Lumen Technologies, Inc. (NYSE:LUMN) Q4 2022 Earnings Call Transcript

Lumen Technologies, Inc. (NYSE:LUMN) Q4 2022 Earnings Call Transcript February 7, 2023

Operator: Greetings and welcome to the Lumen Technologies Fourth Quarter 2022 Earnings Conference Call. As a reminder, this conference is being recorded, Tuesday, February 7, 2023. I would now like to turn the conference over to Mike McCormack, Senior Vice President, Investor Relations. Please go ahead.

Mike McCormack: Thank you and good afternoon, everyone and thank you for joining us for the Lumen Technologies fourth quarter 2022 earnings call. Joining me on the call today are Kate Johnson, President and Chief Executive Officer; and Chris Stansbury, Executive Vice President and Chief Financial Officer. Before we begin, I need to call your attention to our Safe Harbor statement on Slide 2 of our fourth 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 on 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. With that, I’ll turn the call over to Kate.

Kate Johnson: Thanks Mike. Good afternoon, everyone and thanks for joining us today. In a few minutes, Chris will cover our fourth quarter results and discuss 2023 outlook measures. Let me begin by saying how excited I am to be here at Lumen during such a pivotal time in our company’s history. I have a passion for leading businesses through the challenging world of digital transformation. It’s what I’ve been doing for a few decades and it’s where I feel most comfortable. And while it’s only been 3 months since I joined Lumen, I already feel at home. I have had the opportunity to get to know many of our employees, customers and partners. And I have spent time understanding our business processes, our proprietary gifts and our go-to-market capabilities.

I can tell you that I see a very significant opportunity for Lumen and its stakeholders. That said, there is hard work ahead for our team as we make significant changes to how we serve our customers and how we execute for better financial results. 2023 will be a year of rapid change for Lumen as we execute on our plans and pivot towards growth. As with any successful transformation, it’s essential to get the right talent and I am delighted to report the addition of three seasoned technology executives to the Lumen team. Sham Chotai has been appointed Executive Vice President of Product and Technology, running our newly integrated product development and IT organizations. Ashley Haynes Gaspar has been appointed Lumen’s Executive Vice President and Customer Experience Officer, running our marketing functions as well as customer success.

And Jay Barrows has been appointed Executive Vice President of Enterprise and Public Sector sales. With the addition of these three executives to the team, we infuse deep digital transformation leadership, product development and innovation muscle, marketing and customer lifecycle thought leadership and enterprise selling expertise, all essential components of our transformation. Now with the team in place, we are ready to execute our plan. Clarity is an existential priority for any company seeking to transform. As such, over the past 3 months, we have spent considerable time with employees, customers and partners, drafting and rolling out a crystal clear strategic plan, what we are calling inside the company, the Lumen North Star. In short, our North Star to find who we are, who we serve, our proprietary gifts that yield a competitive advantage, our targeted success metrics, and of course, our aspirational culture.

This important plan provides clarity to the Lumen team and our stakeholders on our path to growth. It starts with our mission to digitally connect people, data and applications quickly, securely and effortlessly. The first part, connecting people, data and apps, that’s our core DNA and positions our world class network as the crown jewel of our portfolio. The three words at the end of that mission statement, quickly, securely and effortlessly, that’s really what our customers are demanding as we solve their core problems such as delivering cost effective operations, securing their data and apps, innovating for their customers and helping their employees thrive. It’s where we have the most amount of work to do and is the underpinning of our investment in operating plans.

A big part of our North Star plan is a detailed economic model that provides some sensitivity analysis around our Grow, Nurture and Harvest revenue categories. This work has informed our plans to disrupt negative growth trends in our legacy businesses and bolstered our intention to innovate for growth. As a result of this work, we have established five core priorities for Lumen. Our first priority is to develop company-wide customer obsession. Lumen is the product of many mergers. And as such, we have been forced to drive operational efficiency to ensure we achieve the synergies and the value intended from combining these entities. And that takes a fair amount of looking inward and we’ve built thick muscle memory doing this. Our path to growth lies in solving customer problems and helping them deliver on their desired business outcomes.

And that requires looking outward first. Reorienting our people to focus on understanding customer problems and shaping our core intellectual property in connectivity, security and edge cloud to solve those problems will be a material mindset shift. As with any mindset shift this will take time and practice. It will require deep skills building, a significant part of our culture development priority, which I will talk about shortly. But more than just a mindset shift, delivering on our desire to become a customer-obsessed company requires innovating and investing for growth, our second core priority. As such, we are reshaping our organizational structure by combining our product development teams with our IT teams for greater speed and agility.

We are centralizing marketing for tighter alignment to the customer lifecycle. And we are installing what we call a growth operating system to build the muscle inside of Lumen that enables us to innovate new products that delight customers and drive shareholder returns. Our innovation focus will be to create and monetize capabilities that enhance the value and commercial potential of our work. Now, I think it’s worth spending a minute on this concept of growth operating system. Lumen has been focused on driving operational efficiency, as I said, in our scaled businesses. But to grow, we need to become great at innovating and establishing new to big businesses. We want our teams to act like entrepreneurs, collaborating with our customers and the Lumen teams to solve problems that our customers experience.

And at the same time, much like in the VC world, we will foster this innovation in an environment with important guardrails, including a growth board, executive sponsorship and co-founder teams to ensure we are pursuing and maximizing the value of high potential projects. This means performing extensive testing with our customer base, bailing fast on many concepts, but recognizing the high potential of others and quickly allocating capital accordingly to maximize growth. This is a critical motion as we pivot to an outside-in mindset. And while I just shared our intention to develop net new capabilities that enhance the value of our network, I also want to emphasize that we will continue to invest in our world class network. We just won’t stop innovating here.

And we will continue to invest in our fiber infrastructure to meet the demands of our sophisticated customer base who are dealing with complex business problems, coupled with a workforce that now demands remote work flexibility in the post-pandemic world. We recently announced our major network expansion plan to drive 6 million additional intercity fiber miles to our already expansive network by 2026. As we execute and pivot towards growth, our third core priority will be to ensure we have the complete go-to-market capability in place to enable us to compete in today’s technology market. We believe Lumen will benefit significantly from incremental investment in our marketing and field-facing teams to properly cover the market and capitalize on near-term opportunities in growing spaces like security and edge cloud.

We will therefore inject OpEx and CapEx to ensure that Lumen can serve two distinct groups requiring unique approaches. The first group includes large customers in the public sector, large enterprise, and upper mid-market channels. These organizations offer require extensive intricate and customized solutions. And to serve this group, we aim to offer scalable solutions with a higher level of personal engagement in a robust set of managed service offerings. The second group includes customers in the consumer SMB and lower mid-market channels. This group tends to prefer a less hands-on approach and often utilizes self-service options. To serve this group, we will offer a simplified product selection with a user-friendly digital platform for easy ordering and seamless interactions.

Our goal is to remove any obstacles for them by offering straightforward solutions that can easily be accessed and managed securely and digitally. To support our first three priorities of developing customer obsession, innovating and investing for growth and building a reliable execution engine, we are going to lean heavily into the fourth to radically simplify our company. Simplification will come in two major forms. First, we will focus on doing fewer things better. That means shutting down subscale or non-accretive businesses, which includes no longer selling products or services that don’t directly enhance our value to customers or benefit Lumen and its shareholders. We will ensure all resources are aligned to promote the programs and projects that support our mission to digitally connect people, data and apps quickly, securely and effortlessly.

The second form of simplification will come as we build the digital enterprise, consolidating systems and modernizing our IT infrastructure to support effortless employee and customer digital experiences. These two forms of simplification will help us optimize for cost and growth simultaneously. Our fifth and extremely important core priority at Lumen will be to further develop our culture. We know that the cultural common denominators of companies that successfully transform in the digital era include clarity, customer obsession, courage and a growth mindset. At Lumen’s straight from the tap, we are committing to clarity in everything we do. And I hope my comments today have reflected that commitment. The remaining common denominators won’t come in the form of an edict or a mandate.

We will invest in and train our employees to develop the skills required to change. That wraps up the high-level summary of how we plan to transform Lumen to pivot to growth. We need to do a lot of things, some basic and some quite complex, to position ourselves to take advantage of the opportunity that lies before us. We will continue to move with great speed, but also very thoughtfully and collaboratively, leveraging our customer and partner relationships to guide us. The team is coming together with formidable energy and I am really looking forward to sharing more of our story with you as the year progresses. Before we move on to our discussion of results and the 2023 outlook, it’s important that I talk about a couple of items as we enter 2023.

First, on EBITDA and CapEx, we are leaning into our growth and optimization priorities and Chris will provide financial details of these initiatives shortly. We believe these investments are critical to position Lumen for strong execution and scalable sustainable growth. And we expect revenue and EBITDA stability in less than 2 years. Second, let’s talk about our Quantum pacing. As we have said previously, we hit the pause button during the fourth quarter. Now to be frank, it was more of a stop button than a pause button, which impacted our Quantum metrics for the quarter. That said the evaluation we undertook was absolutely critical to position Quantum for long-term success. By focusing on all metrics and not just the location enablement goal, we have established a higher IRR, more predictable long-term outcome for this exciting project.

A natural outcome of our assessment of Quantum is a more focused build target where we are able to achieve proper returns for shareholders. We believe the overall Quantum enablement opportunity is 8 million to 10 million locations. The engine is ramping back up and we are aggressively working to ramp our build activities in 2023. And to that end, we made an important change during the fourth quarter to separate our operational activities like planning, engineering and all field operations between mass markets and business. Maxine Moreau, our President of Mass Markets, now has top to bottom operational and P&L responsibilities. This is a significant change internally that I expect will improve our Quantum deployment pacing, but it will take time to reach scale.

My expectation is that later this year, you will see significant improvement in our execution on enablement. And with that, I will turn the call over to Chris to discuss our fourth quarter results. Chris?

Chris Stansbury: Thank you, Kate and good afternoon everyone. To start, I hope you had a chance to review the 8-K we filed on January 27, which provides modified financial information back to first quarter of €˜21, removing the impact of the ILEC and LATAM businesses as well as the impact of the CAF II program. The 8-K also outlined the new business sales channel reporting structure for 2023 reporting, which collapsed IGAM into large enterprise and pulled public sector out of large enterprise. This provides better alignment with how we manage these channels internally and should provide for more clarity when modeling our company. Let me move on to discuss some macro thoughts. Later in my remarks, I will address our outlook for full year 2023, but near-term, we continue to face macro headwinds.

Supply chains remains strained with labor as the key headwind and we are all facing the impacts of inflation. In addition, we are actively working to offset dissynergies, resulting from the divestiture of our 20-state ILEC business as well as our LATAM business, but those headwinds are likely to persist through this year. Despite these near-term pressures, this is an exciting time for Lumen and our team. Kate has energized our company and we are positioning Lumen to win. This will require internal systems and process investments to solidify our platform, pivot to a position of playing offense and enable us to grow. I will discuss the impact of these investments later in my remarks. With that, I will move to the financial summary of our fourth quarter results.

I will be referencing results on a modified basis, which aligns with the 8-K disclosures mentioned earlier and removes the impact of the divested businesses that closed during 2022 as well as the impact of the CAF II program. Overall, business revenue declined approximately 4.2% year-over-year and 0.3% sequentially on a constant currency basis and after adjusting for the sale of our correctional facilities business in the prior year period. Mass Markets revenue declined 7.6% year-over-year and 2.8% sequentially. We reported adjusted EBITDA of $1.393 billion in the fourth quarter and generated a 36.7% margin. Our free cash flow was $126 million in the fourth quarter. After paying all taxes owed on the 2022 business divestitures, we reduced estimated net debt by approximately $10 billion during 2022.

And during the quarter, we repurchased 33 million shares of common stock for $200 million. Moving to a more detailed look at revenue, I will be referencing all revenue growth metrics on a modified adjusted basis, where applicable, to remove the impacts of foreign exchange and the correctional facilities business sale in the fourth quarter of 2021. On that basis, our fourth quarter total revenue declined 5% year-over-year to $3.8 billion. This is the last quarter for which year-over-year comparisons are impacted by the sale of the correctional facilities business. The benefit related to the correctional facilities business was about $3 million in the fourth quarter of €˜21, while the impact of FX year-over-year was a headwind of approximately $20 million.

Within our two key segments, business revenue declined 4.2% year-over-year to $3.005 billion and Mass Markets revenue declined 7.6% year-over-year to $795 million. Within our Enterprise Channels, which is our business segment, excluding wholesale, revenue declined 5.9% year-over-year. Our exposure to legacy voice revenue continues to improve within Enterprise Channels dropping 141 basis points year-over-year and now represents less than 12% of Enterprise Channel revenue. Large enterprise revenue declined 2.5% year-over-year. As I previously noted, in the new reporting, we will be providing, starting this quarter, we have collapsed IGAM and large enterprise into the large enterprise channel and have moved public sector to its own channel. Now representing our largest enterprise channel, large enterprise had improved revenue trends both year-over-year and sequentially and was our strongest performing enterprise channel.

Public sector revenue declined 13.8%. We have had significant wins in this channel and we expect to see improving trends as the year progresses. We also had a contract in this channel expire last quarter which is impacting the year-over-year comparisons by 176 basis points. On a sequential basis, public sector revenue declined 0.9%. Mid-market revenue declined 6.6% year-over-year, with VPN and voice, the most significant headwinds. Wholesale revenue grew 0.5% year-over-year. This is the channel that will likely decline over time and one we manage for cash. As I move to our business product lifecycle reporting, I will be referencing percentage changes on the same modified adjusted basis I referenced earlier. As Kate mentioned, our North Star plan incorporates a detailed economic model with plans to disrupt legacy declines and help us innovate for growth.

Grow products revenue grew 2.5% year-over-year in the fourth quarter. We saw strength in waves, security services and unified communications. Grow now represents over 36% of our business segment, up from 34% in the prior year period and carried an approximate 84% direct margin this quarter. For added color, Grow products represented the majority of our enterprise sales in the fourth quarter, which will continue to improve our mix of revenue going forward. I would note that Grow revenue was negatively impacted by approximately 100 basis points related to a public sector contract that expired. This will continue to impact our Grow comparisons through the first half of €˜23. A key focus going forward will be to accelerate the growth of the Grow portfolio.

This will take some time, but we believe we have real opportunity here with our outside-in focus that Kate mentioned earlier. Nurture products revenue declined 7.5% year-over-year in the fourth quarter. The decline was driven by VPN and Ethernet, and Nurture now represents about 31% of our business segment and carried an approximate 68% direct margin this quarter. We are making good progress on our Nurture strategy and our efforts to migrate this revenue back into Grow products. Harvest products revenue declined 8.3% year-over-year in the fourth quarter. Our Harvest team continues to work hard to manage to a lower rate of decline within this product set, which is helping to extend the life of these products. In addition, as with our Nurture products, we are managing customers back to Grow and Nurture products.

Harvest now represents approximately 26% of our business segment, and carried an approximate 76% direct margin this quarter. Other products revenue declined 6.4% year-over-year in the fourth quarter. Our other product revenue tends to experience fluctuations due to the largely nonrecurring nature of these products. Moving on to Mass Markets. As I mentioned earlier, total Mass Markets revenue declined 7.6% year-over-year and 2.8% sequentially. Our Mass Markets fiber broadband revenue grew by over 18% year-over-year, and in the fourth quarter, represented approximately 19% of Mass Markets revenue. Our exposure to legacy voice and other services revenue has improved by 320 basis points year-over-year. As Kate discussed, we have made significant changes in how we are approaching the Quantum Fiber opportunity.

This was a thoughtful evaluation that will result in a significant improvement in long-term shareholder value. That said, our location and subscriber results were impacted by the pause we had in place through our evaluation. This change in strategy will continue to impact Quantum metrics until we get to scale with our new plan, which we expect to occur late this year. During the quarter, total enablements were approximately 97,000, bringing the total enabled locations to over 3.1 million as of December 31. During the quarter, we added 19,000 Quantum Fiber customers, and this brings our Quantum Fiber subscribers to 832,000. Fiber ARPU was stable sequentially at approximately $60, but we’ve seen accelerating year-over-year growth each quarter during 2022.

hin255/Shutterstock.com

As of December 31, our penetration of legacy copper broadband footprint was less than 12%. Quantum Fiber penetration stood at approximately 26%. Our Quantum Fiber 2020 vintage penetration was approximately 29% at the 24-month mark and is now over 30%. Our 2021 vintage was at approximately 17% at the 12-month mark. Our Quantum Fiber NPS score was greater than positive 50 again this quarter, an indication of the quality, value and superior service that Quantum Fiber delivers. As Kate mentioned, we have recalibrated our addressable footprint to ensure we are generating healthy returns for our shareholders. Based on that recalibration, we are targeting 8 million to 10 million locations for the overall build or roughly 5 million to 7 million incremental locations over the next few years.

We continue to monitor how the economic environment is impacting our customers, and we have not observed any discernible changes in customer payment patterns. Turning to adjusted EBITDA. For the fourth quarter of 2022, adjusted EBITDA was $1.393 billion compared to $1.496 billion in the year ago quarter. As I mentioned earlier, we are seeing cost pressures from inflation in addition to our OpEx investments to drive growth. Special items this quarter totaled $583 million related primarily to a non-cash loss reported upon the designation of our EMEA business as held-for-sale and transaction and separation costs, partially offset by a gain on the sale of our ILEC 20-state business. Our fourth quarter 2022 EBITDA margin was 36.7%, down slightly from 37.2% in the year-ago period.

Capital expenditures for the fourth quarter of 2022 were $833 million. Additionally, in the fourth quarter of 2022, the company generated free cash flow of $126 million. Our reported net debt was $19.5 billion as of December 31, 2022, and our expected estimated net debt stands at $20.4 billion. Our expected estimated net debt reflects our utilizing cash on hand to settle the tax obligations related to the divestitures we closed in 2022, which totals $900 million to $1 billion. We anticipate paying these taxes during the first half of 2023. Given the investments that Kate identified, we anticipate leverage to rise to between 4 to 4.3x in the near-term. We expect leverage to peak as we approach year-end 2023 and decline thereafter. For the full year 2023, we expect adjusted EBITDA to be in the range of $4.6 billion to $4.8 billion.

When bridging to our full year adjusted EBITDA guidance, in addition to the CAF II completion and divested business EBITDA, there are a few other drivers to keep in mind. We estimate that our full year EBITDA will be impacted by approximately $100 million related to incremental inflationary pressures. Combined with dissynergies, we expect a headwind of between $200 million to $250 million this year. We’re actively working to mitigate the impact of these dissynergies. As Kate discussed, over the next couple of years, we will be aggressively investing both OpEx and CapEx to position ourselves for long-term sustained success. The focus of these investments will be to enable growth, improve customer experience and simplify how we operate. These investments will include a number of items such as digitization, ERP, Network as a Service and IT simplification.

These growth and optimization investments outlined in our EBITDA guidance waterfall chart are expected to total $150 million to $200 million. Importantly, we expect our revenue and EBITDA to stabilize as we exit 2024 with growth thereafter. Moving to capital spending. For the full year 2023, we expect total capital expenditures in the range of $2.9 billion to $3.1 billion. Growth in optimization investments totaling $250 million to $350 million are included in this guidance. Additionally, we expect to enable an incremental 500,000 Quantum locations in 2023 as we emerge from our project reevaluation. We anticipate a cost per enablement of $1,200 in 2023. Lastly, our capital expenditure guidance includes $35 million to $65 million related to rebuilding efforts in the wake of Hurricane Ian last fall.

Moving on to free cash flow. We expect to generate free cash flow in the range of $0 million to $200 million for the full year 2023. In total, our 2023 free cash flow will be impacted by $435 million to $615 million related to our growth and optimization investments as well as the impact of Hurricane Ian recovery efforts. We do not have any required or planned discretionary pension fund contributions in 2023. Additionally, the cash tax is due on the 2022 sale of the ILEC and LATAM businesses, are being paid out of the cash proceeds from those deals and are excluded from our free cash flow guidance. As a reminder, our first quarter typically has seasonally higher expenses related to timing of bonus payments and other prepaid expenses. We expect net cash interest expense in the range of $1.1 billion to $1.2 billion for 2023.

In terms of special items for 2023, 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, we are positioning Lumen for growth. We’re making tangible progress internally, and we’re investing in ourselves over the next 2 years to deliver on our longer-term goals. We look forward to sharing our progress with you as we execute on our plans, and we will provide more detail around those plans and expected financial performance at our Investor Day in New York City on the afternoon of Monday, June 5. So please save that date.

More details will follow in the coming months. With that, we are ready for your questions.

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Q&A Session

Operator: Thank you. And our first question is from the line of Simon Flannery with Morgan Stanley. Please go ahead.

Simon Flannery: Great. Thank you very much. Kate thanks for all of the positioning of the company and the opportunities. Help us understand the path to revenue and EBITDA stability. I know we’ve got the Analyst Day coming up, but what sort of milestones should we be looking for during 2023 to suggest that things are improving? Do you think there’ll be an inflection in the rate of revenue decline, rate of EBITDA decline? How do we get comfortable that you are on this path to turn this around within a couple of years? And then on the fiber side of things, could you just talk a little bit about how the BEAD program fits into your expectations given you’re kind of sort of less aggressive posture towards Quantum? Is BEAD something that’s interest to you at this moment? Thanks.

Kate Johnson: Sure. Thanks, Simon. So first and foremost, 2023 is a reset year. So we talked about new leadership. We talked about a new mission. We talked about new priorities. And it’s going to take us some time to get rolling. I think we bring a couple of things to the story that we haven’t done before. The first is injecting energy into the growth engine in the form of marketing, in the form of disciplined sales approach at the high end of the market, really an execution focus and mindset with some of the new leaders that I’m bringing in. So I’m excited about that, and I think that we will get some early traction in the form of things like funnel and pipeline. I think that the story of 2-year stabilization is really, as we go into €˜24, we’re going to have sort of the green shoots to show you more explicitly.

With respect to your question about BEAD, our projection this year is €“ or our projection for about 8 million to 12 million enablements in total doesn’t include any BEAD funding. And BEAD is super early. The funds haven’t started flowing yet. So we really don’t know how that story is going to pan out, but it does represent a potential upside to our story.

Simon Flannery: Great. Thanks a lot.

Operator: And our next question is from the line of Philip Cusick from JPMorgan. Please go ahead.

Philip Cusick: Hi, thank you. Following up first on the enterprise space, the $150 million to $200 million in investment, can you just dig more into that? And how much of that is sort of one-time in terms of new ERP investment versus ongoing costs? And how should we think about the potential for revenue and EBITDA growth in business over a long period of time? If we go back to the underlying market, is this a growing market or is it a shrinking market that you need to take share in? Thanks very much.

Kate Johnson: So great question. Our pivot is about moving from a place of playing defense to offense. Where €“ I talked about changing mindset to really obsess about customers, that’s about finding new problems and addressing them with both our existing capabilities as well as building a capability to address those problems with net new capabilities, either build, buy or partnering. And if you think about it, customers are dealing with these giant problems, it’s the usual stuff, cost-effective core operations, how do I get my employees to thrive? How do I secure my data and applications? How do I drive business process improvement? How do I innovate for my customers? But they are doing all of that in the hybrid world, which basically hybrid meaning, working from home or working from the locations that have been in place for years.

As all of that changes the complexity of their networking solution needs is changing as well, and that represents a huge opportunity for us. But I think we all know that we really need to sort of glide up the stack a bit and really lean into both security and edge in order to drive net new growth on top of that core networking solution set that we have. Chris, do you want to add anything to that?

Chris Stansbury: Yes. So €“ hey, Phil. The €“ in terms of what the spending is focused on, we talked about it a bit, but we’ve got to digitize more of what we do end to end, so that, that customer experience is more seamless and self-serve wherever possible. We’ve got to continue to simplify and really stop doing some things, automate some things, which will allow us to get it to dissynergies, but makes us easier to do business with. And the ERP is one piece of that. And then beyond that, we’ve obviously got to invest in things that are going to drive growth, things that would allow us to enable network as a service, for example. So really understanding where the network is so that customers can quickly access it and deploy from there.

So that’s what’s in there, but none of those things will be complete this year. I referenced in my comments that this is probably a 2-year journey in terms of spend. As it relates to why we think we can get to revenue and EBITDA stabilization by the end of next year, I want to be really clear. That’s based off of the things we have today. So when Kate talked about growth OS, that’s extra. That’s kind of supercharging the growth down the road. But with what we have today, I think we can very accurately say that from a product and sales standpoint, we were not executing as cleanly as we could have. And there is renewed focus. There is a lot more rigor behind the connectivity between product and our selling efforts. And frankly, there is some low-hanging fruit that we can go after.

So I’m not going to sit here and tell you that it’s fixed by second half of this year. That’s why we said by the end of next year. But I can tell you that the reason we said that is we’ve got line of sight given what we have in-house today.

Philip Cusick: If I can follow-up and forgive me this €“ I don’t mean to sound disrespectful at all, but we’ve heard from Lumen and the predecessor companies for 12 years about the new changes and plans and how things are going to turn around. And I know you have an Analyst Day coming up in June, and you’ve only, really, as a team, been together for a little while. Is there anything that’s sort of dramatically changing under the hood that can start to give us some faith that this business is really turning as opposed to what feels like another iteration of things that we’ve heard before?

Kate Johnson: Yes. So I’m here now, and I’m excited to be here now because there is a huge opportunity. And one of the things that I’m bringing to the table is this maniacal focus on execution. And I think that, that’s a really important shift. I think when you think about the pivot to growth, you need to think about Lumen as a collection of companies that was trying to drive synergy from a bunch of mergers, and was inwardly focused on driving operational efficiency. Every dollar of revenue looked good because as a potential contributor to EBITDA, and every dollar of cost take-out look good. But there was no anchoring North Star. There was no customer obsession. There was no really focusing on how do we innovate for growth. And we hadn’t been in a position to invest in our go-to-market engine, everything from marketing to sales and sales support and customer success.

And now we are, right? The capital allocation priorities that we set for the company now enable all of that. And the leaders that I’m bringing in from technology, combined with the leaders that are already here at Lumen that really know this business, the combination is going to be incredibly powerful. It’s a really exciting time.

Philip Cusick: That’s helpful. Thank you.

Mike McCormack: Thanks, Phil. Next question, please.

Operator: And our next question is from the line of David Barden with Bank of America. Please go ahead.

David Barden: Hey, guys. Thank you so much for taking the questions. And Kate, congrats on the new job, and welcome to the mosh pit. So I guess I got a few, if I could. I guess, Chris, you’ve been talking about disrupting legacy declines. If you could be more specific about what that really means? And then Kate, you talked about a priority being radically simplifying. Does that mean that there is more strategic stuff to come in terms of the asset base that we’re looking at inside Lumen today? And if I could ask a third. I apologize. Chris, with respect to the stock buyback of $200 million in the fourth quarter, could you walk us through kind of whose idea that was and how you landed on that being the right choice for allocating capital? Thank you.

Chris Stansbury: Yes, sure. So the first question really on kind of how we can disrupt the growth trajectory of legacy products. Look, the historical motion, I think, broadly in telecom is sell things until they die. And hopefully, that new thing, you can sell more of that. What is absent from that is a customer lifetime value mindset. And there is this fear of cannibalization. And I want to be really loud in saying cannibalization is good because if you can keep that customer for longer and you can manage that migration, you’re going to be much better off. So what we’re talking about is aggressively managing end-of-life products, moving customers up the stack. So think about legacy voice, right? Think about things like customers who are nearing the end of a VPN contract who don’t want to renew, but there is IP and ways out there, and we can wrap security around it.

So more proactively addressing those migrations and that’s something that hasn’t been a key focus and I think that’s some of the low-hanging fruit I talked about. As it relates to the buyback, look, there was a big change. And you and I have had conversations about it. We’ve had conversations with your peers about it and other investors. It was a tough decision. But it was guided by the fact that the way we solidify Lumen’s performance for all of our stakeholders going forward is by getting back to growth. And so cutting the dividend did that. In the near-term, we knew that there were index funds and other investors who relied on that dividend to have an ownership position in Lumen. And so we bought back stock around the time that those index funds were rebalancing to support the stock through those big shifts.

And so that was the thinking in terms of how we manage that in the fourth quarter.

Kate Johnson: And David, do you want to €“ you asked a question about simplification. Could you repeat it? I didn’t hear some of it.