Correspondence 0000018926-23-000079 from Lumen Technologies, Inc. (LUMN) (CIK 0000018926) (LUMN)
Lumen Technologies, Inc. (LUMN) (CIK 0000018926)
Date: June 12, 2023 · CIK: 0000018926 · Accession: 0000018926-23-000079
AI Filing Summary & Sentiment
File numbers found in text: 001-07784
Referenced dates: May 26, 2023
Letter
VIA EDGAR Division of Corporation Finance Form 10-Q for the Quarterly Period Ended March 31, 2023 Filed May 2, 2023 Form 8-K Furnished May 2, 2023 File No. 001-07784
Dear Staff of the U.S. Securities and Exchange Commission,
On behalf of Lumen Technologies, Inc. (the “Company”), we submit this letter in response to comments from the staff (the “Staff”) of the U.S. Securities and Exchange Commission (the “Commission”) dated May 26, 2023, relating to the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 filed with the Commission on February 23, 2023, Form 10-Q for the Quarterly Period Ended March 31, 2023, and Form 8-K Furnished May 2, 2023 (the “May 8-K).
Form 10-K for the Fiscal Year Ended December 31, 2022
Consolidated Financial Statements
(3) Goodwill, Customer Relationships, and Other Intangible Assets, page 83
1.We note in your response to prior comment 3 that you used a market approach and a discounted cash flow method. Please tell us how each was weighted in estimating the fair value of the reporting units.
Response: The Company utilized the following weighting for the market approach and discounted cash flow method for each of our reporting units in estimating the fair value of each reporting unit as of October 31, 2022:
Weighting
Reporting Unit Market Approach Value Income Approach Value
NA Business 50% 50%
Mass Markets 50% 50%
EMEA 80% 20%
APAC 80% 20%
As noted above, to estimate the fair value of our NA Business and Mass Markets reporting units, we used a 50/50 weighting between the discounted cash flow method (“DCF” or “Income Approach”) and market approach. Management reviewed different weightings and determined that a 50/50 weighting on DCF and market approach
was the most appropriate at October 31, 2022. In doing so, we considered models used by financial analysts and other third parties to value Lumen, as well as prices offered by third party bidders to purchase portions of our business. As of December 31, 2022, there was no goodwill allocated to the EMEA and APAC reporting units.
2.With regards to your market approach, please describe the trends in your NA Business revenue and EBITDA multiples over the last several years. Also, you disclose on page 50 that you performed sensitivity analyses that considered a range of discount rates and EBITDA market multiples. Tell us whether you performed a sensitivity analysis of the NA Business revenue and NA Business EBITDA multiples and, if so, please provide. Lastly, in your response to prior comment 3, you indicate that your multiples were within the range of the peer group multiples. Please provide us with the range of the peer group multiples and tell us where the NA Business fell within the range.
Response: In connection with estimating the market approach value of our NA Business reporting unit, we utilized the following revenue and EBITDA multiples for quantitative assessments performed during the following periods beginning March 31, 2019 and ending October 31, 2022.
10/31/22 10/31/21 1/31/21(1)
10/31/20(1)
10/31/19(1)
3/31/19(2)
NA Business Revenue Multiple 2.0 2.5 2.2 2.2 2.2 2.0
NA Business EBITDA Multiple 5.0 6.6 6.0 5.9 5.9 5.5
(1) As previously disclosed, we made changes to our segment and customer-facing sales channel reporting categories in early 2021 to align with operational changes designed to better support our customers. Therefore, the NA Business revenue multiples and EBITDA multiples were calculated using a weighted average of our previous reporting units in this trend analysis.
(2) Because our low share price was a trigger for impairment testing, we estimated the fair value of our operations using only the market approach.
As of October 31, 2022, we performed concurrent sensitivity analyses to test the impact of various revenue and EBITDA multiple combinations for the NA Business reporting unit. These sensitivity analyses considered revenue and EBITDA multiple ranges of our peer group as shown in the table below. We historically utilized these peer group comparisons as part of our assessment of potential market participants, as our peers are in similar industries and provide a reasonable range for market-based measurements of fair value. In addition, we examined the impacts of various revenue and EBITDA multiple combinations in relation to:
•Historical NA Business multiples and implied valuations
•The spread between the revenue and EBITDA multiples’ implied valuations
•Impact on fair value of invested capital and excess/deficit to the carrying value of equity
•Impact of the NA Business reporting unit valuation to Lumen’s overall implied control premium
Generally, we have historically performed a similar analysis as part of every goodwill impairment assessment we have conducted in recent years to ensure all relevant factors are considered when selecting the Market Multiples and Long-term Growth Rates (“LTGR”) for our reporting units. We calculate and compare revenue growth, EBITDA, and Unlevered Cash Flow growth as well as EBITDA margin profiles. We generally assume that periods of growth or declines will normalize over time and moderate beyond the forecast horizon. We also consider how cost efficiencies and strategic investments made in the near term will impact our future financial performance. We additionally considered any changes in go-to-market strategies, sales channels, leadership changes and product categories (including our recent change to “grow/nurture/harvest/other” product categories) for each reporting unit. We also considered at October 31, 2022 the areas where initiatives would have the greatest impact while remaining mindful of each reporting unit’s respective strategic position, the overall macroeconomic environment, and related recessionary concerns.
At October 31, 2022, we reduced our NA Business revenue and EBITDA multiples from prior year multiples to align with the lower margins and lower revenue expectations used to set our earnings guidance for 2023. We expect to see the largest uplift from our targeted initiatives in this reporting unit. Key strategic priorities include
promoting our Edge, Network-as-a-Service, Unified Communications & Collaboration, and Security and Secure Access Service Edge products, supported by higher sales from the digital portal and overall enterprise transformation and simplification efforts. As we have discussed in our previous reports, however, we do not expect these initiatives to result in revenue or EBITDA growth until 2025, which we believe supports using the below-market multiples.
The range of peer group 2022 revenue and EBITDA multiples and selected multiples utilized for NA Business are provided in the table below. NA Business’ multiples were substantially below the average peer group revenue and EBITDA multiples.
Peer Group Range Revenue Multiple EBITDA Multiple
Minimum 1.8x 4.7x
Average 2.9x 7.5x
Median 2.7x 7.3x
Maximum 4.6x 10.8x
NA Business 2.0x 5.0x
3.You disclose the weighted average cost of capital (WACC) used for the NA Business reporting unit was 9.4% and you indicate in your response that this included a 5% company specific equity risk premium. Please tell us whether you included a company specific equity risk premium in the WACC assumption in prior quantitative analyses and, if not, why such premium was included in the 2022 analysis.
Response: The Company assesses its specific debt and equity risk premium when determining the overall WACC. We have included a company specific equity risk premium in prior quantitative analyses. Additionally, we consider a company specific debt risk premium based on the trading levels of the Company’s debt and access to capital markets. The increase in our company specific equity risk premium is primarily tied to the volatility and trending of our share price. The following table provides our company specific risk premium (equity and debt) for prior quantitative analysis.
Oct-22 Oct-21 Jan-21 Oct-20 Oct-19 Mar-19(1)
Company Specific Risk Premium 5.0% 5.0% 2.0% 4.0% 0.0% N/A
(1) Because our low share price was a trigger for impairment testing, we estimated the fair value of our operations using only the market approach.
4.In your response you indicate that you compared revenue, Adjusted EBITDA growth and unlevered cash flow growth, as well as Adjusted EBITDA margin profiles and that the long-term growth rate used were in line or below comparable average growth for these measures in future years based on your long-term forecast. You also state that considering these factors, you concluded the selected WACC, market multiples, long-term growth rate estimated fair value and indicated control premium were all reasonable. Please expand on these points and explain further how you concluded that the NA Business growth rates used were reasonable including more details about the comparisons referenced. In this regard, tell us whether you compared these amounts and/or rates with peers and, if so, tell us what the range of peers was and explain where you were within the range.
Response: In Table A below, the selected LTGR of 0.25% for our NA Business reporting unit is shown in comparison to our key growth metrics in the final two years of our internal long-term forecast. Additionally, management compared Lumen to publicly available peer group metrics in the intermediate term (2022-2024) across our key metrics including revenue growth, Adjusted EBITDA growth and Adjusted EBITDA margin, as shown in Table B below. Lumen NA Business average revenue growth and Adjusted EBITDA growth and Adjusted EBITDA margin are all towards the bottom of the range. As part of the forecast process, management goes beyond Lumen’s direct peers and also analyzed available industry data on channel and product trends in relation
to our Lumen forecast, specifically focusing on NA Business Enterprise and Wholesale channel product trends within the context of Lumen’s historical performance and in combination with our revenue initiatives and go-to-market approach.
Table A
Revenue CAGR (last 2 years) EBITDA CAGR (last 2 years) Unlevered Cash Flow CAGR Unlevered Cash Flow (last 2 year average) Revenue (last 2 year average) Selected LTGR
NA Business 1.29% 3.97% 7.91% 4.99% 1.29% 0.25%
Table B
(Figures in Millions and Local Currency) Revenue Growth Adjusted EBITDA Growth Adjusted EBITDA Margin
Ticker Company CY2022 CY2023 CY2024 CY2022 CY2023 CY2024 CY2022 CY2023 CY2024
LUMN Lumen Technologies, Inc. -15.7% -15.4% -1.8% -19.5% -20.9% -0.8% 39.0% 36.4% 36.8%
T AT&T Inc. -25.9% -1.7% 1.5% -26.3% 2.0% 3.4% 33.4% 34.7% 35.4%
VZ Verizon Communications Inc. 2.4% 1.5% 1.6% 6.0% 1.7% 1.8% 35.1% 35.2% 35.2%
ATUS Altice USA, Inc. -3.8% -2.9% -1.1% -10.1% -3.3% 2.2% 40.1% 39.9% 41.3%
CHTR Charter Communications, Inc. 4.6% 2.0% 2.6% 5.5% 2.6% 4.3% 40.0% 40.2% 40.9%
CMCSA Comcast Corporation 4.3% -0.6% 2.2% 6.7% 0.4% 3.4% 30.4% 30.7% 31.1%
AKAM Akamai Technologies, Inc. 3.8% 4.6% 8.7% 27.6% 3.4% 10.5% 42.4% 41.9% 42.6%
BCE BCE Inc. 2.9% 2.8% 2.8% 23.4% 3.7% 3.7% 42.6% 43.0% 43.3%
Peer Average -1.7% 0.8% 2.6% 4.7% 1.5% 4.2% 37.7% 38.0% 38.5%
Peer statistics:
Minimum -25.9% -2.9% -1.1% -26.3% -3.3% 1.8% 30.4% 30.7% 31.1%
Average -1.7% 0.8% 2.6% 4.7% 1.5% 4.2% 37.7% 38.0% 38.5%
Median 2.9% 1.5% 2.2% 6.0% 2.0% 3.4% 40.0% 39.9% 40.9%
Maximum 4.6% 4.6% 8.7% 27.6% 3.7% 10.5% 42.6% 43.0% 43.3%
Table Notes:
- Lumen includes all Lumen reporting units and is impacted by divestitures completed during 2022. NA Business accounts for approximately 75% of Total Lumen revenue.
- Removing the impacts of the 20-state ILEC business divestiture completed October 3, 2022, estimated Lumen NA Business revenue growth and Adjusted EBITDA growth are -2.5% and -6.1%, respectively, on average over the period from 2022 through 2024, while average Adjusted EBITDA margin over the same period is approximately 32%; each of these metrics is below the corresponding peer average.
In connection with determining our LTGR, we review key metrics and multiples used to prepare our publicly available guidance and long-term forecast, as well as reviewing performance data of our peers and the broader industry for additional context. As noted in our prior reports, we expect capital investments and cost reduction initiatives being made in the near-term to drive improved long-term NA Business performance beginning in 2025. We assessed all of these factors in connection with determining that our LTGR is 0.25%.
5.Please tell us whether a sensitivity analysis was performed specific to the assumptions of revenue, adjusted EBITDA and unlevered cash flow growth rates, as well as the WACC, for the NA Business and if so, what those results were. Also, describe the trends in the NA Business assumptions over the last several years.
Response: Lumen’s forecast process is a detailed, drivers-based model that uses hundreds of inputs to derive the forecast. Due to the complex nature of our forecasting process and the large number of metrics that are modeled, the process does not lend itself to simple sensitivity analysis. We do, however, run concurrent sensitivities around specific revenue and cost initiatives factoring in historical attainment.
As part of the forecasting process, hundreds of inputs are carefully considered and selected to arrive at the most-likely base forecast for Lumen, its reporting units, and certain key metrics including revenue, Adjusted EBITDA and unlevered cash flow. Inputs, and their resulting impact to financial projections, are tested during the forecast update process and selected based on reasonableness. Input examples for NA Business include, but are not limited to:
•Sales bookings by month by sales channel based on number of sellers and average productivity per seller
•Revenue installation intervals and installed revenue values in relation to trailing sales levels
•Revenue disconnect rate % by month by sales channel
•Seasonal usage growth or decline rate by month by sales channel
•Certain direct costs (and direct margin) by product by sales channel that are associated with the provision of services and products to customers
•Operating expense by account and by department by month based on annual growth rates, sequential trends, % of revenue and other factors such as changes in headcount, average cost per headcount per department, increases in compensation and rent, capitalization rates by dept and seasonal variability (including utility costs and payroll taxes).
•Capital expenditures by program, details by capital type (Success Based, Project, Base and capitalized operating expense), and review as a % of annualized sales/installations, and as a % of revenue. We also include investments to support initiatives/optimization and other spending to support network capacity requirements and unit growth.
Our current year forecast for NA Business and other reporting units aligns to our external company guidance. The forecast process frequency is at minimum quarterly and typically multiple times per quarter. The long-range forecast is reviewed by Lumen’s Board of Directors annually and throughout the year in connection with assessing strategic alternatives, potential mergers and acquisitions, or divestitures.
Internal controls are in place to assure the inputs and resulting forecast output metrics fall within expected ranges based on historical company results, with a process to ensure any metrics falling outside of reasonable range thresholds are explainable as outlier events or are the result of intentional shifts in company strategy.
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CORRESP 1 filename1.htm Document Lumen Technologies, Inc. 100 CenturyLink Drive Monroe, Louisiana 71203 June 12, 2023 VIA EDGAR U.S. Securities and Exchange Commission Division of Corporation Finance 100 F. Street, NE Washington, DC 20549 Re: Lumen Technologies, Inc. Form 10-K for the Fiscal Year Ended December 31, 2022 Filed February 23, 2023 Form 10-Q for the Quarterly Period Ended March 31, 2023 Filed May 2, 2023 Form 8-K Furnished May 2, 2023 File No. 001-07784 Dear Staff of the U.S. Securities and Exchange Commission, On behalf of Lumen Technologies, Inc. (the “Company”), we submit this letter in response to comments from the staff (the “Staff”) of the U.S. Securities and Exchange Commission (the “Commission”) dated May 26, 2023, relating to the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 filed with the Commission on February 23, 2023, Form 10-Q for the Quarterly Period Ended March 31, 2023, and Form 8-K Furnished May 2, 2023 (the “May 8-K). Form 10-K for the Fiscal Year Ended December 31, 2022 Consolidated Financial Statements (3) Goodwill, Customer Relationships, and Other Intangible Assets, page 83 1.We note in your response to prior comment 3 that you used a market approach and a discounted cash flow method. Please tell us how each was weighted in estimating the fair value of the reporting units. Response: The Company utilized the following weighting for the market approach and discounted cash flow method for each of our reporting units in estimating the fair value of each reporting unit as of October 31, 2022: Weighting Reporting Unit Market Approach Value Income Approach Value NA Business 50% 50% Mass Markets 50% 50% EMEA 80% 20% APAC 80% 20% As noted above, to estimate the fair value of our NA Business and Mass Markets reporting units, we used a 50/50 weighting between the discounted cash flow method (“DCF” or “Income Approach”) and market approach. Management reviewed different weightings and determined that a 50/50 weighting on DCF and market approach 1 was the most appropriate at October 31, 2022. In doing so, we considered models used by financial analysts and other third parties to value Lumen, as well as prices offered by third party bidders to purchase portions of our business. As of December 31, 2022, there was no goodwill allocated to the EMEA and APAC reporting units. 2.With regards to your market approach, please describe the trends in your NA Business revenue and EBITDA multiples over the last several years. Also, you disclose on page 50 that you performed sensitivity analyses that considered a range of discount rates and EBITDA market multiples. Tell us whether you performed a sensitivity analysis of the NA Business revenue and NA Business EBITDA multiples and, if so, please provide. Lastly, in your response to prior comment 3, you indicate that your multiples were within the range of the peer group multiples. Please provide us with the range of the peer group multiples and tell us where the NA Business fell within the range. Response: In connection with estimating the market approach value of our NA Business reporting unit, we utilized the following revenue and EBITDA multiples for quantitative assessments performed during the following periods beginning March 31, 2019 and ending October 31, 2022. 10/31/22 10/31/21 1/31/21(1) 10/31/20(1) 10/31/19(1) 3/31/19(2) NA Business Revenue Multiple 2.0 2.5 2.2 2.2 2.2 2.0 NA Business EBITDA Multiple 5.0 6.6 6.0 5.9 5.9 5.5 (1) As previously disclosed, we made changes to our segment and customer-facing sales channel reporting categories in early 2021 to align with operational changes designed to better support our customers. Therefore, the NA Business revenue multiples and EBITDA multiples were calculated using a weighted average of our previous reporting units in this trend analysis. (2) Because our low share price was a trigger for impairment testing, we estimated the fair value of our operations using only the market approach. As of October 31, 2022, we performed concurrent sensitivity analyses to test the impact of various revenue and EBITDA multiple combinations for the NA Business reporting unit. These sensitivity analyses considered revenue and EBITDA multiple ranges of our peer group as shown in the table below. We historically utilized these peer group comparisons as part of our assessment of potential market participants, as our peers are in similar industries and provide a reasonable range for market-based measurements of fair value. In addition, we examined the impacts of various revenue and EBITDA multiple combinations in relation to: •Historical NA Business multiples and implied valuations •The spread between the revenue and EBITDA multiples’ implied valuations •Impact on fair value of invested capital and excess/deficit to the carrying value of equity •Impact of the NA Business reporting unit valuation to Lumen’s overall implied control premium Generally, we have historically performed a similar analysis as part of every goodwill impairment assessment we have conducted in recent years to ensure all relevant factors are considered when selecting the Market Multiples and Long-term Growth Rates (“LTGR”) for our reporting units. We calculate and compare revenue growth, EBITDA, and Unlevered Cash Flow growth as well as EBITDA margin profiles. We generally assume that periods of growth or declines will normalize over time and moderate beyond the forecast horizon. We also consider how cost efficiencies and strategic investments made in the near term will impact our future financial performance. We additionally considered any changes in go-to-market strategies, sales channels, leadership changes and product categories (including our recent change to “grow/nurture/harvest/other” product categories) for each reporting unit. We also considered at October 31, 2022 the areas where initiatives would have the greatest impact while remaining mindful of each reporting unit’s respective strategic position, the overall macroeconomic environment, and related recessionary concerns. At October 31, 2022, we reduced our NA Business revenue and EBITDA multiples from prior year multiples to align with the lower margins and lower revenue expectations used to set our earnings guidance for 2023. We expect to see the largest uplift from our targeted initiatives in this reporting unit. Key strategic priorities include 2 promoting our Edge, Network-as-a-Service, Unified Communications & Collaboration, and Security and Secure Access Service Edge products, supported by higher sales from the digital portal and overall enterprise transformation and simplification efforts. As we have discussed in our previous reports, however, we do not expect these initiatives to result in revenue or EBITDA growth until 2025, which we believe supports using the below-market multiples. The range of peer group 2022 revenue and EBITDA multiples and selected multiples utilized for NA Business are provided in the table below. NA Business’ multiples were substantially below the average peer group revenue and EBITDA multiples. Peer Group Range Revenue Multiple EBITDA Multiple Minimum 1.8x 4.7x Average 2.9x 7.5x Median 2.7x 7.3x Maximum 4.6x 10.8x NA Business 2.0x 5.0x 3.You disclose the weighted average cost of capital (WACC) used for the NA Business reporting unit was 9.4% and you indicate in your response that this included a 5% company specific equity risk premium. Please tell us whether you included a company specific equity risk premium in the WACC assumption in prior quantitative analyses and, if not, why such premium was included in the 2022 analysis. Response: The Company assesses its specific debt and equity risk premium when determining the overall WACC. We have included a company specific equity risk premium in prior quantitative analyses. Additionally, we consider a company specific debt risk premium based on the trading levels of the Company’s debt and access to capital markets. The increase in our company specific equity risk premium is primarily tied to the volatility and trending of our share price. The following table provides our company specific risk premium (equity and debt) for prior quantitative analysis. Oct-22 Oct-21 Jan-21 Oct-20 Oct-19 Mar-19(1) Company Specific Risk Premium 5.0% 5.0% 2.0% 4.0% 0.0% N/A (1) Because our low share price was a trigger for impairment testing, we estimated the fair value of our operations using only the market approach. 4.In your response you indicate that you compared revenue, Adjusted EBITDA growth and unlevered cash flow growth, as well as Adjusted EBITDA margin profiles and that the long-term growth rate used were in line or below comparable average growth for these measures in future years based on your long-term forecast. You also state that considering these factors, you concluded the selected WACC, market multiples, long-term growth rate estimated fair value and indicated control premium were all reasonable. Please expand on these points and explain further how you concluded that the NA Business growth rates used were reasonable including more details about the comparisons referenced. In this regard, tell us whether you compared these amounts and/or rates with peers and, if so, tell us what the range of peers was and explain where you were within the range. Response: In Table A below, the selected LTGR of 0.25% for our NA Business reporting unit is shown in comparison to our key growth metrics in the final two years of our internal long-term forecast. Additionally, management compared Lumen to publicly available peer group metrics in the intermediate term (2022-2024) across our key metrics including revenue growth, Adjusted EBITDA growth and Adjusted EBITDA margin, as shown in Table B below. Lumen NA Business average revenue growth and Adjusted EBITDA growth and Adjusted EBITDA margin are all towards the bottom of the range. As part of the forecast process, management goes beyond Lumen’s direct peers and also analyzed available industry data on channel and product trends in relation 3 to our Lumen forecast, specifically focusing on NA Business Enterprise and Wholesale channel product trends within the context of Lumen’s historical performance and in combination with our revenue initiatives and go-to-market approach. Table A Revenue CAGR (last 2 years) EBITDA CAGR (last 2 years) Unlevered Cash Flow CAGR Unlevered Cash Flow (last 2 year average) Revenue (last 2 year average) Selected LTGR NA Business 1.29% 3.97% 7.91% 4.99% 1.29% 0.25% Table B (Figures in Millions and Local Currency) Revenue Growth Adjusted EBITDA Growth Adjusted EBITDA Margin Ticker Company CY2022 CY2023 CY2024 CY2022 CY2023 CY2024 CY2022 CY2023 CY2024 LUMN Lumen Technologies, Inc. -15.7% -15.4% -1.8% -19.5% -20.9% -0.8% 39.0% 36.4% 36.8% T AT&T Inc. -25.9% -1.7% 1.5% -26.3% 2.0% 3.4% 33.4% 34.7% 35.4% VZ Verizon Communications Inc. 2.4% 1.5% 1.6% 6.0% 1.7% 1.8% 35.1% 35.2% 35.2% ATUS Altice USA, Inc. -3.8% -2.9% -1.1% -10.1% -3.3% 2.2% 40.1% 39.9% 41.3% CHTR Charter Communications, Inc. 4.6% 2.0% 2.6% 5.5% 2.6% 4.3% 40.0% 40.2% 40.9% CMCSA Comcast Corporation 4.3% -0.6% 2.2% 6.7% 0.4% 3.4% 30.4% 30.7% 31.1% AKAM Akamai Technologies, Inc. 3.8% 4.6% 8.7% 27.6% 3.4% 10.5% 42.4% 41.9% 42.6% BCE BCE Inc. 2.9% 2.8% 2.8% 23.4% 3.7% 3.7% 42.6% 43.0% 43.3% Peer Average -1.7% 0.8% 2.6% 4.7% 1.5% 4.2% 37.7% 38.0% 38.5% Peer statistics: Minimum -25.9% -2.9% -1.1% -26.3% -3.3% 1.8% 30.4% 30.7% 31.1% Average -1.7% 0.8% 2.6% 4.7% 1.5% 4.2% 37.7% 38.0% 38.5% Median 2.9% 1.5% 2.2% 6.0% 2.0% 3.4% 40.0% 39.9% 40.9% Maximum 4.6% 4.6% 8.7% 27.6% 3.7% 10.5% 42.6% 43.0% 43.3% Table Notes: - Lumen includes all Lumen reporting units and is impacted by divestitures completed during 2022. NA Business accounts for approximately 75% of Total Lumen revenue. - Removing the impacts of the 20-state ILEC business divestiture completed October 3, 2022, estimated Lumen NA Business revenue growth and Adjusted EBITDA growth are -2.5% and -6.1%, respectively, on average over the period from 2022 through 2024, while average Adjusted EBITDA margin over the same period is approximately 32%; each of these metrics is below the corresponding peer average. In connection with determining our LTGR, we review key metrics and multiples used to prepare our publicly available guidance and long-term forecast, as well as reviewing performance data of our peers and the broader industry for additional context. As noted in our prior reports, we expect capital investments and cost reduction initiatives being made in the near-term to drive improved long-term NA Business performance beginning in 2025. We assessed all of these factors in connection with determining that our LTGR is 0.25%. 4 5.Please tell us whether a sensitivity analysis was performed specific to the assumptions of revenue, adjusted EBITDA and unlevered cash flow growth rates, as well as the WACC, for the NA Business and if so, what those results were. Also, describe the trends in the NA Business assumptions over the last several years. Response: Lumen’s forecast process is a detailed, drivers-based model that uses hundreds of inputs to derive the forecast. Due to the complex nature of our forecasting process and the large number of metrics that are modeled, the process does not lend itself to simple sensitivity analysis. We do, however, run concurrent sensitivities around specific revenue and cost initiatives factoring in historical attainment. As part of the forecasting process, hundreds of inputs are carefully considered and selected to arrive at the most-likely base forecast for Lumen, its reporting units, and certain key metrics including revenue, Adjusted EBITDA and unlevered cash flow. Inputs, and their resulting impact to financial projections, are tested during the forecast update process and selected based on reasonableness. Input examples for NA Business include, but are not limited to: •Sales bookings by month by sales channel based on number of sellers and average productivity per seller •Revenue installation intervals and installed revenue values in relation to trailing sales levels •Revenue disconnect rate % by month by sales channel •Seasonal usage growth or decline rate by month by sales channel •Certain direct costs (and direct margin) by product by sales channel that are associated with the provision of services and products to customers •Operating expense by account and by department by month based on annual growth rates, sequential trends, % of revenue and other factors such as changes in headcount, average cost per headcount per department, increases in compensation and rent, capitalization rates by dept and seasonal variability (including utility costs and payroll taxes). •Capital expenditures by program, details by capital type (Success Based, Project, Base and capitalized operating expense), and review as a % of annualized sales/installations, and as a % of revenue. We also include investments to support initiatives/optimization and other spending to support network capacity requirements and unit growth. Our current year forecast for NA Business and other reporting units aligns to our external company guidance. The forecast process frequency is at minimum quarterly and typically multiple times per quarter. The long-range forecast is reviewed by Lumen’s Board of Directors annually and throughout the year in connection with assessing strategic alternatives, potential mergers and acquisitions, or divestitures. Internal controls are in place to assure the inputs and resulting forecast output metrics fall within expected ranges based on historical company results, with a process to ensure any metrics falling outside of reasonable range thresholds are explainable as outlier events or are the result of intentional shifts in company strategy.