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 around 1 million 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...

Thank you, Jeff, and good afternoon, everyone. I want to begin by thanking the team here at Lumen for a 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...

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, very solid sales in the quarter, much in line with the strong sales we talked about in the fourth quarter. I understand 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. We've seen great success in very large complex deals with large enterprise customers. These aren't single product plays; we integrate more closely with the customers' environment with multiple products that create 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...

Sure. Yes, Batya, regarding your question about investment for dividends. Obviously, growth is the priority, and dividends are a close second to that. But we have flexibility around capital expenditures. It's dynamic. We can adjust as we go. 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 capital allocation, I think both investment and the dividend are absolutely things that we can do, and we have other choice points that we can make along the way as needed.

Great. Good afternoon and congratulations, Chris, on the new role. I wonder if you could 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? 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. 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.

So we work really hard on controlling inflation within our own business. If you consider 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. 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 bit more money for what 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.

Thanks so much for taking the questions and welcome, Chris. I guess my first question, Chris, going back to your answer. 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. 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...

Yes. So I'll take the first one - the second one first. 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. Chris, do you want add on 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. As we move 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 that by the time we're ready, I'll have more time under my belt to have had input into that process.

Thanks for taking the question. Jeff, I was curious about 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? 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 the second question maybe for Chris. You called out some of the transition costs as transitory. When do you think we'll kind of get past those and we will see those actually have a positive net impact on the current run rate of EBITDA?

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. It does not drive EBITDA, it does not drive cash flow, but it does have a fairly 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 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 challenges we have to deal with. It's not insurmountable. I think we are doing a great job of managing through the supply chain issues. But it's 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.

And just on the transition costs, we expect those to go on probably for one to two years. 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.

You spoke about portfolio optimization and alluded to 2023 in the way you're going to deal with the balance sheet. There's 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?

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 maintain openness to smart optimization of our assets. We've also demonstrated the discipline to get the right deal done, not just any deal. 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. Regarding the mid-market weakness, I really think it's still just a lingering effect of COVID. I look at our products and services and think that we have 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. We need to keep focusing on that.

Thanks and good afternoon. Just curious if you could dive a little deeper on the subject of legacy revenue. 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 to strategic, like what that average algorithm is to understand the current revenue power of the company?

Great question, and I'll ask Chris to answer it because that's what he spends a lot of time on over the past month. He's been thinking about how do we provide better disclosures on our business. Chris, I'll let you take that.

Yes. And I wish I had more specificity for you today. That's obviously something we're going to drive to moving forward. But that's really what we're trying to unpack right now, which assets in our portfolio today are the growers, what are the things that are critical to the portfolio but have a lower growth rate, and what are the things that over time will go away either through business declines or through sales. So that's an exercise that we're going through now.

Thanks. Sorry, I have a small specific question. You talked in February about a million new fiber homes passed for 2022. Your pace for the past four quarters is only 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. Can you just talk about that a little bit?

Sure. First of all, I don't point to supply chain as a major obstacle in our fiber ramps for this year. If you look at our process, we've 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 anticipated in our build schedule but that make it non-linear. The same number you see in the first quarter isn’t necessarily the same you see in the second quarter. I talked about capital in my remarks. I'm confident we are on track to accomplish our goal from a fiber build perspective, and we should continue to ramp throughout the year. 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 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. I look forward to Chris' new leadership of our finance organization and the powerful skills 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. Thank you for your interest in Lumen.

And we would like to thank everyone for your participation and for using the Lumen conferencing service today. This does conclude the conference call. Please disconnect your lines and have a great day, everyone.