration into the network. Customers are demanding left to right, top to bottom integration, quick, secure, effortless. It needs to be exactly that in order to be relevant in the digital economy. And I think you can look to other companies that have some of these digital services and they don't have the fiber network and they just can't get the economics and they can't get the customer service. So we're kind of excited about it. There are four core capabilities that we have right now Lumen Digital. We're just getting started, as I said. The ones that we have here represent a total available market of around 40 billion. But I think that's actually understating it because we have a couple of really interesting opportunities emerging that we'll talk about as we get a little bit closer to shaping them. Think of it this way. NAS is cloudifying telco. It's digital everything, any port, any service, anytime, anywhere. Edge Switch is the center of connectivity, fast pass into the cloud, any cloud and across clouds. The Edge is becoming more and more germane, especially with a totally digital network and high capacity switching because users are everywhere. And the expectation is that I'm going to process all of that data that's generated at the speed of thought. And so proximity really matters. And then the last thing is security. And we have huge muscle here that's totally under commercialized. So we're excited about the future. And right now we're just kind of calling it a very big opportunity for net new profit pools, which is going to really help our growth curve. Very

great. Thank you. Thanks, Frank. I think we have time for just one more question here.

Perfect. We have one final question here for today that is from the line of Jonathan with New Street. Your line is live.

Thanks. Thanks for squeezing me in, guys. Actually, two very quick ones. So Chris, given that it may make sense at some point to separate mass markets out, could you give us a sense for the EBITDA that you're generating in that business today? And then maybe a more conceptual question for you guys. Is you sort of run through the trends in the business, which seem to be improving in a lot of areas. And it seems like you're taking share in the core segments that you're focused on. And you're struggling against a sort of an industry backdrop that's just really, really tough. It strikes me that the end of the business segment in aggregate is just fragmented. And that's part of the problem. And I'm wondering if there's a consolidation opportunity there. And whether you'd be a consolidator or whether a big consolidation transaction would just give you exposure to revenue streams that you're looking to move away from. Thank you.

Yeah. So I'll take the second part of the question. It's an interesting one for sure. And I think you should think of us as seeing huge opportunity in the business segment by providing digital services that are integrated into the network and getting smarter and smarter about how we can take advantage of these really, really complex environments. Hybrid cloud, multi-cloud, gen AI, et cetera. We have not only the right team, as I've talked about, we've got a world-class network, which I've talked about. And we've got a digital property protected by patents that sort of uniquely positions us to take advantage of this. That's where our focus is. We're maniacally focused on delivering value to customers and obsessing about their needs. Because that's how we grow as fast as possible. If there are opportunities to integrate, you know, vertically or horizontally as time goes on, we will strategically look at every single one of those as is our fiduciary responsibility. And as they make sense, we'll go after them.

Okay. And on the EBIT, you know, we don't guide to that. It is in our filings. So I think that's where I would point you to in terms of the splits between mass markets and enterprise. But as it relates to, you know, a potential split of the businesses, what I really want to emphasize is we're not looking to fire sale any assets. We're investing in good assets to make them great. And that's our focus first and foremost. Because that's how we see the path to maximizing value as we go forward. So definitely on the radar screen. But we've got a really dedicated group of people who are very focused on the quantum fiber build out and the customer experience that it brings. And we're going to continue on that path.

Great to hear.

Thanks, guys.

Thanks, Jonathan. Thank you. Harry, with that, we're going to end the call.

Thank you, ladies and gentlemen. This will conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line. Have a great day, everyone. We'll see you next time.