Greetings. And welcome to Lumen Technologies’ Fourth Quarter 2021 Earnings Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. As a reminder, this conference is being recorded today, Wednesday, February 9, 2022. It is now my pleasure to turn the conference over to Mike McCormack, Senior Vice President, Investor Relations. Please go ahead.

Thank you, France. Good afternoon, everyone. And thank you for joining us for the Lumen Technologies fourth quarter 2021 earnings call. Joining us on the call today are Jeff Storey, President and Chief Executive Officer; and Neel Dev, 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 2021 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 that 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, all of which can be found on the Investor Relations section of the Lumen website. And with that, I will turn the call over to Jeff.

Good afternoon, everyone, and thank you for joining us. 2022 brings new beginnings for Lumen. The team is energized for rapid change as we streamline our assets and aggressively invest to drive growth. I want to be clear, our focus is on turning our topline positive with profitable revenue. Every employee in our organization, our sales team, field techs, customer care, support functions is focused on this objective. On today’s call, I will provide a few thoughts on our fourth quarter results, an update on our announced transactions, a review of our key capital allocation priorities and a review of our investment plans, which we believe will position the company for long-term sustainable revenue growth. Neel will discuss the fourth quarter in more detail, provide our outlook for 2022 and update expectations for the timing and financial impact of our two announced transactions. We will reserve time after Neel’s remarks for your questions. Our fourth quarter revenue trend was stable compared to the third quarter, and on an organic basis, our business revenue was unchanged from the third quarter. We said previously, we do not expect a straight-line revenue growth, that our forward indicators provide us confidence that we can achieve our stated long-term goals. Quarterly sales were once again strong and the funnel remains above pre-pandemic levels. The Lumen platform is transforming the way businesses approach their technology needs, bringing best-in-class solutions to enable Fourth Industrial Revolution use cases and enabling the digital transformation for Enterprises. Enterprises are adjusting to new hybrid workloads and Lumen, as well as our world-class partners are delivering the expertise necessary for our customers to succeed. As you can imagine, the excitement within Lumen is high as we position our Quantum Fiber platform for a major acceleration. Our robust symmetric, all-digital experience is resonating with customers. Quantum will help drive revenue growth and lower the operating costs for our Mass Markets segment, improving the profitability and durability of the business. At the same time, incumbency provides us a meaningful cost advantage, as we build and launch new Quantum markets and drive penetration gains. Our expectation for long-term penetration is fully supported by the strength of the product, as well as the performance in our existing Quantum markets. Even in our nascent Quantum footprint, we have achieved 29% penetration with limited marketing activities, more than doubling the penetration we have in our legacy copper areas. As we pivot from micro-targeting to a market-based approach, we expect to attract and retain new and existing customers to our superior product capabilities much more aggressively. The opportunity for Quantum is significant. I hope you can feel our excitement for the future of Lumen, as we invest to drive Enterprise and Quantum Fiber growth. Let’s shift to a few quick thoughts about our previously announced transactions. These transactions allow us to focus on the areas of our business that we believe are best poised for growth. As you think about the pro forma revenue mix, over one-third of our Mass Markets exposure to legacy voice and other revenue will be divested. Not only does our revenue mix improve, but these transactions also delivered strong valuations, supporting the view that our overall asset portfolio remains deeply discounted by the market. While we disagree with our current valuation, there’s only one way to realize our true market value, execution. We get it, and we are focused on delivering. We are making good progress toward closing both deals and Neel will provide an update on our expected timing and financial impacts. We are working to be a strong partner to both Stonepeak and Apollo, as they onboard our employees and customers and as we help position them for success. Last quarter, we provided you our top five capital allocation priorities, as we deploy our significant free cash flow and utilize the proceeds from these valuable transactions. I hope I have been clear that investing in growth is always our highest priority and we will invest in both CapEx and OpEx to lay the foundation to achieve our goals. I feel we are in a great position entering 2022. Let me start with Quantum Fiber. There’s a tremendous amount of activity here at Lumen as we rev up the Quantum engine. We are readying the platform to deliver on our plan and remain very confident in our opportunity to deliver the terrific experience provided by Quantum to more than 12 million locations over the coming years. Quantum Fiber revenue grew 22% year-over-year, and we look forward to the growth that will come from our much more aggressive Quantum stance. We see a long-term significant and sustainable revenue growth opportunity for our Mass Markets business resulting from our Quantum Fiber investment. As of the end of the fourth quarter, we had approximately 2.6 million enabled locations within the retained 16 states, in line with our expectation outlined last quarter. Our excitement builds as we enter 2022, with our plan to accelerate aggressively and ramp that enablement pace to over 1 million new locations, with a goal of hitting the run rate of 1.5 million to 2 million enablements per year as we exit 2022. Our fully funded 2022 Quantum Fiber plan will enable millions of customer locations to experience our best-in-breed Quantum experience and product capability that we believe will drive higher ARPU, lower churn, and significant customer lifetime value. We will invest heavily to bring the Quantum experience to our customers, especially in the areas of product development, marketing, brand and go-to-market sales initiatives. Both Enterprise and Mass Markets supply chains are stressed, and we continue working very closely with our diverse and valued suppliers to mitigate risk as we execute on our growth objectives. In addition, we are managing through this inflationary environment, and with some exceptions, do not expect pricing pressures to impede our goals. Our excitement for Quantum Fiber is easy to understand, but we are equally excited about our Enterprise business, as we continue to invest aggressively in our edge compute and storage platforms, our managed service offerings, SASE and our security products. Our customers' digital experience across our core networking services is unique and drives success with a customer-first posture. Along those lines, we have successfully launched our fully digital self-service edge compute ordering system, which allows existing and new customers to self-provision services, including bare-metal and storage solutions in minutes without the need for human interaction. We believe our extensive long-haul and dense metro infrastructure and our ultra-low latency, ultra-high capacity network provide cost advantages over many of our competitors and deliver a powerful customer experience. We are seeing early signs that our customers understand that value proposition, and our recently announced $1.2 billion network services contract win for the U.S. Department of Agriculture is a great example. As part of this solution, we are delivering secure remote access, managed data, contact center, and cloud connectivity solutions to more than 10,000 USDA locations across the country and abroad. Awarded under the $50 billion Enterprise Infrastructure Solutions or EIS program, the 11-year task order is illustrative of the broad range of products and services offered on the Lumen platform. This is a long list, but our services to the USDA include SD-WAN, MTIPS, Zero Trust networking, edge computing, VPN, managed security, UCaaS, voice over IP, Ethernet and wavelengths, and related equipment and engineering services. I mentioned earlier that we had another strong sales quarter in Q4. While the USDA deal highlights our expertise in the public sector, our other sales within North American Enterprise, which do not include the public sector, were up both sequentially and year-over-year. In fact, December was the highest sales month we have seen in several years for this area. Beyond driving growth, we believe returning cash to shareholders is a very important part of the Lumen strategy and that the $1 per share level is attractive and sustainable long-term. As we said, our payout ratio will likely rise in the near-term during the accelerated Quantum build phase, which we think should be viewed as a discrete project. The completion of the multiyear build phase, coupled with our expectation for topline growth, should return us to more normalized payout ratios over time. We will continue to manage our balance sheet to remain relatively leverage-neutral through our Quantum Fiber deployment plan, but we do expect the timeline to reach our target net leverage ratio of 2.75 times to 3.25 times adjusted EBITDA will be extended. To be clear, relatively leverage neutral is inclusive of the impact of not only the transactions but also the CAF II to RDOF transition. We will also continue to evaluate our asset portfolio, and I hope our opportunistic but open approach to asset optimization is fully appreciated. Let me be clear, no urgency for us to divest additional assets, and we will only pursue opportunities that offer both a compelling valuation and a clear strategic benefit. Lastly, I want to emphasize that we continue to believe our shares are deeply discounted and do not reflect the tremendous opportunity we see for Lumen going forward. Our Board remains prepared to authorize further buybacks on short notice if we believe a buyback provides the best and most prudent return for our shareholders. With that, I will turn the call over to Neel to discuss our fourth quarter results.

Thank you, Jeff, and good afternoon, everyone. We entered 2022 with a clear focus on closing two significant transactions and executing on our plans to drive future growth. I will begin with our financial summary for 2021. We generated adjusted EBITDA of $8.440 billion in 2021 and on a full year basis expanded margins by over 100 basis points year-over-year. We continue to make progress on our objective of improving revenue trajectory, with fourth quarter down 0.8% sequentially. When adjusted for foreign currency and the sale of our last remaining correctional facilities business during the quarter, our sequential revenue declined 0.5% in the fourth quarter. We again delivered solid free cash flow of $3.742 billion. We returned $2.1 billion to our shareholders during the year through quarterly dividend payments and our stock repurchase program. Additionally, we reduced net debt by $1.5 billion during 2021 and exited the year with leverage at 3.6 times. We also announced two significant transactions at very attractive multiples with an aggregate value of over $10 billion. Turning to revenue, in the fourth quarter, total revenue declined 5.4% on a year-over-year basis to $4.847 billion. Year-over-year metrics continued to be impacted by COVID-related demand in 2020. On a sequential basis, total revenue declined 0.8%, in line with the sequential rate of decline in the third quarter. Business revenue in the fourth quarter declined 0.4% sequentially. On a year-over-year basis, revenue declined 4.7% to $3.494 billion. Normalizing for foreign currency headwinds and the sale of our correctional facilities business, sequential revenue was flat and declined 4.3% on a year-over-year basis. Within business, iGAM revenue declined 0.2% sequentially and 1.5% on a year-over-year basis. On a constant currency basis, iGAM grew 0.6% sequentially and declined 1% year-over-year. The year-over-year decline was due primarily to the large customer disconnect which I have referenced on previous calls. We saw sequential benefits from compute and application services, which was driven by managed security and cloud services. Within large Enterprise, in the fourth quarter, we sold the remainder of our correctional facilities communication services business. The sale of this business at the end of October impacted revenue by about $7 million in the fourth quarter, and the impact on a full quarter basis would have been about $10 million. Normalizing for the sale, large Enterprise declined 0.3% sequentially and declined 5.9% on a year-over-year basis. We had strength sequentially in compute and application services, driven by our IT solutions and cloud services. Year-over-year trends were impacted by the surge in COVID-related usage in 2020 and the timing of non-recurring revenues in our public sector channel. Mid-market Enterprise declined 0.2% sequentially and 7.1% on a year-over-year basis, with both measures showing improvement compared to the third quarter. Wholesale revenue was essentially flat on a sequential basis and year-over-year declined 4.3% versus the 7% decline in the third quarter. Wholesale benefited from demand for fiber infrastructure and a few one-time items. We continue to manage this business for cash. Computer and application services for Enterprise channels grew 3.9% sequentially, showing growth across all channels, but declined 2.2% year-over-year. The year-over-year decline is primarily driven by the previously mentioned large iGAM customer disconnect. IP and data services for Enterprise channels declined both sequentially and year-over-year due to fewer new VPN network deployments. We saw continued increased demand for IP in the fourth quarter as customers transition to SD-WAN and hybrid work environments. Fiber infrastructure services for Enterprise channels declined 2.6% sequentially and 2.4% year-over-year. These products have significant professional services and equipment related to complex network deployments. The sequential and year-over-year revenue variability is driven primarily by these non-recurring services. The voice and other services, which include our legacy services, declined both sequentially and on a year-over-year basis as we manage these areas for cash. Voice comparisons continued to be impacted by higher COVID-related usage in the year-ago quarter. Turning to Mass Markets, fourth quarter 2021 revenue declined 1.9% sequentially. Our Mass Markets fiber broadband revenue grew 22% year-over-year this quarter. During the quarter, we added 29,000 Quantum Fiber customers, up from 25,000 adds in the prior year fourth quarter. Turning to adjusted EBITDA, for the fourth quarter of 2021, adjusted EBITDA, excluding special items was $2.088 billion, compared to $2.188 billion in the year-ago quarter. Special items this quarter totaled $19 million and were related primarily to transaction and separation activities. We continued to drive healthy EBITDA margins during the quarter, growing by about 40 basis points year-over-year to 43.1%. Capital expenditures for the fourth quarter of 2021 were $848 million. While we continue to focus on capital efficiencies, capital spending was up both sequentially and year-over-year as we increased success-based spending and invested in the accelerated Quantum Fiber build plan. We expect capital expenditures to increase going forward as our Quantum Fiber build ramps. In the fourth quarter of 2021, the company generated free cash flow of $776 million. At the beginning of each year, we evaluate our external reporting and make adjustments to better align our financial reporting with management focus and drive lot of our business. In 2022, we are adjusting our Mass Markets product revenue reporting categories to Fiber Broadband, Other Broadband, and Voice and Other. The two key reasons for these changes are the increasing importance of our Quantum Fiber platform and the completion of the CAF II program. Given its relatively small impact, the RDOF subsidy revenue will be included in the Voice and Other category in our new reporting structure. We do not contemplate making any additional changes to our reporting at this time. Moving on to the business outlook for 2022, as we focus on portfolio rationalization and transforming the business, we will have several moving pieces that will complicate year-over-year comparability. Before I get into financial guidance, I will touch on some of those factors. First of all, as a reminder, the CAF II subsidy ended in 2021, which will impact year-over-year adjusted EBITDA by about $500 million. When combined, the two divested assets are expected to generate about $1.7 billion of EBITDA with capital spending of about $450 million in 2022. We now expect the transactions to close in early third quarter of this year. For simplicity of guidance, we have assumed first-half results are included in our consolidated results. At this point, we don’t expect deal close related timing variance to be material. For the full year 2022, we expect adjusted EBITDA to be in the range of $6.5 billion to $6.7 billion. When bridging to our 2022 full-year adjusted EBITDA guidance, in addition to the obvious CAF II completion and divested business EBITDA, there are a few other drivers to keep in mind. As Jeff mentioned, we have significantly stepped up our investments and growth initiatives for Enterprise and scaling our Quantum Fiber business. As for the divestitures, we will have separation costs and dissynergies, which will impact near-term results. As we prioritize growth initiatives and supporting our divestitures in 2022, we expect our transformation savings to be lower than prior years. For the full year 2022, we expect total capital expenditures in the range of $3.2 billion to $3.4 billion. Within that, we expect to spend about $1 billion of capital on Quantum during 2022. We expect to generate free cash flow in the range of $1.6 billion to $1.8 billion for the full year 2022. For 2022, we do not have any required contributions to the pension fund, and our free cash flow guidance does not include any discretionary contributions. As a reminder, our first quarter typically has higher working capital use, driven by timing of bonus payments and other prepaid expenses. We expect net cash interest expense in the range of $1.3 billion to $1.4 billion for 2022. As Jeff mentioned, we expect to stay leverage neutral as we close the transactions and scale our Quantum Fiber business. In terms of special items for 2022, we expect a significant ramp-up in costs compared to prior years, primarily driven by dedicated third-party costs to support transition services for the divestitures. The reimbursement for these services will be in other income, with no material net impact to our cash flows. In closing, 2022 is all about executing on our growth initiatives for the Enterprise Lumen platform and scaling our Quantum Fiber business that fuel our return to growth. As a reminder, in addition to free cash flow generated from the business, we expect about $7 billion in discretionary cash proceeds from the transactions after the transfer of debt and transaction costs. The combination of free cash flow from the business and proceeds from portfolio rationalization efforts support our capital allocation priorities that Jeff highlighted. With that, we are ready for your questions.

Thank you. Our first question is from Michael Rollins with Citi. Please go ahead.

Thanks and good afternoon. As you are thinking about the opportunities in 2022 to improve revenue with some of the priorities you mentioned earlier in the call, just curious, as you look at the charts like on Page 6 and 7 that kind of lay out the year-over-year changes in revenue versus the sequential changes in revenue, where should investors focus more in trying to think about the evolution of performance? Is the sequential much more relevant? Or is the year-over-year, as sometimes beginning of the year, you have price changes and other annual updates to your customers and your sales? And then just separately, one housekeeping item. I think there was a mention earlier that in wholesale, there were some one-time items. Just curious if you can unpack the amount of those one-time items impacting the wholesale revenues. Thanks.

Sure. I will start with the wholesale one-time items. In the wholesale channel, there are always carrier settlements and similar occurrences. Overall, we experienced about $10 million to $15 million more than usual. Regarding your question about sequential compared to year-over-year performance, in 2020, a significant portion of our revenue was influenced by COVID in our legacy services. Moving forward, both sequential and year-over-year metrics will become increasingly relevant. However, as you noted, the first quarter typically includes large rebates, among other factors. While there is nothing specific to highlight, we often face contract rerate pressure during this time, and the fourth quarter is usually strong seasonally. Therefore, we’ll see some seasonality at play. Aside from that, there is nothing specific to mention. Additionally, as Jeff pointed out in his comments, once we finalize the transactions, the revenue mix will improve significantly, as a substantial amount of voice and other legacy revenues will shift with the transaction, positively affecting the mix going forward.

Thanks.

Thanks, Michael. All right. Next question.

Our next question is from Eric Luebchow with Wells Fargo. Please go ahead.

Hi. Thanks for taking the question. Quickly, I just wanted to talk about the capital allocation priorities. Obviously, your dividend coverage on free cash flow is tightening this year as you ramp up fiber spending. And beyond this year, as you ramp that up even more, wondering if that will even be fully covered. And if it’s not, how should we think about the split between one-time fiber expansion CapEx versus recurring capital intensity in the business and how we should think about that through the investment cycle? And then second, I just wanted to get a sense, Neel, if you could help size up some of the cost dissynergies. I think if you take out the $500 million of CAF II and the divested assets, the half-year contribution, you get to about $7 billion of EBITDA, and your guide is for about $400 million decline from that level for the full year. So I am just wondering how we should think about how those impact the outlook for the full year? Thank you.

Sure. Eric, I will take the first part and then let Neel take the second question. As we look at the dividend and the payout ratio, and I have said this before, we think that the dividend is an important part of our shareholder value proposition. We think the $1 per share is attractive to investors and it’s sustainable, so we are very comfortable with the dividend there. I have also said that in 2022 and the next few years, we are going to be investing in growth, and you mentioned Quantum Fiber, and with the Quantum Fiber build, we think that that should be viewed as a discrete project that starts already and ends in a few years as we complete the 12 million enablements that we expect over the coming years. We also expect to return to topline revenue growth. And with those two things, while we do see the payout ratio rising in the near-term, with those two things, we think that it will return to more normal levels over time.

So Eric, on your question on dissynergies, I think just to step back a little bit, and if you think about the transaction EBITDA, those are deal basis EBITDA, if you will. So we have allocated costs for shared function, etc. And so it’s a little bit of a moving target in terms of we know what they are going to be, but we are already working on rightsizing those costs and we will continue to do so as we go forward. And the other thing I mentioned is that there is also a little bit of an opportunity cost in 2022, as we focus on the separation of the business and as we focus on all the investments for growth, just think about our IT resources. We are not focused as much on transformation. And so our savings will be a little lighter. And so we factored all of that into the guidance. But the savings don’t go away, and so we will continue to focus on our transformation savings and we will be able to continue to focus on driving those costs out of the business.

Thanks, guys.

Thanks, Eric. France, next question?

Our next question is from Simon Flannery with Morgan Stanley. Please go ahead.

Thank you. Good evening. It's great to hear about the revenue growth for Quantum Fiber and the build plans. Regarding the build plans, should we consider that the 1 million target for this year will be achieved in a fairly linear manner, or is it still expected to be heavily weighted towards the second half of the year to reach that $1.5 million to $2 million? Additionally, why not speed up the process? There's clearly funding available from the infrastructure bill and we've seen fixed wireless gain momentum. With the potential for numerous homes, what is preventing you from accelerating that pace? Also, Neel, on the topic of taxes, I noticed you mentioned around $100 million in cash taxes. What should we anticipate for the ongoing run-rate cash taxes once the transactions are finalized? Will that increase by a few hundred million as we move from 2022 into 2023? Thank you.

So Simon, the build plan for Quantum Fiber is not expected to follow a linear progression. It takes time to develop these capabilities and ensure that we have the necessary construction resources in place. We are currently progressing at a rate of about 500,000 homes and business locations. By the end of the year, we aim to reach a total of 1 million locations. While the plan has some elements that are back-end loaded, it is not significantly so. The challenges affecting our pace include the complexity of the work involved and supply chain issues, particularly regarding equipment and chip availability. We will continue to manage these challenges. Our goal is to reach between 1.5 million to 2 million homes by year-end, as we work towards that target leading into 2023. Neel, would you like to address the cash taxes?

Yes. Simon, on cash taxes, as we have mentioned before, we will use up most of the substantial part of the NOLs this year, a combination of our operating income and the transactions. And you can see that $100 million that we guided to this year is fairly close to what it has been in the past. But going forward, a good assumption is our cash taxes will be fairly close to our GAAP taxes. And at this point, the 26% effective rate is probably a pretty good assumption.

Great. Thanks a lot.

Thanks a lot. Our next question, please.

Our next question is from Phil Cusick with JPMorgan. Please go ahead.

Hi, guys. Forgive me if we just sort of go back to this, but I wanted to talk about the sort of CapEx pace and that acceleration into the back half. You have talked in the past about other projects like network transformation that wouldn’t need to be done this year as an offset. And so I wanted to sort of quantify what that reduction might be as we think about the growth in fiber spending this year and the pace that we are going to exit as we start to think about 2023 CapEx. Can you help us with that? Thanks.

Yes. Let me take a first pass and then let Neel add to it. I don’t want to get into discrete projects that we are funding and not funding, but let me give you a sense of the CapEx and what we fund. There is a certain amount of capital that we call just ongoing operational capital, keep-the-lights-on type stuff. But the majority of our capital funding is success-based or project-based. The project-based things that we have talked about in 2021, we spent a lot of money on edge computing, building a coverage model for edge computing. We finished the year with more than 95% of our US enterprises within five milliseconds of our footprint. We are not going to spend that money again next year. Now what I hope we do, or this year in 2022, what I hope we do is continue to densify the equipment in those locations because that means we are being successful in selling our products and services. So we spend a substantial amount of money on that success-based. Quantum Fiber, we spent money to enable 400,000 homes in 2021. We will spend money to enable 1 million homes and get to the run rate that I talked about in answering Simon’s question. We will continue to spend on that project and really focus there. Beyond that, we manage projects in and out. We are not starving anything to do those activities. We are investing heavily in growth. And I say that on CapEx. I also say it on OpEx. We are investing heavily in growth on OpEx to make sure that we have the product capabilities, to make sure that we have the go-to-market strategy, the brand awareness, all of the things that go into effective selling. We are seeing with the results in the fourth quarter, we are seeing all of that continuing to benefit the company. Neel?

Yes. Just to underline the point that Jeff made on we are not constraining anything. I mentioned in my prepared remarks that we have about $1 billion for Quantum Fiber in the capital guidance that we provided. And to the extent that we can scale faster, if you look at the combination of our free cash flow and deal proceeds, we can easily ramp up more spending for Quantum Fiber. That won’t be the constraint. The constraint really is going to be mundane things like permitting, construction, getting it built, and those are the things that we are focused on scaling. And if we can scale those things and that means we end up spending more, I think we will lean into it.

And just one more comment, Phil, before you ask your follow-up questions. We are currently concentrating on our existing 2.6 million enablements and increasing our penetration in those areas. We are at approximately 29% penetration, which includes homes that we activated just last month. We want to ensure that we maintain our focus on boosting penetration within our current footprint.

Thanks. If I can just follow up quickly, and again, I am trying to think of the exit run rate this year. You have talked about the exit run rate in builds, but also I am thinking about CapEx. I mean, it seems like there could be another $700 million to $1 billion of CapEx next year in fiber in Quantum. Are there other projects that are still happening this year that we could think about, sort of, dropping away? Or should we think about next year being sort of the peak of CapEx on Quantum?

So Phil, the main takeaway is that our capital plan is flexible, as Jeff mentioned, and our priorities vary each year. For instance, many of the significant investments we've made in edge technology occurred in 2020. This year, our approach is more success-driven and at a much lower intensity. While I won't delve into specifics for 2023, you are correct in noting that Quantum will increase. We consider it a distinct project, but the overall plan will remain adaptable and focused on success.

Good. Thanks, Neel.

Thanks, Phil. Next question.

Our next question is from David Barden with Bank of America. Please go ahead.

Hi, guys. Thanks so much for taking the question. I guess the first one would be, Neel, if you could kind of give us any color about the revenue that we need to be taking out of the model when we are thinking about the second half of the year alongside some of the stuff you shared on the EBITDA, the cash flow side. And then the second question, I guess, Jeff, is if we take that $1.7 billion minus the $450 million CapEx and divide that in half at $625 million and then subtract that from the free cash flow guidance, it says that the kind of second half of the year, the dividend is barely covered, maybe a little covered. You talked about buybacks being in the mix with the Board. I was wondering if you could kind of elaborate on that a little bit about where that money would come from. Would you lever up to buy back stock if it got to that point? That would be helpful. Thank you.

Let me address the second question first. I won’t speculate on the Board's potential decisions or our future actions. What I can clarify is our focus on capital allocation, with the primary priority being growth investments. We are committed to spending on Quantum Fiber, SASE, IT solutions, and edge computing, which we believe will drive significant growth in the coming years. Regarding the dividend, we aim to maintain it. It's worth noting that our last buyback decreased our dividend obligation by about $81 million annually, so buybacks play a role in our dividend strategy as well. We want to remain relatively leverage-neutral, staying close to our current position. If appropriate, we will formulate a plan for further buybacks, but I won’t speculate on what that plan might entail or how the Board might view it. I just want to convey that we are open to the possibility.

And on your first question, David, you know we don’t provide revenue guidance so I am not going to get into providing guidance for revenue guidance for divested assets. But like I said, on EBITDA, our expectation is $1.7 billion, and our guidance assumes that we have half year’s worth of EBITDA in our consolidated results.

And one other point. We are getting $10.2 billion for the two transactions that we are doing and so there are other sources of funds.

Got it. And if I could just, maybe just one quick follow-up. Based on kind of some of the revenue mix benefits that you have talked about getting out of this thing, would it be fair to say that the margin on this portfolio, the Apollo portfolio, in particular, is going to be a higher margin portfolio than the kind of the business that you will have, which you are investing to grow?

Yes, you are right. It’s a higher EBITDA margin business. Generally, our legacy revenues are higher margins. So yes, post the transactions, you will see a dip in our EBITDA margin, which also means we will have more opportunity to expand margins going forward.

And we also expect Quantum Fiber to be successful. If you look at the markets that we retain, we have a couple of things going for us. Most of those big markets are growing markets. More people are moving to them. They are higher tech markets. We see a lot of opportunity in those states, and we have incumbency. And incumbency helps us sell. It helps us build. It helps us build at a lower cost, helps us operate, and we are moving to the all-digital experience that those customers have. And so we expect good things from our Quantum business.

All right. Thanks, guys. Appreciate it.

Thanks, David. France, next question.

Our next question is from Batya Levi with UBS. Please go ahead.

Great. Thank you. Can you provide more color and maybe quantify the planned investment for growth specific for this year that could come off next year and how we should think about the pacing through the year? And the second question on subsidies. With cash gone, can you just remind us how much subsidy dollars are left in the model? And I think you applied for $200 million in subsidies to replace some foreign equipment in the network. To the extent that you get that approved, how would you account for it and does the guidance include it? Thank you.

There’s a lot packed in there, Batya. So what Quantum Fiber investments are we going to make in 2022 that could come off in 2023? We are not giving guidance for 2023. But we do plan to ramp our Quantum Fiber investments. We have said that. We said that our plan for the year in 2022 is 1 million homes, and then we plan to do 1.5 million to 2 million at a run rate basis by the end of the year. So we are not giving forward-looking guidance, but we have given you an indication of what we expect and how we expect to build. Neel, I will let you take the question on how do we account for $200 million.

Yes. I believe your other question was about CAF II compared to RDOF. CAF II amounts to approximately $500 million, while RDOF is around $26 million annually. However, it's important to note that a significant portion of that will be associated with the divested assets, so it shouldn't be very impactful moving forward. Regarding the equipment reimbursement, we are still finalizing the details on that, so it's probably too early to provide any comments.

Got it. Just one quick follow-up on the investments. I appreciate the CapEx part, but in terms of the OpEx part that could hit this year, is there any way you could provide some color around that?

Yes. That is all included in our EBITDA guidance. I believe we will begin to see a gradual increase, although the changes will not be significant from one quarter to the next, with a possible slight uptick in the second half of the year. The main reason we are making these investments, as Jeff mentioned, is to enhance revenue and EBITDA growth in the coming years, and we are confident about that.

Okay. Thank you.

Thanks, Batya. France, next question please.

Thank you. Our next question is from Nick Del Deo with MoffettNathanson. Please go ahead.

Hi. Thanks for taking my questions. One for Jeff and one for Neel. Jeff, on the supply chain, you said it’s an issue but you didn’t want to overstate it. I guess as we think about your $1.5 million to $2 million passings target in the coming years, is that predicated on the supply chain situation improving? Or is that achievable if things stay stressed? And I guess, more generally, what’s your outlook on the supply chain? And then for Neel, I was wondering if you could help us better understand what relatively means in the context of staying relatively leverage-neutral? Are you talking about a quarter turn, a half turn? What sort of balance should we think about?

Yes. Let me address the first question regarding the supply chain. We are closely monitoring the situation and collaborating with our vendors across various sectors, including enterprise, consumer, and Fiber. We are actively implementing mitigation plans in case they are unable to fulfill our orders. This situation affects all areas of our business. I don’t want to exaggerate the issue, but it is something we are vigilant about while working with our vendors. Several months ago, we placed full-year and nine-month orders to ensure we secured our place in the queue for the equipment and resources we require. We are beginning to notice some companies delaying new orders. In response, we are developing our mitigation plans to incorporate this into our build strategy. It is a genuine concern that we are addressing. Neel?

Regarding leverage, in 2020 we were at approximately 3.6, and we exited 2021 at around the same level. We have reduced about $6 billion of debt since announcing our deleveraging plans, and $7 billion since the Level 3 transaction closed. It's important to note that we've managed our leverage in relation to our business profile effectively. Despite divesting some legacy revenues, we haven't increased our leverage. Considering Quantum Fiber, which is expected to be a high-growth and infrastructure-focused business, we need to evaluate our leverage strategy going forward. At this moment, we believe that a leverage level of 3.6 is a reasonable estimate, although there may be some fluctuations quarter-over-quarter. Until there is a significant change in our business profile, we don’t see the need for adjustments. As Jeff has mentioned multiple times, we're currently in an investment cycle involving a specific project: upgrading our copper network to fiber, which is a long-term asset. Hence, we are comfortable with some fluctuations in leverage as we finance this development.

Okay. Thank you, guys.

Thanks, Nick. Next question for us.

Our next question is from Greg Williams with Cowen. Please go ahead.

Great. Thanks for taking my questions. First one is just on rising rates. I mean, you have a couple of commitments here, the Fiber to the Home builds and staying leverage-neutral through the build and the dividend. How should we think about your priorities if it’s changing your capital allocation and your balance sheet amid escalating rate environment? Second question is just on the penetration goals for your Fiber to the Home as you are up 29%, and you noted nascent markets and unlimited marketing. So as you ramp up that marketing engine, what are your longer-term penetration targets or terminal penetration targets as we just think about your revenue inflection and free cash flow growth in the outer years? Thanks.

Okay. So with rising rates, Neel, I will let you address penetration. I will take the next question, and I'm sorry, Greg, what was the third one?

Just the penetration as I think about the revenue inflection and your outer year free cash flow.

Okay. Well, first of all, we are always focused on free cash flow. We think that is the primary driver of business success. And free cash flow is sustainable long-term free cash flow growth is what we are after. That’s why we are investing today. That’s why we divested or divesting the properties that we are divesting because we weren’t willing to invest to the level that we think they can tolerate. But it’s why we are investing in the 16 retained states. It’s why we are investing growth initiatives on the Enterprise side. It’s why we have invested in our relationship with the federal government. That’s why we are investing is to drive long-term sustainable free cash flow. Penetration for Quantum Fiber, we are at 29%, but that’s always going to be a blended average of new homes, new business locations for Mass Markets that we have just added with ones that we have been marketing at for a while. But we expect when we reach steady state, it will be north of 40% and every indicator is they are supporting it. If you look at the quality of the product that we have, we have a very effective competitive product and even with the limited marketing, we are doubling our penetration rates in our traditional copper areas. And the symmetrical nature of our product is far better for a work-from-anywhere environment. And the capacity needs continue to expand for consumers just like they are for businesses and business customers. With the abundance of streaming providers, the bundling of video is becoming less relevant. And so we see lots of factors in addition to our all-digital world-class experience that we are offering to customers, our great NPS scores, we see a lot of factors that give us high confidence in the 40%-plus numbers. Neel, on the rising rates?

Yes. So a couple of points. One, about 80% of our debt is fixed. If you combine that with the fact that we refinanced about $20-plus billion in the last three years and the fact that we are going to be paying down a significant amount of debt, and you look at our maturity profile, we have very minimal needs in terms of tapping the market. So I think we are very well positioned in terms of our balance sheet for negotiating in a rising rate environment.

Great. Thank you.

Operator, next question?

Our next question is from Frank Louthan with Raymond James. Please go ahead.

Great. Thank you. I wanted to ask about the longer term topline growth and I want to take Quantum Fiber out of it. You have set some aggressive goals there. That’s a great opportunity. I am sure you will be able to show the growth. But post these deals, you can have close to 80% of your revenue from the enterprise side, which has struggled for many years to show topline growth for a 12-month period. What are you going to be doing differently over the next two to three years to hit the overall topline growth goal that will really affect meaningful change in that business?

We have discussed various topics today, including edge computing. A significant percentage of US enterprises, around 95% to 97%, are located within 5 milliseconds of our network, which enables machine-to-machine control for our customers. This proximity also opens up opportunities for AI and machine learning applications as these businesses enter the 4th Industrial Revolution, enhancing their ability to gather, analyze, and act on data. We are focusing on secure access service edge (SASE), which involves software-defined networking at customer locations for improved connectivity and security. Additionally, we are implementing Dynamic Connections, a network-as-a-service that allows customers to leverage their purchased networks to connect with various cloud service providers. Our goal is to orchestrate these capabilities to simplify management and maintain connectivity in complex environments, supported by our IT solutions. We are launching a range of initiatives that are already showing success.

So that network proximity has been the case for a while, but are you indicating that there are new salespeople being hired or a significant number of new products being introduced to the market that put you ahead of your competitors? What is different about this opportunity with these new products that will bring about change compared to the last several years?

The fundamental nature of our products is distinct. We have unique network proximity with edge computing facilities located just a few milliseconds from our customers, which sets us apart from anyone else. Our capabilities in providing network as a service and integrating security into access solutions are unmatched. We will keep focusing on these areas. I believe that no one is better than Lumen at helping customers build and manage their networks while orchestrating connectivity needs. We will continue to stand out in the market. Additionally, our all-digital experience through the Lumen platform connects our customers with top partners for various applications, including wireless services and VMware for virtual machines. We have formed significant partnerships, and while I won’t list them all, I want to emphasize that we have excellent partners contributing to our offerings. Collectively, these solutions create a comprehensive package, and I don’t think it’s accurate to believe that other companies possess all these capabilities.

Thanks, Frank.

Thank you very much.

France, we have time for just one more.

Our last question will be from the line of Tim Horan with Oppenheimer. Please go ahead.

Thanks, guys. The edge compute product, can you talk about maybe some new use cases? Because I guess a lot of what were predicated on the growth areas for kind of new use cases and uniqueness of the infrastructure. Any color on what you are seeing out there, that would be great?

We are observing a variety of use cases. Primarily, storage, where edge computing and storage capabilities play a crucial role. Customers need to store their data close to their own computing resources without necessarily having to keep it on their premises. They want the advantages of the cloud while maintaining proximity to their data center, which is exactly what our edge solutions provide. For instance, retail clients are looking into how to process video feeds from their stores for purposes like monitoring for shoplifting or managing shelf restocking. They prefer not to send this data thousands of miles to a remote location, nor do they want to establish a data center at each store. Instead, they turn to us for assistance in building computing resources that can aggregate data from an entire market with fast connectivity and minimal transportation across the country. These are some examples of the use cases emerging in the context of the fourth Industrial Revolution, where the volume of data is rapidly increasing along with the applications to utilize it. Our clients are eager to collect, analyze, and act on this data swiftly and effectively. This is the essence of our edge compute applications. We are starting with bare metal, expanding into storage solutions, and will continue to enhance our offerings with virtual machines and other edge computing features. Additionally, we will integrate orchestration to enable our clients to manage their hybrid cloud environments efficiently, thereby enhancing their agility in responding to changes in IT. I hope that clarifies things.

Thank you. On the fiber side, 12 million homes. What percentage of your homes will that be? And does the infrastructure bill enable you maybe to expand that or help get subsidies here for that 12 million homes?

Yes, Tim, too early on the infrastructure bill. But the $12 million, I think, it’s about $21 million we have post the transaction. The 12 million gets to kind of the large urban areas. But that doesn’t mean that’s the total opportunity. As we continue to build out, we will continue to evaluate the footprint and we also look at different technology solutions to kind of reduce the build cost. And so we will continue to evaluate that aspect of it as well.

Thank you.

So let me wrap-up. I hope that you all, on the call today, get a sense of the excitement that we have here at Lumen. We are poised for growth and expect our investments in the business to not only give strong growth in revenue and earnings but also deliver value creation for our stakeholders. So we are excited about what we are doing. We see progress in our results. And we appreciate all of your interest in Lumen. With that, I will end the call, so thank you all for joining today.

We would like to thank everyone for your participation and for using the Lumen conferencing service today. This does conclude the conference call. We ask that you please disconnect your lines. Have a great day, everyone.