Greetings, and welcome to Lumen Technologies First Quarter 2024 Earnings Call. [Operator Instructions]. And as a reminder, this conference is being recorded, Tuesday, April 30, 2024. I would now like to turn the conference over to Matthew Debnam, Director, Investor Relations. Matthew, please go ahead.

Good afternoon, everyone, and thank you for joining Lumen Technologies First Quarter 2024 Earnings Call. On the call today are Kate Johnson, President and Chief Executive Officer; Chris Stansbury, Executive Vice President and Chief Financial Officer; and Jim Breen, Senior Vice President, Investor Relations. Before we begin, I need to call your attention to our safe harbor statement on Slide 1 of our first 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 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 our Investor Relations section of the Lumen website. With that, I'll turn the call over to Kate.

Good afternoon, everyone, and thanks for joining us. I'm excited to have a chance to share Lumen's turnaround progress with all of you. As you know, our strategy is focused on empowering enterprises with next-gen on-demand connectivity solutions powered by our fiber network. Effectively, we're cloudifying telecom to meet our customers' need for blazing fast speed, ultra-low latency and dynamic capacity to support the immense expansion in data workloads, all in a secure and hybrid world. But before I get into the transformation update, I want to address our 2024 first quarter financial performance. As we shared last quarter, the debt restructuring in the second half of 2023, created uncertainty for our customers and partners, which translated into softer sales during that period. As a result, we saw weaker 2024 Q1 revenue and EBITDA results. Now despite these pressures, we did maintain sequential and year-over-year revenue growth in Q1 within our North America Grow product portfolio. We also made material traction in driving customer adoption of our flagship digital offering, network as a service, or Lumen NaaS, both important components of our turnaround story. Now that we've successfully executed the TSA agreement with a broad group of our creditors, our balance sheet is significantly stronger. When we unveiled our transformation plans at our mid-2023 Investor Day, it would have been hard to imagine the level of financial flexibility we would achieve through this agreement that addressed over $15 billion of our debt, extending over $10 billion of our maturities due over the next 4 years to 2029 and beyond, while securing access to over $2.3 billion in new liquidity. We're pleased with the runway this deal created for our transformation. And you can expect us to continue to find ways to strengthen our balance sheet and return value to shareholders.…

Thanks, Kate, and good afternoon, everyone. In the first quarter, we took important steps towards strengthening our balance sheet and reshaping the business. As we position Lumen towards driving for long-term growth, as expected, our first quarter revenue and EBITDA performance was affected by TSA-related customer uncertainty as well as some seasonality factors discussed in our last earnings call. While we have more hard work ahead of us to improve trends, we're demonstrating our ability to execute. A few key highlights. First, as Kate mentioned, we successfully completed the TSA in the first quarter, which creates additional runway for our pivot to growth in terms of rephasing our debt maturities and providing more than $2.3 billion in new liquidity. The transaction included high participation from creditors across our capital structure, underscoring their broad support in our turnaround strategy and will continue to strengthen our balance sheet as we move forward. As planned last week, we took material cost-out actions as we continue to improve processes and shape-shift our organization to support our strategy. These savings were included in our full year 2024 guidance. Going forward, we expect to realize additional cost takeout opportunities as we further reshape our organizational structure, rationalize third party spend, drive increased adoption of AI to automate manual processes and shut down non-core legacy products. Finally, and most importantly, our sales growth engines within our Business and Mass Markets segments accelerated in the first quarter as we saw a strong improvement in performance within both North America Enterprise sales with a 27% year-over-year growth and Quantum Fiber broadband net additions. All of this gives us confidence in our 2024 guidance with EBITDA expected to improve from a low point in the first quarter. Before covering our first quarter results in more detail, I'd like to first…

[Operator Instructions] Your first question comes from Michael Rollins with Citi.

Two topics. The first one, in terms of the performance sequentially and year-over-year, your organic business revenue declined for things like Harvest and for Nurture, and then just for the customer vertical designation. Can you share a bit of how much of that was seasonal versus other factors, whether it's competition or an acceleration in the legacy revenues? And how much of that is customer driven versus some of the initiatives that you have to try to drive out the unprofitable or lower-margin or legacy revenue to help your customer relationships? And then I have one other topic for you afterwards, if I could, please.

Michael, good questions. We don't have the split outs and all that. But what I'd say very broadly and generally is these are the industry declines that I think everybody is talking about, right? Customers are leaving legacy telecom services. Our competition is also trying to turn off off-net services. We're trying to turn off off-net services that are increasingly expensive to operate. And all of that is driving some of those trends. So I would say this is more the continued behavior that exists. It's not something new that we're seeing. I wouldn't say that it's seasonal, and we expect it to continue. I think the more important point is that that's why we're changing the rules of the game, and focusing on bringing newer products consumed digitally that meet the needs of customers today rather than the needs of customers from the past. And that's really where the focus is. And that's why our Grow category is the biggest portion of our overall portfolio, and you'll see that continue to grow.

And then the second topic, you mentioned in terms of the market-by-market assessment for the Mass Markets business, the possibility of [ wholesaling ] and joint ventures. If you could expand on that a bit more? And are you considering offering fiber on a wholesale basis, whether it's to wireless carriers or other third parties?

So we're looking at all possible arrangements. There's no secret, obviously. There was an announcement last week where joint venture arrangements exist with a number of our competitors. So we're looking at those. Wholesaling is one that could be added to that. And there may be opportunities to sell any given market if the valuation is right. So -- the whole point here is on driving incremental enablements and penetration and then how we increase our EBITDA leverage on those investments as we go forward. So there's no one answer at this point. And as we get closer to making decisions around those things, we'll certainly communicate that.

Thank you, Mike. Operator, we will take the next question.

Your next question comes from Sebastiano Petti with JPMorgan.

I was hoping perhaps, Chris, if you can give some more color on the levers of what's driving that continued momentum in Quantum Fiber. Obviously, great to hear on the NPS side as well. But any -- if you could unpack the drivers of the subscriber growth and perhaps maybe what you're seeing from a take rate perspective in terms of your product and service level speed mix, -- that would be great.

So again, broadly speaking, there's been an enormous amount of focus by the team and great work by the team to really scale up our marketing efforts. We said last year that one of the issues we had until we got to scale was our -- on the build side, was our ability to scale the marketing motion. And so a lot of our marketing efforts in the past were focused on very localized efforts. We have expanded that. There's a lot more media in market today than there was. We continue to refine that media approach to make sure that it's effective. And that's driving improved penetration. And again, really importantly, for that team, their focus is 2 things. It's about getting really good enablements in the ground, efficiently and at speed and it's about driving penetration as fast as we can, so that we can shorten the time to pay back. So kudos to the team, we'll continue to evolve those programs to make sure they're effective, but we feel very good about what we've done to date.

Your next question comes from Batya Levi with UBS.

Can you provide a little bit more context on the [ cloud ] sales funnel that you mentioned in 1Q? And with that coming in into the second quarter, can we also expect maybe business revenue decline to be the low point in 1Q as well? And maybe if you could touch on the competitive environment for these new next-gen services that you're building up that would be helpful.

Sure, you want to start?

Yes. So I'll take the first part and then turn it back to Kate. I think, Batya, it's too early to say that first quarter is going to be the low point because we obviously do have the legacy drag that we've talked about openly. And it's going to be choppy as we go through the year. What I would say is that the results that we saw in first quarter, we're really pleased with, but it's 1 data point. And the team is focused on rigorous execution to make sure that, that continues and obviously converting that funnel into installs as we go forward. So a little early yet to call how revenue performs quarter-by-quarter this year. EBITDA, we're more confident in because of the cost savings that we've been able to generate with some of the activities we talked about.

And with respect to your question around the competitive environment, it's clear that we are focusing on the future and applying all of our resources to building a platform to give customers what they -- what they want. And every customer conversation that I have basically is reflected in this notion of capacity on demand. And really, like when I talk about cloudifying telecom, it's really about having the ability to fire up any service, anytime, anywhere and to do so with dynamic bandwidth and all of the digital capabilities that make it easy to not just consume network services, but to do so in a really, really complex environment from on-prem to edge and in the cloud and back and to push processing and data workloads where it makes sense to do so cost effectively. Traditional telecom doesn't account for that. It's too physically oriented and doesn't have that digital wrapper to enable what I just explained. We're investing in it heavily, and what we're hearing from our customers and our partners is that we're the only ones that are. And I think that's differentiating. We're very committed to it. And as such, we're getting what I see is a nice increase in demand across the board for our products and services. That's translating into a healthier pipe.

Your next question comes from the line of Dave Barden with Bank of America.

So if I could, just the first question would be related to Batya's question. Kate, if we went backwards 5 or 6 years ago, MPLS would have been the growth driver of the business, SD-WAN was this very small thing that was coming up the curve. Then 3 or 4 years ago, MPLS kind of stopped growing and SD-WAN started growing significantly as a cost savings opportunity. And now we're talking about maybe high speed, low latency custom private networks. And I'm wondering kind of as you think about the kind of interplay of these different product arcs, your confidence level that the next generation of the next product isn't the product that kind of cannibalizes the existing products that are the meat and potatoes of the business today. And then the second question, Chris, if I could, just on the TSA, congrats for getting it all done. Our math is that it contributes $200 million of incremental interest expense to the business. Is that roughly right? And if it is, you've reiterated all your guidance, kind of can you talk about how that $200 million fits into all the numbers and where the offset comes from?

I'll start and pass the mic over to Chris. So the first part of your question regarding net new capabilities and how the portfolio grows over time rather than just cannibalizing. It's a great one. What we see is increased demand for the ability to consume services in the digital era. And as I said before, there's not a lot -- there aren't a lot of companies out there who are doing this, which gives us a bit of a differentiated value proposition when we approach customers with NaaS, but also with ExaSwitch, which is an important part of this story of creating fabric to basically create infinitely flexible and dynamic connectivity solutions. That's going to do 2 things. Number one, it builds a digital platform upon which we can build more services like Lumen Defender service I just described earlier in my remarks, and increase our portfolio and the amount of available market we're going after. We're entering into a new space with some of these new offerings. The second thing it does is -- it allows us to provide a seamless customer experience where we can help customers go faster in terms of their digitization and they are starting to recognize that and choose this more, which gives us a huge share take opportunity. So it's 2 ways to grow, acquire more customers, which is happening. And the second way is to sell more to them, which is also happening, what you saw in both of the metrics that I shared earlier with net new customers and the size of the deals that we're selling to them. Chris?

Yes. And that's correct on the interest expense, roughly $200 million. This year, we gave a range. It could be a little less than that, just given the timing of when that deal was consummated. And we talked really last year and late last year in our guidance about the fact that we adjusted our capital spend to compensate for that from a free cash flow standpoint. Between that and the cost of capital considerations and the time to pay back on consumer fiber, we pulled back on the build plan from $750,000 a year to $0.5 million a year. So that's how that's contemplated. I think importantly, though, David, we're not done, right? There will be opportunities for us to use new sources of cash, additional sources of cash to continue to focus on delevering, and that's job #1. So you'll see more as we go forward.

Your next question comes from Simon Flannery with Morgan Stanley.

Chris, I wonder could you help us a little bit more with the EBITDA cadence? I understand the head count reductions. But I think according to the Q, it looks like they're sort of being phased in during the second quarter. So how do we think about the cost line items over the kind of Q1 to Q2, Q2 to Q3? Any sense of what the step functions will be there? And then, Kate, could you -- I think there was -- Kate, you briefly touched on AI in your comments, and I'd just love to dig a little bit more deeply into what do you see as the big buckets of opportunity to drive cost out of the business, drive improved customer experience in AI? And what's the timing on getting those sort of work streams to kind of full strength?

Yes. So the -- just on the timing, Simon, obviously, we don't give quarterly guidance. I'm going to be careful here. The reality is that I think if you look at the savings, you'll see a lot of the benefits start in Q2 will be at run rate in Q3. Don't forget in your modeling, Q3 is always seasonally our highest cost quarter because it's when we're doing a lot of maintenance. It's obviously our highest use of energy for cooling and whatnot. But I don't want to get into specific quarterly guidance other than to say we're confident that Q1 is the low point in EBITDA for the year.

And regarding your question about leveraging some of these technologies to drive productivity and create the digital experience for our customers, to help them choose us over other platforms. We're super excited about our progress so far. But what I've explained to you in my prepared remarks was really just one portion of this. Chris used the term shape-shifting. We're reshaping Lumen to be a digital company, and that requires us to do a bunch of things. We're going to import net new skills into the company. You're seeing me do that at the leadership team. It's happening across the entire company. Number two, you'll see us reskill and upskill different populations across the company depending on what organization... [Audio Gap] And, of course, but we'll do that selectively as and where and we'll always take the opportunity to redeploy those folks to higher priority items. And what we're seeing so far, last year, we went really hard at this opportunity being beta customers for various AI capabilities, both native to our enterprise system platform as well as being beta customers for things like Microsoft 365 Copilot. We're really pleased with the adoption of those capabilities across the company at every level, across every function, and we're seeing amazing return on those investments. I'll give you 2 examples. The first is in knowledge worker productivity. We're seeing about 30 minutes a day of productivity per person across the company. That equates to around 700,000 hours of time that we get to redeploy towards higher priority items. We're super excited about that. The second thing we're seeing is about a 30% increase in our developer productivity, deploying AI and GitHub. And so that is also extremely exciting for a company that's now developing a digital platform. I think we can talk about the 14 new innovations in NaaS being directly attributable to a highly productive development team. We have another 16 innovations that we've delivered to market across ExaSwitch and our security and edge platforms, all since October. So 30 net new innovations since that October time frame, that's multiple times the number of productivity that we were able to achieve in prior periods. So, lots of progress there, and we're continuing to go after it. It's a major part of our turnaround.

Your next question comes from Nick Del Deo with MoffettNathanson.

First, Kate, you talked about seeing demand for high-capacity solutions driven by AI. Is it fair to say that it's waves and dark fiber that are benefiting the most from that trend? And to what degree was this component of your bookings responsible for the overall increase in bookings that you cited? And then second, I think you've also talked about Mid-Market enterprise being a segment that you turned to growth after public sector. And I think you've talked about the channel being an important driver of that -- engage your channel partners more. So I guess what can you share regarding the quality of the deals that the channel is bringing in and the compensation you're paying to those partners for them?

I'll start with your first question. Yes, we're seeing a huge increase in demand for waves and for dark fiber, for sure. We're also seeing an increase in demand for what I referred to as custom private networks. And think of it as big technology companies or cloud companies that need to interconnect their data centers to push data back and forth, huge workloads and to do so in a friction-free way as possible. And they're coming to us for a couple of reasons. Number one, we have conduits. So there's this ability to continue to overpull fiber and it gives a lot of flexibility there and room to grow. The second piece of it is because of the digital platform and because of our mission around delivering capacity on demand at every level of the network, it's the value proposition of doing business with Lumen. So that's the first part. I think the second part regarding channel productivity. Let me just say that we're excited to be focused on the channel. We're excited to continue to recruit and help our partners to be as productive as humanly possible. We're seeing improvement there, but it's not enough yet. And so I just look at it as a huge opportunity to have more feet on the street, selling these net new capabilities. And I think we're getting better at building the rhythms around a true commercial engine, which is both direct and indirect for these net new capabilities like NaaS, like enterprise to cloud connectivity through ExaSwitch and like Lumen Defender with our security offering. So more to the story coming. But Chris, do you want to add anything?

Yes. Yes, Nick. And I think Kate hit most of it. I think the key thing for us. If I think about a large enterprise, Mid-Market, public sector, public sector first to turn a well-established sales motion deeply connected to the customer and understanding of the customer. And that was really strong muscle tissue at Lumen, frankly. Mid-Market was almost the exact opposite. It's -- there wasn't a lot there. There was a heavy reliance on a direct selling motion. The product set was really large enterprise focused trying to sell to a Mid-Market customer. And so the bar was lower and there's been tremendous work on fixing the products that dramatically expanding the partner ecosystem to reach a bigger customer base. As Kate said, getting a lot of processes and measurement in place that's beginning to work. And I won't give the numbers specifically, but what I can tell you is that our partner ecosystem, those new logos are selling at a rate that's into double digits in terms of growth, and it really is those growth products. So the motion is working. Large enterprise is the most difficult pivot because it's big, and because it was probably least prepared for where we're going in terms of the kind of instrumentation, measurement, et cetera. And it's obviously where a lot of the products that is focused. So a lot of work has happened there. It's not that it hasn't happened. It's just going to be longer to see that turnaround take place.

Thank you, Nick. Operator we will take the next question.

Your next question comes from Greg Williams with TD Cowen.

I just have one on the ILEC opportunities. You mentioned you take a market-by-market approach. Just wondering about the operational complexity with the plant specifically if you sold some of it. When you sold Brightspeed, you noted there wasn't much overlap with the enterprise market. So it was like a cleaner break and now you have a lot of plant that's intertwined with the Enterprise segments. Just wondering if there's more complexity and more time to take for any opportunities?

Yes. I mean it's -- there is more complexity, but that's part of what we do. It's obviously contemplated in everything that we look at. And it is in no way an impediment to us having the flexibility to do things that we think are right strategically. So I would say it's a consideration, but it's certainly not a driver of our thinking.

Operator, we will take the next question.

Your next question comes from Frank Louthan with Raymond James.

Can you walk us through on Slide 6, what percentage is that Lumen Digital Platform of revenue now? And where can that go? And then second question, Black Lotus Labs a pretty fair amount of success. Would that be better as a stand-alone company to drive -- could you drive some shareholder value by spinning that out? Or is that best left inside the company?

Thanks. So couple of things. The first is the Slide 6 shows the digital platform, NaaS, ExaSwitch, Edge Fabric and Security. That is a significant opportunity for growth across all those capabilities, not something we're ready to report on. As we look to become a growth company, we're maniacally focused on delivering customer value. That's about making sure we delight every single customer one at a ton and bring them in the door. And we're going to focus on our key metric internally is customer adoption. That's why I shared we're across 20 different industries because the number of industries that we can get to and then first, second, third, 10th, 20th, 25th customer, you start to go faster in each one and you get some momentum and critical mass for scale. So we're excited about the progress, lots more to do, but this is the future of the company. And it represents net new profit pools and available marketplaces that Lumen didn't have access to before. In the tens of billions across each one of these spaces, some in the hundreds of billions. And so we're excited at the opportunity. Black Lotus Labs is without a doubt the not-so-secret weapon. And they have helped keep the country safe. Their value is incredible, and we're incredibly proud to have them in our portfolio. The reason why they're so valuable is because they see our network traffic. And the capabilities that we're developing and launching in Lumen Defender take their patented data models and basically enable those to be available in an integrated fashion with our network. Nobody else is doing that right now. So we're excited about the potential value and you will see them as an integral part of our team moving forward.

Thank you, Frank. Operator, we've got time for one last question.

Your next question comes from Jonathan Chaplin with New Street.

I had just a couple on the Mass Markets business. So I was wondering if the timing of when you think you'll get to the end of your inquiry into how best to monetize these assets, whether it's wholesale agreements or JVs or selling off market. And I'm wondering if you look at different assets differently as you go through that process. For instance, are you more likely to hang on to fiber assets and sell copper assets or vice versa? And then on net adds, the result was really strong this quarter as you mentioned. I'm wondering if the momentum that you built in the quarter continues as we go through the year or if you sort of reached a new level, and this is the new normal?

Yes. So as it relates to the market-by-market assessment, I don't want to put a time frame on that because I think it's something that we're going to continue to look at. But as we have news, we'll certainly share it. The net add performance, we're not committing at this point to see that increase quarter-on-quarter. That said, as we have scaled the marketing and continue to refine that approach, that's obviously the goal. So I can tell you that there's just intense focus from the team on driving that performance. And hopefully, we can continue to show good results in the coming quarters.

And one more, Chris, if I may, on ARPU. It's the one where I'd expect ARPU to be sort of accelerating for you guys as well. It's a bit slower, a few [ raise prices as ] your peers. Is there something -- given that you guys have this, one of the fastest fiber products in the market, most of your [indiscernible] taking a gigabit per second. Is there something holding back ARPU growth?

There's nothing structurally that's holding it back. Obviously, as we're driving penetration we've got to make the trade-off between at what time you raise prices, right? You do it at the front end and then try to drive penetration? Or is that something that changes over time. And again, there's a lot of work that's done really on a market-by-market basis given the competitive environment to determine that. Our view, my view is we're far better off driving sub growth as fast as we can. Obviously taking the price that we can along the way, but to turn this into a pricing game upfront rather than driving overall customer adoption, probably not the best approach.

That does conclude our question-and-answer session. And with that, that does 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.