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

Lumen Technologies, Inc. (NYSE:LUMN) Q4 2023 Earnings Call Transcript February 6, 2024

Lumen Technologies, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings and welcome to Lumen Technologies Fourth Quarter 2023 Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded on Tuesday, February 6th, 2024. I would now like to turn our conference over to Mike McCormack, Senior Vice President, Investor Relations. Please go ahead.

Mike McCormack: Thank you, Aaron. Good afternoon, everyone, and thank you for joining Lumen Technologies’ Fourth Quarter 2023 Earnings Call. 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 2023 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, which can be found in our earnings press release.

In addition, certain metrics discussed today exclude costs for special items as detailed in our earnings materials, which can be found on the Investor Relations section of the Lumen website. With that, I’ll turn over to Kate.

Kate Johnson: Thanks Mike. Good afternoon, everyone, and thanks for joining us today. I’m excited to provide an update on the significant progress we’re making on Lumen’s business transformation. A year ago, I shared that 2023 was a reset year for this company with new mission and vision, a new executive team, and a newly redesigned culture. And importantly, we aspired to restore confidence in Lumen, not only with improved financial results, but with execution excellence that delivers on our commitments. We outlined big, multiyear strategic priorities, including strengthening our balance sheet, executing our key programs to turn the core business around by 2025 and igniting new growth by delivering disruptive innovations that help our customers solve their next-gen networking needs.

And now, I’m pleased to report that we both delivered on our 2023 EBITDA and free cash flow guidance, and we made material progress on our strategic priorities. I’ll start with the balance sheet. As we announced in late January, we entered into an agreement with a significant number of our creditors that clears the path for our turnaround. The deal extends most of our debt maturities to 2029 and beyond, injects $1.325 billion of net new financing into the business and gives us access to a new approximately $1 billion revolving credit facility to support our operations. It’s a strong indication of the confidence of our bondholders and the broader debt markets that they have in our strategy, and it allows us to focus our energy on executing our business transformation.

All right, so how is the pivoted growth going? While we have a lot of work left to do, we’re seeing progress, as evidenced by our North American business performance compared to other industry competitors. While two large legacy telco companies saw Q4 revenue declines in their business wireline segment of roughly 8% to 10% year-over-year. Lumen’s business Q4 revenue decline was only 3.5% year-over-year. Breaking away from the others for the second straight quarter. We believe our positive peer group performance is due both to our strategy and our turnaround execution. Simply put, Lumen stands alone in how we think about the industry. In today’s digital economy, technology environments are complex and multi-layered. Whether it’s hybrid or multi-cloud or edge compute or emerging technologies like GenAI, businesses need fiber networks with digital services that deliver blazing fast speeds, ultra-low latency, massive capacity for growing data workloads and proximity to widely distributed users.

All in a secure environment. While our competitors harvest their business wireline segments for cash, Lumen is building a fully digital platform to deliver important new capabilities to these customers. And importantly, we’re tailoring our go-to-market approach to get them there. So let’s dig a little deeper into that go-to-market execution progress. I’ll start with our commercial excellence efforts in the business segment, which is all about driving better sales execution, securing our base of customers and creating a world-class digital customer experience. In 2023, we tailored our go-to-market approach to each customer segment. This focus is allowing us to meet customers where they are and provide unique and tailored paths to our modern communication infrastructure.

And not surprisingly, it’s driving better sales execution. This year, with a North America enterprise, we added over 3,000 customers and increased new logo sales by 13% sequentially in Q4. Specifically, our public sector segment grew double-digits quarter-over-quarter and year-over-year in Q4, powering our strong revenue performance. Year-over-year, we sold 29% more growth products to existing public sector customers in Q4 and we increased seller productivity by 18% for the full year. With this momentum, we expect this segment to be the first to bend the revenue curve back to growth, and we think bid market segment will follow suit. Since establishing the dedicated go-to-market team for bid markets last June, tenured direct sales productivity increased 26% while we simultaneously grew the sales force by 15%.

Importantly, we exited 2023 by outperforming market growth rates and taking share in both SASE and IP. In our Large Enterprise segment, we’re winning business with sophisticated digitally native companies like Uber, who recently chose Lumen’s 400-gig wave service to ensure that they can scale and accelerate their company’s growth with greater agility. Okay, let’s turn to securing the base. This is all about installs, disconnects, renewals, migrations and usage. This program is the most challenging part of executing Lumen’s turnaround for sure. The good news is, we’re making progress in mid-markets and large enterprise, shown by our sequential results for the second half. Installations were up 13%, migrations were up 4%, renewals were up 50%, and in Q4, usage was up 3%, helping us end the year strong.

Now that said, we’re just not satisfied, and we’ll be focusing on improving performance here in this part of our turnaround using data and analytics in AI to help determine the right action for each unique customer at the right time. The third piece of commercial excellence is all about customer experience. The Lumen operations and IT teams did a fantastic job building the digital CX foundation in 2023, redesigning our processes from order to cash, starting to implement new state-of-the-art systems and infusing GenAI into our service delivery and assurance. And while we’re still in the initial stages, we’re seeing signs of impact. And for example, in our North American business pilot, we were able to reduce order processing time by 70% for Dedicated Internet Access, or DIA, one of our highest volume products.

And across all products for Large Enterprise and Public Sector customers, we’re already seeing a 17-point year-over-year improvement in net promoter scores based on our process improvement work. Time to talk about innovation, innovating for growth. As we announced last month, Dr. Satish Lakshmanan, joined Lumen as our Chief Product Officer. Satish comes to us from AWS and brings a highly valuable combination of cloud, artificial intelligence and product development experience that will be an important part of fueling our innovation engine. And just this morning, we announced that Dave Ward is joining Lumen as our Chief Technology Officer. Dave has a long history of successful executive leadership, having served as CTO for Cisco Systems and most recently as the CEO of PacketFabric, a Network-as-a-Service provider.

Talented visionaries like Satish and Dave are joining because they see the potential for Lumen to innovate, disrupt the industry and create major value for customers, and therefore major value for investors. And I’m delighted to report that we are well on our way. In 2023, Lumen co-created with customers and launched several new digital services that take advantage of our world-class fiber network. Our vision is to empower enterprises to leverage the Lumen digital platform as we are calling it, enabling customers to digitally consume our secured network services. This innovative platform will help customers build AI-powered applications across on-prem, colo and cloud environments seamlessly, while also simplifying network on-boarding and management to save costs.

In the latter half of this year, we’ll share new reporting for Lumen Digital to allow you to better understand our growth trajectory. Let me highlight a few important capabilities in the Lumen digital platform. First is Network-as-a-Service or NaaS. We continue to enrich our NaaS offering with more capability, and just last week we announced the availability of two new NaaS solutions with private connections. As a recent customer, Element Materials remarked, Lumen’s NaaS solution was not just timely, but transformative, it highlighted the untapped potential of such innovative network solutions. Another Lumen digital breakthrough capability is ExaSwitch, our high-capacity optical switching platform originally conceived for direct inter-cloud peering.

It’s performing extremely well in the market and as Microsoft shared, they highly value the ExaSwitch platform for the fast and scalable interconnections that it provides and they’re eager and excited to expand ExaSwitch to new metros in 2024. Lumen sees ExaSwitch as the soon to be must have solution for any corporation needing simplified, low latency, high-capacity direct cloud connectivity. Finally, Lumen Security. You may have read in the Washington Post that the Department of Justice announced it had disrupted the Volt Typhoon botnet used by a major Chinese government-backed effort to hack the US critical infrastructure. I’m incredibly proud of our Black Lotus Labs team for identifying this threat and being credited by the DOJ for helping to keep the United States safe.

Soon you’ll see Black Lotus Labs powering the Lumen digital platform with some highly valuable security services. Now, the initial capabilities in the platform give Lumen access to around $40 billion in net new available market. And to be clear, we’re just getting started. We’re bullish on the impact that Lumen Digital will have on helping pivot our company to growth. Finally, let’s cover mass markets. We’re executing our strategy to deploy capital where we see the greatest opportunities with the goal of continuing to evolve our business across a portfolio of markets, investing wisely and driving fiber market penetration. Some quick notes to share about 2023 in mass markets. We delivered our commitment to grow our fiber network by more than 500,000 locations and intend to maintain that similar robust rate in 2024.

While we weren’t happy with our net adds performance in 2023 all up, our sales and marketing engine is now gaining momentum as we close the year strongly with record-high December sales, and we continue to see this pace hold through January. Quantum Fiber is the best multi-gig product in the market and to maintain that status, we know that constant innovation is a priority. That’s why we made sure we were the first company in the industry to achieve WiFi 7 certification. And finally, Quantum Fiber customers continue to be delighted as shown by our Q4 net promoter score of plus 64, improving both quarter-over-quarter and year-over-year customer satisfaction. One last exciting note. I’ve talked about rebuilding this company from the people up and how important culture change is to supporting our transformation.

In just the fourth quarter alone, we won four different culture awards, most notably US News & World Report named Lumen Technologies one of the 2024 Best Telecom Companies to Work For. Our culture is helping us attract new talent as well as supporting our current Lumen workforce through a pretty intense time for this company. To sum it up, 2023, we made great progress pivoting Lumen for growth. We believe our strategy is the right one and we’re executing well. So our plan is to hold steady on that strategy through 2024. We’ll continue to strengthen our balance sheet. We’ll drive commercial excellence to return the business to growth by 2025, and we’ll co-create innovative new capabilities that delight customers and give Lumen access to net new profit pools.

And we’ll do all of that while keeping you apprised of our progress, being transparent about our wins and our struggles, and delivering on our commitments every step of the way. And with that, I’ll turn the call over to Chris.

Chris Stansbury: Thanks Kate, and good afternoon, everyone. Kate spoke about our progress and how we are disrupting an industry ripe for change as Lumen transforms into the leading digital enterprise solutions provider. She also spoke of our success in reaching agreement on an amended TSA with a broadened group of creditors to extend our debt maturities. On our Q2 earnings call, we said we viewed the formation of the creditor group as an opportunity to address a large part of the capital structure in a very efficient way, and the amended agreement we announced in January accomplishes that. The amended TSA has support from a broadened group of creditors, and when finalized, will address approximately $9 billion of outstanding indebtedness, including more than 77% of debt maturing through 2027.

The TSA transactions will extend debt maturities to primarily 2029 and beyond, provide $1.325 billion of new money, and provide access to a new approximately $1 billion revolver. This agreement and the broad support for it speaks to the confidence our banks and creditors have in our plan and provides Lumen ample runway to execute on our business turnaround. In short, our capital structure is no longer a limiting factor in our transformation. We expect to complete the transactions contemplated by the TSA in the first quarter subject to the satisfaction of limited remaining closing conditions. Before covering our fourth quarter results, I’d like to take a moment to discuss some changes to our 2024 financial reporting to enhance comparability with prior periods and better align with how we manage the business.

First, we are updating our business sales channel reporting by breaking out a new international and other channel, including CDN. Secondly, given the sale of substantially all of our CDN contracts during the fourth quarter of ’23, we are updating our business product category reporting to move CDN from harvest to other within the international and other channel. And finally, with the sale of our EMEA business and select CDN contracts completed in the fourth quarter of ’23, we have updated our financial trending schedules to provide the historical contributions of these sales as well as the associated commercial agreement impacts. Keep in mind, when these impacts are excluded from results, our sequential and year-over-year growth rates are substantially better than the reported rates.

I’ll now discuss the financial summary of our fourth quarter. Our fourth quarter total reported revenue declined 7.4% year-over-year to $3.517 billion. Approximately 39% of the decline was due to the impact of divestitures, commercial agreements and CDN. Adjusted EBITDA was $1.099 billion in the fourth quarter with a 31.2% margin. Free cash flow was $50 million in the fourth quarter. In 2023, we delivered on our expectations for both adjusted EBITDA and free cash flow. Next, I’ll review our detailed revenue results for the quarter on a year-over-year basis. Within our North America Enterprise channels, which is our business segment excluding wholesale and international and other, revenue declined 0.1%. This quarter, we had a public sector benefit in our other product group.

As a reminder, our other category tends to fluctuate quarter-to-quarter given the nature of these revenue streams. Overall, North America business declined 3.5%. We again significantly outperformed our two largest historical competitors in the fourth quarter. While results can vary in any given quarter, we expect this trend of divergence between performance at Lumen and the legacy business wireline providers to continue to widen over time as we expand our digital service offerings. Large Enterprise revenue declined 3.6% in the fourth quarter. Large Enterprise revenue was impacted by lower other product revenue and also the timing of large infrastructure revenue benefiting the year ago quarter. Our year-over-year growth rate within Grow moderated.

We expect continued variability in trends as we drive toward overall stabilization. Now, moving on to mid-markets. Revenue declined 6% year-over-year. Mid-markets is a very important channel for us, and one where we had lost considerable share prior to our focus and investment in this important area. We are leaning into this channel with products and buying tools to make ordering and provisioning more frictionless. As Kate mentioned, we’re seeing improved leading indicators and are taking share in both IP and SASE products. This is a channel that we expect will be extremely interested in our NaaS offering given the flexibility and ease of provisioning it provides. Public Sector revenue grew 14.8% year-over-year. Trends improved, driven primarily by continued Strength in Grow revenue, moderating declines in Nurture and higher other revenue as mentioned earlier.

Over the past 12 to 18 months, investors have asked us when we will start to see the benefits of the big contracts signed with the USDA, the US Postal Service, the Department of Defense and other public sector wins. As our results demonstrate, we are seeing revenue strength in part due to those and other deals ramping as we work diligently to deploy these mission critical services. Given our visibility to sales bookings and the longer install cycles related to the complexity of the solutions we’re deploying within Public Sector, we have high confidence that we’ll be the first sales channel to return to sustainable growth. Wholesale revenue declined 11.2% year-over-year. The majority of wholesale represents the balance of trade with other carriers as we negotiate with each other on buy-side and sell-side arrangements.

The historical industry behavior between carriers has been to leverage pricing and rate changes to drive results instead of delivering incremental value to customers. In our opinion, these actions are often to the detriment of the industry’s customers and is also generally unhealthy for the industry, while also creating volatility in our and others results. Within wholesale, approximately 39% of our revenue comes from Harvest products, which declined 15.9% year-over-year in the fourth quarter and contributed to a majority of the 11.2% decline. Our Harvest product revenue will likely continue to decline over time and is an area we will continue to manage for cash. International and other revenue declined 43.5% year-over-year, driven by the divestiture of our EMEA business and the sale of select CDN contracts in the fourth quarter of ’23.

Moving to our business product lifecycle reporting, I’ll reference results based on our North America Enterprise channels which represent our core strategic categories. Grow products revenue increased 5.7%, driven by Strength in IP across all enterprise channels, cloud services and infrastructure product growth, particularly within colocation and dark fiber. Grow represented approximately 40% of our North America Enterprise revenue and for our total business segment carried an approximate 80% direct margin this quarter. Within Nurture and Harvest, we continue to expect headwinds in these categories as we take proactive steps to migrate customers to newer technologies. These actions improve our customers experience and provide an uplift in customer lifetime value for Lumen.

As Kate mentioned, we continue to see positive leading indicators that our initiatives are working, and it will take some time to be reflected in our results. Nurture products revenue declined 9.7% year-over-year. Pressure within VPN and Ethernet services drove the decline. Nurture represents about 30% of our North America Enterprise revenue and for our total business segment carried an approximate 69% direct margin this quarter. Harvest products revenue declined 10.4% year-over-year. Harvest continues to be negatively impacted by declines in TDM-based voice and other legacy services. Now I want to take a minute to discuss Harvest in more detail. We have a very tactical approach to our Harvest portfolio, which contains a mixture of customers that are on-net as well as off-net.

These off-net customer contracts carry a much different margin profile and in some cases are margin dilutive. We utilize re-rates to manage the margin, and in some cases, this can result in non-regrettable churn. In other cases, we will seek to migrate customers to our newer Grow technologies. Another set of customers within Harvest are quite profitable and their needs can be met with existing services. Our data-driven approach drives our product migration and pricing strategies for each of these customers, enabling us to optimize our return profile. Harvest represented less than 17% of our North America Enterprise revenue in the fourth quarter, an improvement of approximately 200 basis points year-over-year. For our total business segment, it carrying approximate 81% direct margin this quarter.

Other products revenue grew 31.7%. As I mentioned earlier, Public Sector showed particular strength in this product set. Now moving on to mass markets. Revenue declined 8.3% year-over-year. Our mass markets fiber broadband revenue grew 11.5% and represented approximately a third of mass markets broadband revenue. Also, note that our exposure to legacy voice and other services revenue continues to improve with an approximate 200 basis point reduction year-over-year. During the quarter, fiber broadband enabled location adds were 126,000, bringing our total to approximately 3.7 million as of December 31st. As Kate mentioned, we intend to maintain the same 500,000 build pace this year. And during the fourth quarter we added 20,000 Quantum Fiber customers and this brings our total to 916,000.

Fiber ARPU was flat sequentially and increased on a year-over-year basis to approximately $61 in the fourth quarter. At the end of the quarter, our penetration of legacy copper broadband was approximately 10% and our Quantum Fiber penetration stood at approximately 25%. Our 12-month frozen penetration of our 2022 enablement cohort was 18% at December 31st, while our 24-month frozen penetration of our 2021 enablement cohort was 25%. Turning to adjusted EBITDA. For the fourth quarter of 2023, adjusted EBITDA was $1.099 billion compared to $1.393 billion in the year ago quarter. The fourth quarter of this year included a net headwind of $13 million related to the divested EMEA business, a net benefit of $3 million from divestiture-related post-closing commercial agreements, and a net headwind of $16 million from the sale of select CDN contracts.

These items represent approximately 9% of the year-over-year decline. Special items impacting adjusted EBITDA this quarter totaled $211 million. Our fourth quarter 2023 adjusted EBITDA margin was 31.2%. Capital expenditures for the fourth quarter of 2023 were $821 million and the company generated free cash flow of $50 million in the fourth quarter. Moving to our financial outlook. For the full year 2024, we expect adjusted EBITDA to be in the range of $4.1 billion to $4.3 billion. Our EBITDA guidance includes an expected 2% to 5% organic decline, a significant and roughly 600 basis point improvement from the organic decline included in our 2023 outlook as our transformation initiatives take hold. Moving to capital spending and our other outlook metrics.

For the full year 2024, we expect total capital expenditures in the range of $2.7 billion to $2.9 billion. We expect to generate free cash flow in the range of $100 million to $300 million for the full year of 2024, and this includes an approximate $700 million tax refund received during the first quarter of this year. We expect free cash flow to be impacted by higher interest expense related to our new TSA agreement, and based on our initial analysis, we’ve included an incremental $125 million to $225 million of cash interest in 2024 versus 2023. We do not have any required or planned discretionary pension fund contributions in 2024. In terms of special items for 2024, we continue to expect 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 addition, in the first quarter of 2024, we expect to recognize meaningful charges related to the negotiation and execution of our TSA agreement. Before we move to Q&A, just a couple of housekeeping items. First, please remember that the first quarter typically has seasonally higher expenses related to the timing of bonus payments and other prepaid expenses. Additionally, while we are happy to discuss the recent TSA announcement in further detail, our focus is now on our business and the financial results as we move forward. Accordingly, we would prefer to be oriented to questions around the business. With that, I’ll turn over to Mike.

Mike McCormack: Aaron, we’re ready for questions.

Operator: [Operator Instructions] And our first question for today comes from the line of Simon Flannery with Morgan Stanley. Your line is live.

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Q&A Session

Simon Flannery: Great. Thank you very much, and good evening. Thanks for all the color. I was wondering if you could just help us with the updated trajectory of revenues through the quarter. I think in the past you’ve talked about a second half acceleration after some first half noise. You didn’t really talk to that during your prepared remarks, so any updates there would be great. And then, thanks for the color on Q1 OpEx. How should we think about some of the OpEx savings from some of the severance and other actions that you’ve recently been taking? How does that flow through the quarters in 2024? Thank you.

Chris Stansbury: Yeah, Simon, on the revenue side, we would expect the Public Sector implementation and the conversion from sales to revenue to accelerate as we move through the year. And to Kate’s point, we continue to see improvement in the other channels as well. But mid-markets, we expect to continue to improve over the course of the year as well. Obviously, wholesale can be a little more choppy, so that’s a harder one to predict. As it relates to OpEx, most of the savings that related to the action we took last year will be realized this year, and I would expect that to be fairly even quarter-to-quarter. It’s a full-year impact.

Simon Flannery: Great. And just on that Public Sector, I mean to what extent was the Q4 number, including, I don’t know, CPE sales or other things that may not recur next quarter?

Chris Stansbury: So we did say that other product revenue impacted the fourth quarter and that’s the bulk of it. I would say that our commentary around our confidence in Public Sector really relates to the revenue recognition associated with the installs from those big deals we announced over the last 12 months to 18 months.

Simon Flannery: Great. Thanks a lot.

Chris Stansbury: Thanks, Simon. Next questioner.

Operator: Thanks for your question. Our next question comes from the line of Batya Levi with UBS. Your line is live.

Batya Levi: Great. Thank you. On the enterprise trends, earlier you had mentioned that you were concerned about some of the upcoming maturities and the conversations with enterprises were kind of on a hold. Can you provide more color on maybe recent conversations with some of those larger clients and how the sales funnel is shaping up? And maybe just another follow-up on the, on 1Q, can you quantify the seasonal expenses we should think about for the first quarter? And lastly, taxes, how should we think about tax range if bonus depreciation or other credits are extended? Thank you.

Kate Johnson: Thanks, Batya. I’ll handle the debt one and give the other two pieces to Chris. The clarity of having this TSA updated and amended is — has been great for our customer conversations. It basically shifts the maturities to ’29. It provides the ability to focus on you know our transformation efforts and have conversations with customers without that question. And so, we’ve really been relishing that. You know our pipeline and conversations with customers are, you know, positive and growing, and a lot of that has to do with the sales excellence that we’ve put in place in terms of supporting our people with world-class platforms and you know driving AI for sales productivity and things like that. So I think we’re in a good spot. Chris?

Chris Stansbury: Yeah. And on taxes, our guidance, we gave, a cash tax amount that we feel is the best way to look at it. Obviously, with the one-time expenses and special charges associated with the debt transaction, the impact from an ETR standpoint on net income can be really sensitive. So that’s why we chose to guide the cash tax amount. As it relates to legislation, again, we’re really pleased with the momentum around that. We would expect that if everything was enacted that’s out there, the benefit to us could be in the $300 million to $400 million range on an annual basis, but we’ll have to wait and see.

Batya Levi: All right. Thank you.

Chris Stansbury: Thank you.

Mike McCormack: Thanks, Batya. Next question, please, Aaron.

Operator: Our next question comes from the line of David Barton with Bank of America. Your line is live.

David Barden: Hey, guys. Thanks so much for taking the questions. I guess, two if I could. The first would be, just Chris, you know how you could maybe put some guardrails around how a successful TSA conclusion would impact the free cash flow guidance outlook that you’re presenting here today, which does not appear to have it in there? And the second question would be, and sorry to go back to the Public Sector, but given that this is kind of the tip of the iceberg of the growth turnaround, you know, third quarter to fourth quarter it was up $30 million, third quarter to fourth quarter it was up another $50 million, most of — all of that was attributed to kind of one-time items. Where — when you say it’s going to be the first to return to growth, from what number should we assume that growth begins? Thank you.

Chris Stansbury: Yeah. So I’ll answer the last part first. Again, you’re right, we did — we have said over the last couple of quarters there were some one-time benefits that have repeated themselves and certainly helped us. But as we look into the year from here forward, David, we should continue to see growth in Public Sector as the installs around those big contracts build their pace. So we do expect Public Sector revenue to be increasing as we go forward from here. And as it relates to the free cash flow guidance, it does include all of the TSA costs, so successful closure means closing in Q1, and we’ve got line-of-sight to doing that, we’ll certainly give more commentary around that as that gets finalized. But it is contemplated, and I think part of the confusion may be that included in that free cash flow guidance is the $700 million tax refund impact that hit in Q1.

David Barden: Right. Those are the offsetting forces. Perfect. All right. That’s all helpful. Thank you, Chris.

Chris Stansbury: Yeah.

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

Operator: Our next question is from the line of Michael Rollins with Citi. Michael your line is live.

Michael Rollins: Thanks and good afternoon. A couple of questions. The first one is, if we go back to the Analyst Day slides from a few months back, the EBITDA guidance range is lower at $4.1 billion to $4.3 billion versus the $4.3 billion to $4.6 billion. Can you remind us of just some of the influences and some of the developments that got you to the current range? And then, can you also give us an update on how the revenue range should look, after all this time, I think it was originally at 13.6 to 14.1 for 2024? Thanks.

Chris Stansbury: Yeah. So a few things. So what’s changed versus Investor Day. Obviously the EMEA sale, the CDN sale, and last but not least, just the impact of the debt discussions and that overhang in our business. We were pretty clear, I think, on the Q2 and Q3 calls that customers were concerned and certainly the size of the ’27 debt tower and our ability to execute the turnaround in time to refinance that, particularly the Lumen debt and that was of a particular concern. So we adjusted for that and with the negotiations behind us, we see positive momentum there. As it relates to revenue, we’re not guiding revenue at this point, and I would say that’s conscious because the revenue piece is going to be choppy as we go forward, and we want to be really transparent about that.

It’s hard to predict what totals will do. It’s easier to predict channel by channel that when we expect to see a turnaround, but to try to give that with some level of confidence at this point is just a little too early. So we’ve chosen to stick to EBITDA where we obviously have more levers to pull and more control around that.

Michael Rollins: And then just the second. In the past you’ve talked about the opportunities to proactively churn some of the legacy revenue and convert that into the strategic revenue. Can you share maybe some additional details or developments or there’s some numbers where you’re able to show the financial benefit of being able to migrate customers more quickly to fresher strategic services?

Kate Johnson: So a couple of things. There’s, number one, using AI to reach out to customers in a programmatic fashion at scale to drive productivity of the outbound calling that we do is the first step. And so, we’ve made a lot of progress there, putting the platform together. Number two, taking a migration factory approach, so for each legacy platform that customers are on, understanding the behavior signals that drive likelihood to churn and approaching them in cohorts and then meeting them where they are in terms of you know what they have and the best solution that we can migrate them too, and doing as much of that in an automated fashion as possible. All of that is the chassis that we built in ’23. Now we’re starting to — and in Q4 we had you know some pretty significant progress, numbers we don’t report on, but in terms of doing the reach outs and making progress with migrations, et cetera.