Lumen Technologies, Inc.

Greetings, and welcome to Lumen Technologies' third quarter 2024 earnings call. After the speaker's remarks, there will be a question and answer session, and if you would like to ask a question, please press star 1 on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to Jim Green, Senior Vice President, Investor Relations. Jim, please go ahead.

Good afternoon, everyone, and thank you for joining Lumen Technologies' third quarter 2024 earnings call. On the call today are Kate Johnson, President and Chief Executive Officer, and Chris Stansbury, Executive Vice President, Chief Financial Officer. Before we begin, I need to call your attention to our safe harbor statement at slide one of our third quarter 2024 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 and the risk factors in our SEC filings. We'll be referring to certain non-GAAP financial measures to reconcile 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 our investor relations section of our Lumen website. With that, I'll turn the call over to Kate.

Good afternoon, everyone, and thanks for joining. Lumen's third quarter headline is this, the transformation is happening. We're making progress in our journey to turn Lumen into a digital network services company with simple and modern product offerings, infrastructure, and operations. We're pursuing two major growth vectors, building the AI backbone and cloudifying telco, and have made material progress with each. And that said, and as expected, our financial performance still reflects the secular headwinds on our legacy revenues. We're also investing heavily in transformation programs while running the core business, which weighs heavily on our EBITDA results. And we've fully recognized we have a long way to go on this journey. And we understand that our current financial results, coupled with the fact that telcos in the industry are not talking about a turnaround, make it difficult to imagine long-term success for Lumen. But our team sees a clear path to turn this company around. We have a plan to take cost out deleverage our balance sheet, and drive growth by using our assets and intellectual property to give enterprise customers new value in a multi-cloud hybrid architecture environment. All of this will take time to execute, and it will take time to show up in our financials. But the path is real, and today I want to share more on the opportunity ahead and what we've accomplished so far. I'll be covering three topics. One, how we are continuing to drive operational efficiency with sales growth and higher customer sat in our core business to ensure we maximize cash generation, customer lifetime value and cost out. Number two, how a woman is building the backbone for the AI economy, adding more than $3 billion in incremental private connectivity, fabric sales in partnership with the biggest names in the technology industry. And number three, how Lumen Digital is cloudifying the industry, driving NAV adoption to well over 400 customers and positioning the company for high value digital revenue growth. Let's start with our operational turnaround. We continue to see solid sales performance in the third quarter with North American large enterprise and mid-market sales up nearly 14% year over year. We saw notable strength in IP sales up 18% year to date and 100 and 400 gig wave sales up 50% year-to-date through September. To complement these sales results, once again, we saw significant year-over-year improvement in customer SAT scores for every one of our enterprise customer channels as measured by transactional net promoter scores. 17 points for large enterprise, up 11 points for wholesale, 28 points for mid-market, and a whopping 98 points for public sector. We continue to improve our efforts to secure the base by focusing on five key levers of installs, renewals, migrations, usage, and disconnects. And while installs were down slightly in the quarter, we did see a 14% sequential improvement in disconnects, with total disconnects being at their lowest level in over five quarters. In mass markets, the team continues to execute well and drive increased value for our consumer segment, and once again, had record quarter for fiber net ads. Finally, last quarter we announced a billion-dollar cost take-up by the end of 2027 by unifying our network from four architectures to one, allowing dramatic simplification of our product portfolio and IT estate. While this work is incredibly complicated, given our long history of mergers and accumulation of tech debt, we're on track to developing the plan to execute. And as we have said, these cost-out efforts will require upfront spending with a back-end loaded cost take-out curve. We'll provide further details on this important work as we progress. To summarize, we're pleased with how we're galvanizing Lumen's core network services business, how we're driving growth in quantum fiber, and how we're simplifying and modernizing the company. But I want to be clear here. We are not here to find revenue growth in legacy telco. All of our transformation work is in service to customers who need and want to leverage technology like GenAI to transform their business. And the legacy networks of yesterday just won't serve tomorrow's enterprise. They're not big enough, they're not fast enough, and they're not secure enough. And of course, the customer experience in legacy telco is neither quick nor effortless, especially in complex multi-cloud hybrid environments, which have become the norm for every business. Lumen is fixing all of that by reinventing digital networking, and that is what will fuel the company's long-term financial growth. We see several growth vectors in digital networking, and I'm gonna share two that we're going after right now. The first is what's been receiving a lot of attention given the size of the deals we're signing. Lumen is building the backbone for the AI economy. The market now recognizes that AI needs data, data needs data centers, and those data centers need to be connected. And several of the biggest names in technology, including Microsoft, Meta, AWS, and Google, have chosen Lumen as their trusted network for AI. We get asked all the time, what does the AI market mean for Lumen? How many of these deals are out there? How long will this growth spurt last? And as I've shared, we see a few phases playing out. In phase one, high scalers, social platforms, and cloud companies are massively expanding their networks to support data center buildups for their AI model training. As long as these companies keep building data centers, we will have the opportunity to connect them. These deals are deeply accretive to Lumen and well-timed for our transformation. And we shared that we booked more than $5 billion of PCF sales in last quarter's call, providing ample liquidity to close near-term funding gaps. And since then, we have booked more than $3 billion in additional PCF sales, giving us the opportunity to use the extra cash to do some deleveraging. We remain in active discussions for more deals like this, and we're going to update you on our progress when they materially affect guidance. And finally, we've established a dedicated operations team to build these next-gen AI networks, and they've already broken ground on this exciting work. So if you're wondering why and how we're able to close more than $8 billion in PCF sales so quickly, I'll share this. is choosing Lumen because our geographically diverse conduit-based intra- and intercity fiber network was built for this moment. And Lumen's private connectivity fabric just awarded the Competitive Strategy Leadership Award by Frost & Sullivan is a best-in-class architecture that gives customers the control, capacity, performance, and security they need. And we believe the second phase of AI evolution is starting to emerge as enterprises are beginning to use those AI models at scale, and they recognize the need for major network upgrades. And these enterprises are calling Lumen because they know we connect all three public clouds, and they also see that we are investing in the future networking needs unlike any other company in the networking marketplace. We believe Lumen has become the thought leader in the space, and it's showing up in our business results. We're seeing an increased demand for higher performance Lumen services, specifically for Waves and IP in our large enterprise and mid-market segments, with IP sales up 18% year-to-date and Waves sales up over 25% year-to-date through September for these customers. And that's why we expanded our high-speed IP service to include 400 gig ports in 14 different markets, with plans to expand to several more markets this year. Additionally, we currently offer 400 gig waves in over 70 markets across nearly 80,000 route miles, with plans to increase wave CapEx to further expand this footprint in 2025. In the third phase of AI evolution, we see AI talking to AI, driving another potential parabolic increase in data workload volume. It's too early to share proof points for this phase, but given our network, our digital platform, and our portfolio of intellectual property, We believe that Lumen is well-positioned to handle the volume, pace, and complexity of enterprise networking needs, and we are playing to win. Cloudifying telecom is going to disrupt the industry and provide Lumen with another major growth vector. Expanding the internet and building out the required critical infrastructure is just step one, but customers expect to be able to quickly, securely, and effortlessly use that infrastructure, and that's why Lumen is building a digital platform natively integrating with our fiber network to enable enterprises to digitally design, price, order, and consume secure networking in a hybrid multi-cloud world. To our knowledge, no other telco that owns a fiber network is doing this. And we see it as a material differentiator and revenue generation opportunity for Lumen in the future. A year ago, we established a Lumen digital team and launched our flagship network as a service, or NAS offering. As of today, Over 400 customers have adopted Lumen NAS, a good start for sure. The NAS overlay lets our customers get the network pieces they want, when they want it, how they want it, in true consumption form. Recent wins for our NAS product include Agilisys, the Blackstar Group, the PAC-12, and C3 Arrow, among others. And MEF, formerly known as the Metro Ethernet Forum, just named Lumen the best NAS provider in North America. Our progress in a short period of time isn't just exciting or encouraging. It has fundamentally repositioned this company. NAS is just the beginning. With our world-class fiber network, our PCF architecture, ExaSwitch, and an ecosystem of big tech companies, all three clouds, committed to our network for the long haul, we have all the pieces to redefine networking and drive massive value in a multi-cloud hybrid world, which is exactly what our customers want and need. So to finish up, we have the cash, we have the assets and intellectual property, we have a world-class leadership team and culture, we have a great strategy, and we have a lot of momentum. Lumen's future is very bright. And with that, I'll turn the call over to Chris.