Greetings, and welcome to Lumen Technologies First Quarter 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, May 4, 2022. It is now my pleasure to turn the conference over to Mike McCormack, Senior Vice President of Investor Relations. Please go ahead.

Thank you, France. Good afternoon, everyone, and thank you for joining us for the Lumen Technologies First Quarter 2022 Earnings Call. Joining me on the call today are Jeff Storey, President and Chief Executive Officer; Chris Stansbury, Executive Vice President and Chief Financial Officer; and our Senior Vice President and Treasurer, Rafael Martinez-Chapman. Before we begin, I need to call your attention to our safe harbor statement on slide 2 of our first quarter 2022 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 2 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 of the Lumen website. With that, I'll turn the call over to Jeff.

Thanks, Mike, and good afternoon, everyone, and thank you for joining us. I'd like to begin the call today by welcoming Chris Stansbury to the Lumen team as our Chief Financial Officer. Chris joined us from Arrow Electronics and brings over 25 years of finance leadership experience. I'm confident that Chris' skills and knowledge will prove invaluable to our organization as we drive toward profitable revenue growth. Chris joins Lumen at an exciting time for our company and its stakeholders. We continue to anticipate closing two major transactions this year, which will provide a significant improvement in our revenue mix and generate over $7 billion of net cash proceeds. Within our business segment, we see strong momentum in our forward indicators like sales and churn, which provide us confidence in achieving our growth objectives. In addition, our Quantum Fiber build plan is ramping, and we expect momentum to continue to accelerate as we drive toward our expectation of hitting 1 million or so new fiber enablements in 2022. On today's call, I will provide some thoughts on our first quarter results as well as the opportunities we see in the year ahead. Chris will discuss the first quarter in more detail, and we'll reserve time after Chris' remarks for your questions. As we mentioned last quarter, our first quarter revenue performance tends to be seasonally weaker compared to the fourth quarter, and this year was no exception. We continued strong performance in security, cloud, unified communications, and IT products, offset by anticipated declines in voice and other categories, as well as lower non-recurring equipment revenue. We are managing through supply chain constraints that have caused some delays in our install intervals and significantly slowed down our CPE sales. Although CPE has little impact on EBITDA and free cash flow, it has a larger impact on revenue on a year-over-year and sequential basis. We continue to advance the Lumen platform. Last week, we launched our new Lumen marketplace feature. The marketplace provides our enterprise customers the ability to self-serve a number of our key products and services—no phone calls, no order tickets. The customer selects the services they need from the marketplace, and the system takes it from there. This self-service capability resonates with our customers, improving their experience while also improving our speed of delivery and reducing our cost to deliver services. As we continue to execute on our transformation plan with capabilities like the Lumen marketplace, we believe Lumen is well-positioned to drive long-term growth in the enterprise market. We continue to win large enterprise and public sector contracts, driving long-term growth in consumption-based services like security, application delivery, and managed services through our edge capabilities and built-in security across a world-class fiber network. These capabilities are complemented by the increasingly all-digital experience of the Lumen platform and supported by relevant and capable professional services. While these large complex deals take longer to turn up, they come with tremendous upside as we push more and more applications to the customer edge, leading to profitable and durable revenue for years to come. Coupling our edge facilities with our dense fiber infrastructure provides machine-to-machine level latency for approximately 97% of the U.S. enterprise locations, allowing customers to implement cloud-based solutions as if all the processing and storage were located within their facilities, which is an increasingly critical capability. We see traction across traditional industry verticals like retail and healthcare, but also opportunities for new use cases of our edge compute infrastructure, like we're seeing from leading crypto platforms. With the strong sales environment for large enterprises, we expect revenue trends to improve as we install the solutions called for in these more complex deployments. On the other hand, we remain dissatisfied with mid-market enterprise performance but expect improvements as these customers return to more normal operations post-COVID. We are confident our products and services serve these customers well and can execute better in this channel. As you've heard me say before, our path to growth will not be linear, but we are excited about the market's appetite for our new and existing services. Our enterprise product expansions and the steady increase in the depth and breadth of our platform will continue to open new addressable markets for Lumen. Within our Mass Markets group, the team is energized as we move deeper into our accelerated ramp of quantum enablement, increasing our addressable footprint and subscriber opportunity. Quantum Fiber is the growth engine for Mass Market, and we're excited to update you on our progress. Our most recent Net Promoter Score, which is above 50, demonstrates that Quantum Fiber is delivering a very high-quality product with unmatched symmetric capacity within an all-digital experience. We continue to enhance the Quantum experience, including the deployment of our multi-gig fiber capability, which will be commercially available to mass market customers later this year. While it's very early in the adoption phase of this type of capacity, we know there is an insatiable appetite for bandwidth. Our fiber expansions and the architectures we're now deploying with our accelerated build factor in multi-gig services from the beginning position us for future growth coming from VR, AR, gaming, work and learn from home, and other high-bandwidth services. We expect the Quantum capital investment to be concentrated over the next several years, but we believe the capabilities we are enabling will sustain our Quantum product for years into the future. Chris will share more details about our enablement in a minute, but the short answer is that having accelerated our engineering and preconstruction work processes in the first quarter, we expect our build pace to continue to accelerate throughout the year, putting us on track to achieving our goal of 1 million or so enablements in 2022. As we see it, we are in the first inning of this exciting expansion and are laying the foundation for what we believe is a sizable growth opportunity. As with our enterprise business, we are managing through supply chain constraints within mass markets, but we believe our strong supplier relationships provide support for our build plan. We expect continued strong revenue growth as we ramp enablements and execute on our penetration targets. Quantum delivers a best-in-class service as highlighted by the very positive NPS scores I mentioned, and we are excited to provide this experience to a growing number of Mass Market locations, both consumer and small business. Beginning this quarter, we are providing the investment community with enhanced mass market disclosures regarding our retained 16-state footprint as well as other important metrics. Overall, we are pleased with our accelerating build pace and look forward to taking meaningful market share as we continue to gain scale. I'd like to provide a quick update on our previously announced actions. We continue to expect the transaction with Stonepeak to close early in the third quarter, and our confidence is building that we will close as early as July 1. Separation planning is well underway on the Apollo transaction, and we're working closely with various regulatory bodies. We recently received our completeness determination from the Department of Justice. That said, the process has not moved as quickly as we had hoped, resulting in our pushing back our expectation to close early in the fourth quarter. This delay has no impact on our confidence in deal closure. In a few minutes, Chris will provide a financial update related to the revised closing. But essentially, we will raise our EBITDA and free cash flow guidance based on the presumed closing. As you will hear from Chris, we are passing through the effects of the adjusted closing date but are making no other change to the outlook we provided last quarter. As these deals close in the second half of the year, it's very important to us that we are a strong partner to both Stonepeak and Apollo as they drive further success and serve these valued customers. Beyond the financial effects, these transactions allow Lumen to focus on the right opportunities for growth. While improving our pro forma revenue mix, these transactions also highlight the value of the Lumen asset portfolio, and we will continue to opportunistically evaluate further portfolio optimization. As always, we'll be disciplined. While there is no urgency for us to divest additional assets, we will pursue transactions that provide clear strategic and economic benefits for Lumen. Our first priority remains achieving profitable revenue growth, and we're actively deploying the assets, personnel, and investments across our entire footprint to achieve that goal. Growth is the principal long-term driver of improved shareholder returns, but we believe shareholders should be rewarded as we transform our company to drive that growth and believe returning cash to shareholders in the form of a dividend is a crucial part of our overall value proposition. We do continue to expect an elevated dividend payout ratio as we execute on our Quantum build plan, but also expect it to normalize over time as growth improves and Quantum investments normalize in the latter years of the plan. We remain committed to a healthy balance sheet and expect a meaningful reduction in our outstanding debt as we prudently utilize over $7 billion of net proceeds from our announced transactions. We continue to believe our market value does not reflect the exciting growth opportunity we are driving toward. And while investing in growth and supporting our dividend are paramount, our Board remains prepared to authorize a share repurchase on short notice if they believe a buyback provides the best return for our shareholders. I would like to end my remarks by thanking Neel Dev for his finance leadership as CFO over the past three years, as well as his contribution to Lumen and its predecessor companies over the past 18 years. We thank him and wish him continued success in the future. With that, I'll turn the call over to Chris to discuss our first quarter results in more detail.

Thank you, Jeff, and good afternoon, everyone. I want to begin by thanking the team here at Lumen for the warm welcome. While it's only been a few weeks since coming on board, I can tell you that the excitement for our goals and initiatives is palpable. I look forward to being a part of the transformation occurring at Lumen and believe I bring a unique perspective as we execute on our plan. I'll begin with the financial summary of our first quarter. We reported adjusted EBITDA, excluding special items, of $1.966 billion and generated a 42% margin. A number of items impacted margins this quarter, which I will discuss in more detail later in my remarks. Our reported revenue was down 7%, meaningfully impacted by the completion of the CAF II program and seasonal factors within our enterprise business. Our free cash flow was $846 million. We returned $271 million to our shareholders during the quarter through our quarterly dividend. Additionally, we reduced net debt by over $450 million during the first quarter and by approximately $1.5 billion since the same time last year. As we announced on our last earnings call, we are adjusting our mass markets product revenue reporting categories this quarter 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 this relatively small impact, RDOF support revenue will be included in the voice and other category in our new reporting structure, consistent with other state support payments. We currently expect to begin recognizing RDOF support revenue during the second quarter. But even on a full year basis, RDOF will have a very small impact on our results, particularly after the expected sale of our ILEC assets in the fourth quarter. We've also provided added disclosures for our mass market segment associated with our 16 retained states, which we have referred to as RemainCo in our earnings materials, and those are internal estimates, which may be subject to change. These materials can be found in the Investor Relations section of our website. Our goal is to allow investors and others to begin to model our mass market segment as we near the divestiture of the 20-state ILEC business to Apollo. Given the complexity, we do not provide prior period estimates but will provide RemainCo estimated quarterly results through the close of the transaction with Apollo. In addition, we're actively working to help investors better understand the drivers of our business segment and hope to provide additional disclosures in future periods. We experienced typical sequential seasonal pressures on revenue in the first quarter with an added headwind from supply chain constraints. With respect to supply chains, we've been managing through the impact well, but this is an ongoing issue that we will continue to manage very closely, and the same can be said for the impacts of inflation. Moving on to revenue performance. On an adjusted basis, revenue was down 2.2% sequentially, similar to the 2% sequential decline we had in the first quarter of last year. On a year-over-year basis, total revenue declined 7% in the first quarter to $4.676 billion. Year-over-year metrics were materially impacted by the end of the CAF II program, which was partially offset by a related one-time CAF II revenue release in the first quarter of 2022. When adjusted for CAF II foreign currency and the sale of our last remaining correctional facilities business last quarter, the year-over-year rate of decline was 5.5% versus a decline of 5.2% last quarter on the same basis. Within our two key segments, business revenue declined 5.4% to $3.401 billion year-over-year. When excluding foreign currency headwinds and the sale of our correctional facilities business, revenue declined 4.9% year-over-year. Mass markets revenue declined 11.1% to $1.275 billion year-over-year. Adjusting for the CAF II impacts mentioned earlier, mass markets revenue was down 7.2%, in line with the performance in the fourth quarter. This will be the last quarter with the year-over-year negative impact of our Prism TV shutdown, which was about a 70 basis point headwind to growth this quarter. Wholesale revenue was down 4.3% year-over-year, similar to last quarter's performance. We continue to manage this business for cash. As you look at our enterprise channels, which is our business segment, excluding wholesale, reported revenue declined 5.8% year-over-year. When adjusting for the impacts of foreign currency, and the sale of the correctional facilities business, revenue was down 5.1%. Our exposure to legacy voice and other revenue, which we also manage for cash, has dropped by 340 basis points year-over-year and now represents less than 21% of enterprise channel revenue. iGAM revenue declined 2.1% year-over-year. On a constant currency basis, iGAM declined 1.3% year-over-year versus a 1% year-over-year decline in the fourth quarter on the same basis. We had particular strength in our managed security, cloud services, and IP services. Large enterprise revenue declined 8% year-over-year. The sale of the correctional facilities business is reflected in this channel and resulted in an approximate $10 million negative impact year-over-year. Normalizing for this sale, large enterprise declined 6.9% year-over-year. We had growth in managed security, cloud services, unified communications, and IP services. Overall, large enterprise growth was negatively impacted by equipment in our IT Solutions business, both of which tend to experience quarterly fluctuations. Mid-market enterprise declined 8.2% year-over-year. As Jeff said, we're not yet satisfied with the mid-market results but see the subsiding of COVID as positive for this channel. We had growth in cloud, IT services, and IP services as well as wavelengths, offset by lower voice revenue and one-time revenue from CPE sales. As I mentioned earlier, on an adjusted basis, mass markets revenue declined 7.2% year-over-year. For ease of comparison and footnoted on our slide, we recognized approximately $14 million of our $59 million CAF II benefit this quarter within the 16 retained states. This compares to approximately $53 million and $54 million of CAF II revenue recognized in the retained states in the fourth quarter of 2021 and the first quarter of 2021, respectively. Our mass markets fiber broadband revenue within our RemainCo footprint grew by nearly 18% year-over-year and in the first quarter represented more than 15% of our total mass market revenue. With the anticipated close of our ILEC sale, our exposure to legacy voice and other services will improve and reduce our annualized voice and other revenue by over $650 million based on our first quarter 2022 results and after adjusting for the CAF II release. During the quarter, we added 27,000 Quantum Fiber customers, roughly in line with last quarter as we pivot to our market-based approach and prepare for our significant shift in the go-to-market strategy. This brings our total Quantum subscribers to 830,000, with 762,000 of the subscribers within the 16 retained states. During the quarter, total enablements were approximately 160,000, with approximately 130,000 of those enablements located in our 16 retained states, bringing total enablements in the retained states to 2.67 million as of March 31, with approximately 250,000 additional locations enabled in the business to be sold to Apollo. ARPU in the retained states was approximately $59 million, and we see ARPU expansion opportunities with the adoption of in-home WiFi solutions, security services, and multi-gig speeds among others. As you frame our Quantum journey, we wanted to share a few important expectations for the positive impact this product will have on our future results. We expect that as Quantum ramps, we will achieve overall broadband revenue and subscriber growth within mass markets in the second half of 2023. As of March 31, our penetration of legacy broadband subscribers in our retained 16 states was down to approximately 13%, highlighting the low risk of quantum cannibalization and our significant share-taking opportunity as we accelerate the Quantum build. In fact, roughly 90% of our 2021 fiber gross adds were new to Lumen. Within the same footprint, our quantum penetration stood at approximately 29%, but we would expect that to fall in the near term as we ramp enablements. That said, today, we are pleased to announce that our Quantum 2020 vintage penetration is greater than 22% and ramping nicely, supporting our expectations for the longer-term penetration opportunity. This is bolstered by our current Quantum NPS score within RemainCo, which is greater than positive 50, highlighting the quality, speed and customer-friendly nature of our fiber offering. Quantum is an all-digital prepaid product that features simple pricing with no contracts, helping reduce call center volumes and bolstering our NPS scores. Turning to adjusted EBITDA. For the first quarter of 2022, adjusted EBITDA, excluding special items, was $1.966 billion compared to $2.165 billion in the year-ago quarter. Our adjusted EBITDA this quarter benefited from $59 million from the CAF II revenue release mentioned earlier. Special items this quarter totaled $52 million and were related primarily to transaction and separation activities. Our adjusted EBITDA margin was 42% this quarter. When comparing margins to the year-ago period, you should consider the non-recurring CAF II benefit of $59 million this quarter and the $123 million of high-margin CAF II subsidy revenue in the prior year period. When adjusting for these impacts, our first quarter 2022 margin would have been 41.3% compared to 41.6% in the year-ago period. Capital expenditures for the first quarter of 2022 were $577 million. We continue to focus on capital efficiencies. However, when you think about our capital spending, be aware that we had a meaningful year-end 2021 spend ahead of our Quantum acceleration. Lower capital expenditures this quarter do not change our outlook for the year. In the first quarter, capital expenditures represent accelerated investment in engineering and preconstruction activities. Future quarters will represent accelerated construction results. Also note that there will be timing differences with respect to reported CapEx based upon payment terms for our purchases. Our full-year capital guidance remains unchanged. With respect to our maintenance capital spending, as we look at the average over the last few years, it has been in the $400 million to $500 million a year range. In the first quarter of 2022, the company generated free cash flow of $846 million, which was positively impacted by the timing of capital expenditures, as I mentioned. Moving on to our outlook. We are adjusting our expectations for both EBITDA and free cash flow to reflect the expected closing date of our ILEC transaction, as Jeff highlighted earlier. Our capital expenditure guidance range remains unchanged given the relatively small impact of the new expected ILEC closing date on that metric. We now expect 2022 adjusted EBITDA between $6.9 billion and $7.1 billion and free cash flow between $2 billion and $2.2 billion. In order to provide a bit more detail on the other category within the waterfall chart in our earnings presentation, you should consider three main moving parts: investing in OpEx for growth, the synergies expected related to transactions, and lower transformation cost savings expected in 2022 as we focus resources on separating the pending divestitures. I think it's fair to consider these three items as roughly equal in size. Also, be aware that we expect both the synergies as well as the pause on transformation savings to be transitory in nature. Recall that 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 cost for these services are removed from adjusted EBITDA. The reimbursement for these services will be in other income with no material net impact to our cash flows and reflected in our schedules of non-GAAP items impacting net income. In closing, I look forward to engaging with all of you and our analysts and investor communities and hope to have an opportunity as the year progresses to meet many of you in person to discuss what I see as a tremendous opportunity for shareholder returns here at Lumen. Our team is focused on executing our growth initiatives for Lumen Enterprise and scaling our Quantum Fiber business, which we expect as we drive our return to top-line growth. As a reminder, in addition to free cash flow generated from the business, we expect about $7 billion in discretionary cash proceeds later this year from the transactions after the transfer of debt, taxes, and transaction-related costs. The combination of free cash flow from the business and proceeds from portfolio rationalization efforts support our 2022 capital allocation priorities. With that, we are ready for your questions.

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

Great. Thank you. Two questions. First, can you provide a little bit more color on the Enterprise trends that you're seeing, maybe the sales funnel versus bookings? And when would you expect to see a trough maybe in the revenue decline in that segment? And Chris, maybe a question for you. You did provide priorities for capital allocation with investment on the top of the list. Can you talk a little bit about how you would weigh the shareholder return, the dividend payment versus the debt pay down, if the revenue decline persists? Thank you.

Sure, Batya. I'll take the first question. I mentioned in the prepared remarks that we see strong forward indicators. And what that looks like to me is, number one, sales. If you look at our first quarter sales, we had very solid sales in the quarter, much in line with the strong sales we talked about in the fourth quarter. I get that we don't always see this in revenue yet. And so I'll talk a little bit about that. But the sales for large enterprise, in particular, is the first area that I point to. And there's good news and bad news in that fact. We've seen great success in very large complex deals with large enterprise customers. These aren't single product plays, and we integrate more closely with the customers' environment with multiple products that makes it a very strategic and sticky relationship. These deals shift our revenue mix and move up the stack with managed services and security and edge capabilities. So they're good-margin products moving up the stack and make those relationships much stickier. Some of the bad news associated with the fact of these big deals is they convert to revenue more slowly. They have thousands of locations; it takes months and months to coordinate with the customer to turn up the locations. And so they don't convert to revenue quite as quickly as some of our mid-market type deals. The other thing is we need to make sure that we can— as Chris and I both said, we need to make sure that we're driving more success in our mid-market sales. That's more of the flywheel business of Lumen, and we need to make sure that we're driving that. Now lastly, I'll point out that we discussed this in the fourth quarter call, and that is seasonality tends to impact the first quarter more than it does other quarters. And we've seen that for many years. It's not new to us. And we've talked about it for many years. Looking at the first quarter 2021 seasonal/sequential revenue comparison is pretty typical to what we've seen in previous years. And so those are some of the things that I look at, not really to predict where a trough is, and we don't give revenue guidance. I'll tell you that we are looking at what type of information we provide, and it may be something that we look at in the future to provide, but we really don't give revenue guidance at this point. Chris, do you want to ask— answer that?

Sure. Yes, Batya, on the question regarding investment for dividend. Obviously, that— I mean that answer is growth is the priority, and dividends are a close second to that. But we do have flexibility around the CapEx. It's dynamic. We can adjust as we go. And as Jeff mentioned, the dividend payout ratio will move around as we move through the investment phase. So when you look at all the variables that go into the capital allocation, I think the investment and the dividend are both absolutely things that we can do. And we've got other choice points that we can make along the way as needed.

Maybe just a quick follow-up. Do you also have a target on when you would like to take the leverage down to the original target, I guess, closer to 3% or 3.25%?

That's a longer-term goal. I think it's the right goal. But obviously, as we move through the current investment window, having a strong balance sheet is critical, and that's something that we'll keep a mindful eye towards. But I do think we'll be more in the neighborhood of where we are now. That's—I know what we've talked about in the past, relatively net leverage neutral. And that's what the focus will be as we go forward.

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

Great. Good afternoon and congratulations, Chris, on the new role. I wonder if you could— just for housekeeping, just explain to us what happened with the CAF II? I think most people had assumed we were done with that at the end of last year. So what exactly is going on there? And why did you have to release it? And is there any more to go for the rest of the year? And then just any comments on the macro environment. There's certainly been concerns about consumers and businesses suffering from higher fuel prices, rising interest rates, etc. Are you seeing anything as you go through March and April, the uncertainty around the war you referenced, the supply chain? But any comments there on just the general operating environment would be great?

Sure. On the CAF II, this was something that was contemplated in the guidance for the year. And as the program winds down and audits are completed by various states, there were reserves that we had in place, and we've been able to release some of those reserves as those have been closed down. There's only a bit left to go, smaller than what we have released here, but that’s really the impact that you're seeing in the quarter.

And you never know what those reserves exactly are going to be until you go through those audits and things. So that's the process that we have to go through. On the macro environment, I mean, we see some impacts of the war with certain customers, our government customers, and some things slowing down, making sure that doing upgrades to the network while you've got something that critical going on. So we see some impacts of that. Haven't really seen impacts of inflation on customer buying habits. We still see some impact from COVID on customers not being fully back into the office or having slowed evaluations of new solutions during COVID and just now getting back up to speed on those, but there really are no macro comments that we would make about inflation or other things like that.

And what about cost control within your own business from inflation, your exposure to energy and labor cost inflation?

Yes. So we work really hard on controlling inflation within our own business. If you—from a fuel standpoint, we have worked over the past few years through our ESG efforts to really reduce our fuel consumption. And we've been pretty proud of what we've done there. And so it's got an impact, but it's got a smaller impact than it would have had four or five years ago. And with respect to supply chains, we see do have trouble with supply chains, we see that lingering effect from vendors being able to deliver equipment to us, wanting a little more money for what the equipment they are delivering. But we've got great relationships with them, and we're working through all of that to mitigate the risks and pressures that come from inflation.

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

Thanks so much for taking the questions and welcome, Chris. I guess my first question, Chris, going back to your answer, I think to Batya's question. I think that when we look at the pro forma organization into 2023 from a free cash flow standpoint, basically all the money is spoken for when we look at CapEx investments and dividends, and it doesn't really leave anything left for deleveraging. And if we do something on the stock buyback program, it means we're willing to take leverage up from where it is currently. So I guess I'm wondering kind of as you come in with fresh eyes on the balance that we're trying to strike with a fairly narrow margin for error in 2023 on cash, kind of how you perceive the willingness of the company to take up or the ability to take down leverage? And then I guess if I could, on kind of the second question was just on the comments just that you made about the progress in Quantum, the expansion of the footprint and availability. Your comments about maybe not getting credit in the stock for some of these investments that you're making. I think that the people would love to kind of get a sense as to where the time in the future is that we see a crossover where the fiber net adds are beginning to turn the corner on the legacy broadband net add decline? Thanks.

Yes. So I'll take the first one—the second one first. And Chris said in his prepared remarks that at that time is the second half of 2023, we see subscriber—broadband—overall broadband subscriber net adds growing in the second half of 2023. And we see overall broadband revenue growing in the second half of 2023. And so Chris gave those comments in his prepared remarks. Chris, you want to add at the leverage?

Yes, sure. And I would just add to that, that we made a real effort this quarter to provide more disclosure and transparency around mass markets, and we'll continue to do that. Obviously, as we go forward, we'll work on the Enterprise side. As it relates to 2023, obviously, we're not in a position to guide 2023 right now. And I guess the good news is, is that by the time we're ready, I'll have more time under my belt to have had input into that process. We hear you on the math. The reality is there are other things that we've got to look at as well in terms of what assets do we keep? What assets do we not keep? Are the new assets we would add to the portfolio? There's also the opportunity, I think, to continue to drive cost efficiencies as we go forward. So there are a lot of things that go into baking 2023 guidance, and as we move through the year, that will be part of my focus.

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

Thanks for taking the question. Jeff, I was curious on the supply chain commentary. First of all, how much of a revenue impact did you see from, I think you said some lower non-recurring equipment sales? And are you seeing these supply chain issues? Is that contributing to some of the larger, longer install cycles from some of your customers? Or is that largely related to some of the large complex deals you talked about recently? And then second question maybe for Chris. You called out some of the transition costs as transitory. And I think it was the separation costs, the synergies, and the transformation savings. When do you think we'll kind of get past those, and we will see those actually have a positive net impact to the current run rate of EBITDA? Thanks.

Sure. On the supply chain issues, it does have an impact on our CPE sales. We don't quantify that number generally, but it's not insignificant. So we look at it pretty carefully. It does not drive EBITDA, and it does not drive cash flow, but it does have a significant impact on revenue in the quarter. So we'll continue to focus on it, but not worry about it from a free cash flow or EBITDA perspective. Within the service delivery, it absolutely creates bottlenecks for us, especially with customer premise equipment. If the customer wants a particular vendor's product and the vendor isn't shipping it, those are that we have to deal with. It's not an insurmountable challenge. It's not something that I'm pointing to say, oh, service delivery isn’t delivering. I think we are doing a great job of managing through the supply chain issues. But it is something that I want you to be aware of that we do see it, and we do face it, and I hope that it's getting better. It seems to have improved a little bit over the last month or so, but we'll continue to stay focused with our vendors. Now the last point is we have great relationships. And so I talked to our major vendors pretty regularly, and we work with them in good times and in bad to make sure that they have accurate forecasts for our services. And so during COVID, I worked with a lot of these vendors to make sure they knew what they could expect from us. And now we're working with them to make sure that we can expect from them. So we'll continue to work through the supply chain issues. It's a warning flag that I want you to hear, but I don't want you to overemphasize it either.

And just on the transition costs, we expect those to go on probably for one to two years. Now again, we'll recover a lot of that in other income, and you'll see that as we go sooner. Transformation savings, I think we can ramp up sooner. Obviously, in the near term, we've got a lot of people working on the divestitures, but we can refocus on transformation savings next year. But I do think the other thing that will impact OpEx increases is really the growth in Quantum. And frankly, I hope that continues. That's a positive reinforcement mechanism because we'll be driving the revenue that goes with that. So we'll continue to provide insight on that as we move forward, but that's how I see it unfolding.

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

Thanks for taking my question. You spoke about portfolio optimization and alluded to 2023 in the way you're going to deal with the balance sheet. There are some media reports suggesting that Lumen is exploring a sale of the European assets. Just wondering if that's something that you would be considering? And can you remind us how much revenue and EBITDA those assets do generate? And then the second question is just on the mid-market weakness, if you can elaborate a little bit. Is this really COVID related? Or is this more voice attrition? Or are they adopting lower ARPU, SD-WAN and the technology risks there? Just help us think about the trajectory going forward? Thanks.

Sure. Let me address the first question on asset sales. I never speculate on any particular asset sales and never comment on anything. But I'll point out that we demonstrate an openness to smart optimization of our assets. We've also demonstrated the discipline to get the right deal done, not just get a deal done. And so we'll continue to do that. There's no urgency for us to divest anything, but we're always interested in figuring out the best ways to generate strong returns for our shareholders. I'll also add that any acquisitions or dispositions must meet two fundamental criteria, and the first is attractive valuation and the second is strategic benefit to Lumen. And so anything we do will have to meet those two requirements. As you look at our LatAm sale and our ILEC sale in the 20 states to Apollo, both of those transactions meet the attractive valuations and provide strategic benefits to Lumen. And so that's the context in which we'll look at any type of acquisition or disposition. I'm sorry, Greg, what was the other question?

Just the mid-market, the trajectory and elaborate on the weakness?

The mid-market weakness, I really think it's still just a lingering effect of COVID. I look at our products and services and our sales motion with them and our digital experience and think that it is—so we've got all the right capabilities for the customers. They're just not yet back into the office or just now getting back into the office and starting to look at sales opportunities again. And so we'll continue to focus on that. I'm pretty confident in our ability to win in that group. We just need to make sure that we do and execute on the plan. It's a relatively small number of our overall Enterprise business. I don't have the exact percentage in my head, but it's a relatively small number.

Our next question is from Michael Rollins with Citi. Please go ahead.

Thanks and good afternoon. Just curious if you could dive a little deeper into the subject of legacy revenue. And is there a way to frame whether it's by product or by customer vertical of how investors should think about what's legacy or at risk over time? And what's strategic? And then maybe how—when legacy converts the strategic like what that average algorithm is to understand the current revenue power of the company?

Sure. So great question, and I'll ask Chris to answer it because that's what he spends a lot of time over the last month that he's been here. He's thinking about how do we give appropriate disclosures, better disclosure, clear disclosures on our business. And so Chris, I'll let you.

Yes. And I wish I had more specificity for you today. That's obviously something we're going to drive to going forward. But that's really what we're trying to unpack right now, right, which if you think about the assets in our portfolio today, what are the growers, what are the things that are critical to the portfolio but are going to have a lower growth rate? And then what are the things that over time will go away either through just regular business declines and harvesting cash or we sell them? So that's an exercise that we're going through now. We didn't have enough time to get through that before this call, but you can expect more visibility on that going forward.

A couple of follow-ups and maybe a real question. First, can you break out for us what the revenue and EBITDA were for the planned asset sales this quarter? And then, did last quarter's outlook anticipate that $59 million in non-cash CAF benefit that you got this quarter? And then the third follow-up, talk again on the mass market growth in the second half of 2023, was that on a year-over-year or quarter-to-quarter basis that growth number? Finally, a real question, have you seen any shift in copper broadband churn in markets where fixed wireless has launched versus markets where it hasn't? Thanks very much.

Yes. So I'll try and take a couple of those and leave whichever ones I've forgotten to Chris. I don't know the number on asset sales, what the revenue is. So Chris, you can have.

Yes. Yes. So—for the ILEC sale, the revenue number for the year was $2.5 billion.

For 2020.

Sorry, for 2020, it was $2.5 billion. And for Latin America, it was $800 million.

Okay, but nothing for the quarter? Thanks.

Yes. The second question you had was on the CAF II release and was it contemplated in the guidance and what we said last quarter. And the answer is the CAF II—the opportunity for CAF II release has always been contemplated in the guidance. I won't give details on how much, when, or any of that. But yes, it's contemplated in our guidance. It's a little bit of a fuzzy number moving forward because we don't know what the audits will result in. And until you go through that process, you don't know whether there is a release or how much of a release or if there's some sort of make it has to go. And then on top return due to fixed wireless, we're not seeing it, but there's a little bit, but we're not seeing it. If you think about fixed wireless moving forward and the broadband capabilities of Quantum, I look at it and think we have exactly the right solutions for fixed wireless. And we use fixed wireless and our Enterprise business as a campus area in networking technology. There are always multiple technologies to deliver similar services. And so we use it in our campus area and networking solutions to provide mobility within a campus. But as soon as you want to have traffic that wants to leave the edge of the campus, it moves to fiber. And we think that is ultimately the answer for all communications, whether it's leaving the edge of the campus for fixed wireless-type communications. Whereas leaving the edge of the campus, we're leaving the edge to the home; it wants to leave best on fiber. And so we look at it and think there's certainly some application probably more applicable in rural environments than in dense urban market clusters that the Quantum Fiber is targeting. But I don't know that we see any particular churn as a result of it.

Okay. And then on the mass market growth, just to clarify, was that year-over-year or quarter-to-quarter revenue growth, I think it was?

Yes. That's right. And so that's year-over-year.

That's year-over-year. So you expect it to start growing sequentially more quickly than that?

That's tougher to call, but I would expect that at that point in time, you would see year-over-year growth and sequential growth. I wouldn't say cumulatively it would be growth at that point. So we got to be careful with that. But the key message is that we see a light at the end of the tunnel at an inflection point where that segment starts to grow again this year.

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

Hi, good afternoon, and thanks for taking my questions. First, a high-level one for Chris. What have Jeff and the Board charged you with accomplishing in the role? And can you describe any high-level philosophies that you bring with respect to value creation, financial KPIs you focus on, and so on? And then second, I think you guys disclosed $400 million to $500 million annual maintenance CapEx. I guess how are you defining that since everyone seems to do it a little bit differently? And how do you think about a more holistic maintenance CapEx number when you kind of bake in the cost of churn replacement? Thanks.

So Nick, I think I should answer the question about what am I charging him with, but I'll let Chris answer.

Thanks, Nick. I mean, really, the conversations that I have with Jeff and the Board when I was considering this opportunity were really around helping Lumen transition to growth. And if you look at my experience with Arrow, Arrow was in a very similar situation when I joined and went through a big strategic shift and focus to drive growth. And I think that's something I bring to Lumen. And quite frankly, the reason I came is I saw all the hardworking people and initiatives inside the building. And I think it's a tremendous opportunity. So that's job number one. But moving through these windows is obviously tricky. And some of the questions today obviously get to that. So maximizing EBITDA while we're navigating that transformation, I think, is critical, and that's going to be a close second to helping drive growth. I'd say that on that journey, obviously, I'm going to learn more as I get closer to the business, but one thing near-term that I think is critically important is giving more transparency to the investment community around what's under the covers. And I think that's a real opportunity for us as well, and I've talked about that earlier. I'll touch on the CapEx. When we say $400 million to $500 million, that's keep the lights on CapEx. That's what we need to do to keep the business running. Where that goes as we move forward? That's a little trickier, but the reality is when you look at a lot of the capital that's going into the ground now, those are very long-lived assets. And so I don't expect a ton of maintenance associated with that, certainly in the near term. Longer term, I've got to educate myself a little more before I can answer that. And then really, when you think about some of the things that Jeff talked about on the enterprise side, a number of those initiatives become less CapEx-intensive, right, when you're talking about complex solutions. There is CapEx involved, but that—the pace of that looks different, perhaps in some of the more historical motions. So that's how I'd address that.

Our next question is from James Ratcliffe with Evercore ISI. Please go ahead.

Thanks for taking the question. Two, if I could. First of all, Chris, just to clarify in the guidance changes, there is no organic change in EBITDA; it's just adding another quarter of the US telco EBITDA and just rounding on CapEx? And secondly, Jeff, can you give us a little color around what you think you need to do better in mid-market? You highlighted a scenario you're not satisfied. What's the blocking and tackling there? Thanks.

Sure. Yes, you're correct. On the guidance, it's just the timing shift, and that flows through to free cash flow as well.

And what do we need to do better in mid-market? I'll give you a short-term answer and a long-term answer. The short-term answer is we need to get people back in the office. We need to get them looking at new technology solutions for their businesses. And that's obviously beyond our control to some extent, but we need to keep working with those customers as they come back from the past two years. Longer term, we need to keep investing in an all-digital experience. Last week—and I guess this is near-term, too. But last week, we launched the Lumen Marketplace. The Lumen marketplace is ideal for our mid-market customers to go in and explore and learn about our capabilities, to configure things that they want and to place orders that we can then turn up very quickly because we've been standardizing our building platform in which those customers exist. So we need the customers to get back in the office and start buying, but we also need to make sure that we're driving utilization of the capabilities that we've been building and have recently launched for those customers. So we're excited about that business. And if you look at our security business, our DDoS mitigation, our excellent broadband, SASE, SD-WAN, all of those capabilities, we think we have the right answers. We just need to continue to execute on the plan.

Our next question is from Walt Piecyk with LightShed Partners. Please go ahead.

Thanks. Sorry, I have a bit of a small specific question. You talked in February about a million new fiber homes passed for 2022. Your pace really for the past four quarters is only is very small. Is this impacted by supply chain? Is there a specific ramp that's going to occur? And then when you talked about 2023, I think you said maybe more than that 1.5 million in homes passed. If you can get momentum in these fiber builds, does that carry into the first half of 2023? Can you just talk about that a little bit? Thanks.

Sure. First of all, everything affecting our supply chain— I don't point to that as any major obstacle in our fiber ramps for this year at this point. So I don't want to discount it entirely; again, I don't want to overhighlight it either. If you look at our process, we have shifted from micro-targeting to a more market-based targeting. That means more engineering upfront, longer permitting times, and all of the things that we contemplated in our build schedule but makes it non-linear. Now I'm going to see the same number in the first quarter that you see the second quarter; it's not always as efficient as you would want it to be, and you certainly can't divide one million by four and think that that's the right number. So I talked about capital in my remarks. And I think that we are on track for what we're wanting to accomplish in 2022 from a fiber build perspective, and we should be continuing to ramp throughout the year.

Thanks. And then on Slide 11, you referenced hitting, think if I'm reading this correct, 22% penetration of the 12-month mark for the 2022—2020 vintage? When you think— I mean, obviously, there are small builds in 2021. Are you seeing similar performance as you continue to build in terms of a one-year target of 20%-plus penetration?

We've always been very excited about the success that Quantum Fiber brings to the market. We've had a great digital experience. We handle the sales and turn it up and all that through the digital experience. So we think that we—and we have a great symmetrical high-speed product. And so yes, we are very pleased with what we see; we haven’t reported specifically what we're seeing in 2021, but we think that one-year mark is a good place to look at it, and so that's why we talked about 2020. Thank you, everybody. Look, in closing, I just want to say that Lumen is a company undergoing rapid and exciting change in 2022. We've been on a transformation journey for the past several years, and it's really coming to a focal point in 2022. We see a broad opportunity set across our business and mass market units as we streamline and position them for revenue growth. In addition, I look forward to Chris' new leadership of our finance organization and the powerful skills that he brings to the team. So Chris, I'd like to add my welcome in front of everybody. With that, we will end the call. Thank you all for joining. As always, thank you for your interest in Lumen.

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