Chris Stansbury
Executive Vice President and Chief Financial Officer at Lumen Technologies
Thank you, Kate, and good afternoon, everyone. As Kate described, our turnaround is underway, and we're very excited with what lies ahead. Our teams are energized. We're pleased with our progress on the Quantum build with fiber enablements outpacing our first quarter results, and we expect further acceleration in the third quarter. This gives us confidence that we will meet or exceed our plan of 500,000 locations in 2023. Our Grow product group's performance was solid this quarter, and when excluding in divested businesses and foreign currency impacts, it grew year-over-year at a similar rate compared to our first quarter's performance.
I'll now discuss in more detail the financial summary of our second quarter. As I did in our first quarter earnings call, I'll reference our financial performance primarily on a sequential basis for better comparability as the year-ago period included the impacts of our divested LATAM and ILEC 20 state businesses. We're again providing supplemental information and the discrete impacts in our footnotes at where applicable in our earnings presentation and on a separate page in our financial trending schedule. When these impacts of the divestitures and commercial agreements are excluded from results, our year-over-year growth rates are substantially better than the GAAP reported rates.
Our second quarter total revenue declined 2.1% on a sequential basis, to $3.661 billion. Adjusted EBITDA was $1.229 billion in the second quarter with a 33.6% margin. Free cash flow was negative $896 million in the second quarter, including $938 million of taxes paid related to our two divestitures last year. We've now paid all the transaction-related taxes for those divestitures. As a reminder, our 2023 free cash flow guidance excludes the impact of these taxes.
Next, I'll review our detailed revenue results for the quarter. On a year-over-year basis, reported revenue was down 20.6% with the impact of the divestitures and commercial agreements representing approximately 72% of the reported decline. Within our two key segments, business revenue declined 2% sequentially to $2.897 billion and mass markets revenue declined 2.3% sequentially to $764 million. Within our enterprise channels, which is our business segment excluding wholesale, revenue declined 1.8% sequentially. Our exposure to legacy voice revenue continues to improve, and is now less than 11% of enterprise channel revenue and is down approximately 50 basis points sequentially. Large enterprise revenue declined 1.3% sequentially in the second quarter. Large enterprise revenue trends were similar to the first quarter year-over-year when excluding the impact of divested businesses, driven primarily by declines in harvest, due to legacy voice and partially offset by stronger trends in Grow due to demand for cloud, colocation, and IP.
Public sector revenue declined 3.7% sequentially. Excluding the impacts of our divested businesses, public sector trends worsened year-over-year, primarily due to lower other revenue, which includes nonrecurring equipment and IT solutions. Declines in Nurture and Harvest products were also contributed to the declines, with a partial offset by accelerating growth within Grow driven by IP, voice over IP, and wavelengths. As a reminder, we had a contract expiration at the end of the year-ago quarter, which is impacting the year-over-year comparisons for some public sector Grow products by approximately $10 million.
Mid-market revenue declined 1.6% sequentially. Excluding the impacts of our divested businesses, there was a similar level of year-over-year decline compared to last quarter. Strength in Grow products was driven primarily by broadband, IP, and UC&C, and was partially offset by lower legacy voice revenue within Harvest. Wholesale revenue declined 2.4% sequentially. Excluding the impacts of our divested businesses, trends worsened year-over-year. As with public sector, the accelerated decline rate was primarily due to lower other revenue. Recall that in the second quarter of last year, we benefited by approximately $25 million related to a nonrecurring IT professional services agreement that was provided in connection with the now divested 20 state ILEC assets. Separately, we lapped the benefits from certain carrier contract discount aspirations, which we previously identified in the year-ago quarter. We expect our wholesale channel will likely continue to decline over time, and it is an area we manage for cash.
Now moving to our business product lifecycle reporting. Grow products revenue grew 0.9% sequentially. As I mentioned earlier, excluding the impacts of our divested businesses, this quarter's results showed a similar level of strong year-over-year growth to the first quarter of this year. While results can vary in any given quarter, we expect continued strength in this area as we execute on our overall pivot to growth. Grow now represents approximately 39% of our business segment and carried an approximate 83% direct margin this quarter. Accelerating Grow product growth is a key focus of our strategy, and we continue to be pleased with these early results.
Moving on to Nurture and Harvest, we continue to expect headwinds in these categories as we take proactive steps to migrate customers to newer technologies. This improves our customers' experience and provides an uplift in lifetime value of those customers for Lumen. As Kate mentioned, securing the base is hard work and will take some time to be reflected in our results. Nurture products revenue declined 4% sequentially due to continued pressure in VPN and Ethernet services. Nurture represents about 30% of our business segment and carried an approximate 68% direct margin this quarter. Harvest products revenue declined 3% sequentially. Recall that Harvest is an important part of our business and generates cash to fuel our growth initiatives. Harvest represents approximately 25% of our business segment and carried an approximate 81% direct margin this quarter. The subtotal of our business product revenue, including Grow, Nurture, and Harvest collectively declined 1.7% sequentially and 14.8% on a year-over-year basis. The impact of the divestitures and commercial agreements accounted for approximately 68% of the reported decline.
Other products revenue declined 6% sequentially. Our other product revenue tends to experience fluctuations due to the variable nature of these products. Within other, we have de-emphasized low-margin equipment and changed our sales commission structure, which will continue to impact comparisons to prior periods. These changes are focusing our sales efforts on products that provide a better customer experience and stronger returns for Lumen.
Moving on to mass markets, revenue declined 2.3% sequentially. Our mass markets fiber broadband revenue grew 3.3% sequentially and represented approximately 31% of mass markets broadband revenue. Also note that our exposure to legacy voice and other services revenue continues to improve with a nearly 40 basis-point reduction sequentially. During the quarter, total fiber broadband enablements were approximately 130,000, bringing the total fiber-enabled locations to approximately 3.4 million as of June 30. We're focused on penetrating our deploy fiber assets through our simplified Quantum Fiber broadband product to maximize subscriber and ARPU growth. In the second quarter, we added 21,000 Quantum Fiber customers. This brings our total Quantum Fiber subscribers to 877,000. We expect to add subscribers at a faster rate in the second-half of the year with our significant increase in Quantum marketing. Our marketing plans are ramping in conjunction with our conversion of the CenturyLink fiber brand to Quantum Fiber later in the third quarter of this year, potentially further benefiting subscriber growth as more potential customers can benefit from our world-class Quantum digital experience.
Fiber ARPU increased both sequentially and on a year-over-year basis to approximately $61 in the second quarter. New customers are seeing the value and quality of Quantum Fiber, with most choosing our flagship symmetrical gig and in some cases, multi-gig service, benefiting our fiber broadband ARPU, which grew both sequentially and year-over-year. As of June 30, our penetration of legacy copper broadband was approximately 11%, highlighting the significant share-taking opportunity as we accelerate the Quantum Fiber build. Our Quantum Fiber penetration stood at approximately 26%, and as we expand our footprint, we expect penetration to fall as we increase our addressable market at a higher rate than new customers are at. Our Quantum Fiber 18-month penetration rate of the 2021 Vintage was at approximately 20%. The performance of our 2021 Vintage continues to track below that of 2020 at these milestones, and expect the same will be true of our 2022 Vintage. This performance was the catalyst for us to reevaluate our Quantum build enablement targets during the fourth quarter of last year, refocusing our efforts on locations that provide the best opportunity and returns for Lumen. We expect that our 2023 Vintage will exhibit stronger performance given our more disciplined approach to our build. That said, our Quantum Fiber NPS score remains greater than positive 60, an indication of the quality, value, and superior service that Quantum Fiber delivers. Quantum Fiber is an all-digital, prepaid product that features simplified pricing with no contracts, helping reduce call center volumes and supporting our very strong NPS scores.
Now turning to adjusted EBITDA. For the second quarter of 2023, adjusted EBITDA was $1.229 billion, compared to $1.811 billion in the year-ago quarter. The second quarter of last year included $398 million related to the divested businesses. And the second quarter of this year included a negative impact of $51 million from divestiture-related commercial agreements. These items represent approximately 77% of the year-over-year decline. Adjusted EBITDA benefited during the second quarter from a year-to-date adjustment related to a carrier settlement. Given legal agreements, I will not be able to comment further on the settlement.
Special Items impacting adjusted EBITDA this quarter totaled $102 million. Our second quarter 2023 adjusted EBITDA margin, including special items, was 33.6%. Capital expenditures for the second quarter were $796 million. In the second quarter, the company generated free cash flow of negative $896 million. As previously noted, this includes $938 million of taxes paid related to our two divestitures that closed last year.
Moving on to our financial outlook. We're reducing our estimate for stock-based compensation expenses to approximately $65 million for the full year 2023. We are reiterating all other guidance metrics.
Now before we go to Q&A, I'd like to take a moment to address recent media reports regarding lead sheet cables and telecommunication networks. We began phasing out lead cables from our network infrastructure during the 1950s. And based on our initial analysis, we currently estimate that less than 5% of our approximately 700,000-mile copper network contain lead, of which, we believe the majority is buried in conduit-based infrastructure. We thoughtfully manage our network to ensure the health and safety of our employees and the communities we serve. We also regularly assess our safety protocols and meet established regulatory and scientific standards related to potential lead exposure for workers. Moving forward, we're committed to working with independent experts, regulators, and our industry peers to maintain our positive track record of safety and compliance.
With that, we're ready for your questions.
