Lumen Technologies Q1 2022 Earnings Call Transcript

There are 14 speakers on the call.

Operator

Thank you for standing by, and welcome to the Lumin Technologies First Quarter 2022 Earnings Call. Please remain on the line. The conference will begin in a few minutes. Greetings, and welcome to Lumen Technologies First quarter earnings conference call. During the presentation, all participants will be in a listen only mode.

Operator

Afterwards, we will conduct a question and answer session. As a reminder, this conference is being recorded today, Wednesday, May 4, 2022. It is now my pleasure to turn the conference over to Mike McCormack, Senior Vice President of Investor Relations. Please go ahead.

Speaker 1

Thank you, France. Good afternoon, everyone, and thank you for joining us for the Lumen Technologies Q1 2022 earnings call. Joining me on the call today are Jeff Storey, President and Chief Executive Officer Chris Stansbury, Executive Vice President and Chief Financial Officer and our Senior Vice President and Treasurer, Rafael Martinez Chapman. Before we begin, I need to call your attention to our Safe Harbor statement on Slide 2 of our Q1 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.

Speaker 1

We will be referring to certain non GAAP financial measures is reconciled to the most comparable GAAP measures that can be found in our earnings press release. In addition, certain metrics discussed today exclude costs or special items as detailed in our earnings material, all of which can be found on the Investor Relations section of the Louvain website. With that, I will turn the call over to Jeff.

Speaker 2

Thanks, Mike, and good afternoon, everyone, and thank you for joining us. I'd like to begin the call today by welcoming Chris Stansbury to the Lumin team as our Chief Financial Officer. Chris joins us from Arrow Electronics and brings over 25 years of finance leadership experience. I'm confident that Chris' skills and knowledge will prove invaluable to our organization as we drive toward profitable revenue growth. Chris joins Lim in an exciting time for our company and its stakeholders.

Speaker 2

We continue to anticipate closing 2 major transactions this year, will provide a significant improvement in our revenue mix and generate over $7,000,000,000 of net cash proceeds. Within our business segment, we see strong momentum in our forward indicators like sales and churn, which provide us confidence in achieving our growth objectives. In addition, our Quantum Fiber build plan is ramping and we expect momentum to continue to accelerate as we drive toward our expectation of hitting 1,000,000 or so new fiber enablement in 2022. On today's call, I will provide some thoughts on our Q1 results as well as the opportunities we see in the year ahead. Chris will discuss the Q1 in more detail and we'll reserve time after Chris' remarks for your questions.

Speaker 2

As we mentioned last quarter, our Q1 revenue performance tends to be seasonally weaker compared to the Q4 and this year was no exception. We continued strong performance in security, cloud, unified communications and IP products, Offset by anticipated declines in voice and other as well as lower non recurring equipment revenue. We are managing through supply chain constraints that have caused Some delays in our install intervals and significantly slowed our CPE sales. Although CPE has little impact on EBITDA and free cash flow, it has a larger The marketplace provides our enterprise customers the ability to self serve a number of our key products and services. No phone calls, no order tickets.

Speaker 2

The customer selects the services they need from the marketplace and the system takes it from there. This self-service capability resonates with our customers improving their experience while also improving our speed of delivery and reducing our cost to deliver services. As we continue to execute on our transformation plan with capabilities like the Lumin marketplace, we believe Lumin is well positioned to drive top line growth in the enterprise market. We continue to win large enterprise and public sector contracts, driving long term growth in the consumption based services like security, application delivery and managed services through our edge capabilities and built in security across a world class cyber network. These capabilities are complemented by the increasingly all digital experience of the Lumin platform and supported by very relevant and capable professional services.

Speaker 2

While these large complex deals take longer to turn up, they come with tremendous upside as we push more and more applications to the customer edge leading to profitable and durable revenue for years to come. Coupling our edge facilities with our dense fiber infrastructure provides machine to machine level latency for approximately 97% of the U. S. Enterprise locations, allowing customers to implement cloud based solutions As if all the processing and storage were located within their facilities, an increasingly critical capability. We see traction across traditional industry verticals like retail and healthcare, but also opportunities for new use cases of our edge compute infrastructure Like we're seeing from leading crypto platforms.

Speaker 2

With the strong sales environment for large enterprise, we expect revenue trends to improve as we install the solutions called for in these more complex deployments. On the other hand, We remain dissatisfied with the mid market enterprise performance, but expect improvements as these customers return to more normal operations post COVID. We We have confidence our products and services serve these customers well and can execute better in this channel. As you've heard me say before, Our path to growth will not be linear, but we are excited about the market's appetite for our new and existing services, Our enterprise product expansions and the steady increase in the depth and breadth of our platform will continue to open new addressable markets for Lumin. Within our mass markets group, the team is energized as we move deeper into our accelerated ramp of Quantum enablement, increasing our adjustable footprint and subscriber opportunity.

Speaker 2

Quantum Fiber is the growth engine for mass markets and we're excited to update you on our progress. Our most recent Net Promoter Score, which is above 50, demonstrates that Quantum Fiber is delivering a very high quality product with unmatched symmetric capacities within all digital experience. We continue to enhance the Quantum for the conference call. Including the deployment of our multi gig fiber capability which will be commercially available to mass market customers later this year. While it's is very early in the adoption phase of this type of capacity.

Speaker 2

We know there is an insatiable appetite for bandwidth. Our fiber expansions and the architectures we're now deploying with our accelerated build factor in multi gig services from the beginning and position us for growth coming from VR, AR, gaming, work and learn from home and other high bandwidth services. We expect the Quantum Capital investment to be concentrated over the next several years, but we believe the capabilities we are enabling will sustain our Quantum product for years into the future. Chris will share more details about our enablement in a minute, but the short answer is that having accelerated is our engineering and pre construction work processes in the Q1. We expect our build pace to continue to accelerate throughout the year, and are laying the foundation for what we believe is a very large growth opportunity.

Speaker 2

As with our enterprise business, we are managing through supply chain constraints within mass markets, but we believe our strong supplier relationships provide support for our build plan. We expect continued strong revenue growth as we ramp enablement and execute on our penetration targets. Quantum delivers a best in class service as highlighted by the very positive NPS scores I mentioned and we are excited to provide this experience to a growing number of mass market locations, both consumer and small business. Beginning this quarter, we are providing the investment community with enhanced mass market disclosures regarding our retained 16 state footprint, as well as other important metrics. Overall, we are pleased with our accelerating build pace and look forward to taking meaningful market share as we continue to gain scale.

Speaker 2

I'd like to provide a quick update on our previously announced transactions. We continue to expect the transaction with Stonepeak to close early in Q3 and our confidence is building that we will close as early as July 1. Separation planning is well underway on the Apollo transaction And we're working closely with various regulatory bodies. We recently received our completeness determination from the Department of Justice. That said, the process has not moved as quickly as we had hoped resulting in our pushing back the expected close to early in Q4.

Speaker 2

This delay has no impact on our confidence in deal closure. In a few minutes, Chris will provide a financial update related to the revised closing. But essentially, We will raise our EBITDA and free cash flow guidance based on a presumed Cineworld closing. As you will hear from Chris, we are passing through the effects of the adjusted is closing date. We are making no other changes to the outlook we provided last quarter.

Speaker 2

As these deals close in the second half of the year, it's very important to us that we are a strong partner to both Stonepeak and Apollo as they drive further success and serve these valued customers. Beyond the financial effects, these transactions allow Lumin to focus on the ripest opportunities for growth, while improving our pro form a revenue mix. These transactions also highlight the value of the Lumin asset portfolio and we will continue to opportunistically evaluate further portfolio optimization. As always, we'll be disciplined. While there is no urgency for us to divest additional assets, We will pursue transactions that provide clear strategic and economic benefits for Lumin.

Speaker 2

Our first priority remains achieving profitable revenue growth and we are actively deploying the assets, personnel and investments across our entire footprint to achieve that goal. Growth is the principal long term driver of improved shareholder returns, but we believe shareholders should be rewarded as we transform our company to drive that growth and believe returning cash to shareholders in the form of a dividend is a very important part of our overall value proposition. We do continue to expect an elevated dividend payout ratio as we execute on our Quantum build plan, but also expect it to normalize over time as growth improves and Quantum investments normalize in the out years We remain committed to a healthy balance sheet and expect a meaningful reduction in our outstanding debt as we prudently utilize over $7,000,000,000 of net proceeds from our announced transactions. We continue to believe our market value does not reflect the exciting growth opportunity we are driving toward. And while investing in growth and supporting our dividend are paramount, Our Board remains prepared to authorize a share repurchase on short notice if they believe a buyback provides the best return for our shareholders.

Speaker 2

I would like to end my remarks by thanking Neel Dev for his finance leadership as CFO over the past 3 years, as well as his contribution to Lumin and its predecessor companies for over the past 18 years. We thank him and wish him continued success in the future. With that, I'll turn the call over to Chris to discuss our Q1 results in more detail. Chris?

Speaker 3

Thank you, Jeff, and good afternoon, everyone. I want to begin by thanking the team here at Lumin for a warm welcome. While it's only been a few weeks since coming on board, I can tell you that the excitement for our goals and initiatives is palpable. I look forward to being a part of the transformation occurring at Lumin and believe I bring a unique perspective as we execute on our plan. I'll begin with the financial summary of our Q1.

Speaker 3

We reported adjusted EBITDA, excluding special items of $1,966,000,000 and generated a 42% margin. A number of items impacted margins this quarter, which I will discuss in more detail later in my remarks. Our reported revenue was down 7%, is meaningfully impacted by the completion of the CAF II program and seasonal factors within our enterprise business. Our free cash flow was $846,000,000 We returned $271,000,000 to our shareholders during the quarter through our quarterly dividend. Additionally, We reduced net debt by over $450,000,000 during the Q1 and by approximately $1,500,000,000 since the same time last year.

Speaker 3

As we announced on our last earnings call, we are adjusting our mass markets product revenue reporting categories this quarter to fiber broadband, Other Broadband and Voice and Other. The two key reasons for these changes are the increasing importance of our Quantum Fiber platform and the completion of the CAF II program. Given its relatively small impact, RDOF support revenue will be included in the voice and other category in our new reporting We currently expect to begin recognizing RDOF support revenue during the Q2, But even on a full year basis, RDOF will have a very small impact in our results, particularly after the expected sale of our ILEC assets in the 4th quarter. We've also provided added disclosures for our mass market segment associated with our 16 retained states, which we have referred to as RemainCo in our earnings materials and those are internal estimates, which may be subject to change. These materials can be found in the Investor Relations section of our website.

Speaker 3

Our goal is to allow investors and others to begin to model our mass market segment as we near the divestiture of the 20 state ILEC business to Apollo. Given the complexity, we do not intend to provide prior period estimates, but will provide RemainCo estimated quarterly results through the close of the transaction with Apollo. In addition, we're actively working to help investors better understand the drivers of our business segment and hope to provide additional disclosures in future periods. We experienced typical sequential seasonal pressures on revenue in the first With an added headwind from supply chain constraints. With respect to supply chains, we've been managing through the impact well, But this is an ongoing issue that we will continue to manage and watch very closely and the same can be said for the impacts of inflation.

Speaker 3

Moving on to revenue performance. On an adjusted basis, revenue was down 2.2% sequentially, similar to the 2% sequential decline we had in the Q1 of last year. On a year over year basis, total revenue declined 7% in the Q1 to $4,676,000,000 Year over year metrics were materially impacted by the end of the CAF II program, which was partially offset by a related one time CAF II revenue release in the Q1 of 2022. When adjusted for CAF II, foreign currency and the sale of our last remaining correctional facilities business last quarter, The year over year rate of decline was 5.5% versus a decline of 5.2% last quarter on the same basis. Within our 2 key segments, business revenue declined 5.4 percent to $3,401,000,000 year over year.

Speaker 3

When excluding foreign currency headwinds and the sale of our correctional facilities business, revenue declined 4.9% year over year. Mass markets revenue declined 11.1 percent to $1,275,000,000 year over year. Adjusting for the CAF II impacts mentioned earlier, Mass markets revenue was down 7.2 percent, in line with their performance in the Q4. This will be the last quarter with the year over year negative impact of our Prism TV shutdown, which was about a 70 basis point headwind to growth this quarter. Wholesale revenue was down 4.3% similar to last quarter's performance.

Speaker 3

We continue to manage this business for cash. As you look at our enterprise channels, Which is our business segment excluding wholesale, reported revenue declined 5.8% year over year. When adjusting for the impacts of foreign currency and the sale of the Directional Facilities business, revenue was down 5.1%. Our exposure to legacy voice and other revenue, Which we also manage for cash has dropped by 3.40 basis points year over year and now represents less than 21% of enterprise channel revenue. IGAM revenue declined 2.1% year over year.

Speaker 3

On a constant currency basis, iGAM declined 1.3% year over year versus a 1% year over year decline in the 4th quarter on the same basis. We had particular strength in our managed security, cloud services and IP services. Large enterprise revenue declined 8% year over year. The sale of the correctional facilities business is reflected in this channel resulted in an approximate $10,000,000 negative impact year over year. Normalizing for the sale, large enterprise declined 6 is 0.9% year over year.

Speaker 3

We had growth in managed security, cloud services, unified communications and IP services. Overall large enterprise growth was negatively impacted by equipment and our IT Solutions business, both of which tend to experience quarterly fluctuations. Mid market enterprise declined 8.2% year over year. As Jeff said, we're not yet satisfied with the mid market results, But see the subsiding of COVID as positive for this channel. We had growth in cloud, IT Services and IP Services, as well as wavelengths, offset by lower voice revenue and one time revenue from CPE sales.

Speaker 3

As I mentioned earlier, on an adjusted basis, Mass markets revenue declined 7.2% year over year. For ease of comparison and footnoted on our slide, we recognized approximately $14,000,000 of our $59,000,000 CAF II benefit this quarter within the 16 retained states. This compares to approximately $53,000,000 fifty $4,000,000 of CAF II revenue recognized in the retained states in the Q4 of 2021 and the Q1 of 2021, respectively. Our mass markets fiber broadband revenue within our Remainco footprint grew by nearly 18% year over year And in Q1 represented more than 15% of our total mass market revenue. With the anticipated close of our ILEC sale, Our exposure to legacy voice and other services will improve and reduce our annualized voice and other revenue by over $650,000,000 based on our Q1 2022 results and after adjusting for the CAF II release.

Speaker 3

During the quarter, we added 27,000 Quantum Fiber customers roughly in line with last quarter as we pivot to our market based approach and prepare for our significant shift in the go to market strategy. This brings our total Quantum subscribers to 830,000 with 762,000 of the subscribers within the 16 retained states. During the quarter, total enablements were approximately 160,000 with approximately 130,000 of those enablements located in our 16 bringing total enablements in the retained states to $2,670,000 as of March 31, with approximately 250,000 additional locations enabled in the business to be sold to Apollo.

Speaker 2

ARPU in

Speaker 3

the retained states was approximately $59 and we see ARPU expansion opportunities with the adoption In home Wi Fi solutions, security services and multi gig speeds among others. As you frame our Quantum journey, we wanted to share a few important expectations for the positive impact this product will have in our future results. We expect that as Quantum ramps, We will achieve overall broadband revenue and subscriber growth within mass markets in the second half of twenty twenty three. As of March 31, our penetration of legacy broadband subscribers in our retained 16 states was down to is approximately 13%, highlighting the low risk of quantum cannibalization and our significant share taking opportunity as we accelerate the quantum build. In fact, roughly 90% of our 2021 fiber gross adds were new to Lumin.

Speaker 3

Within the same footprint, our Quantum penetration stood at approximately 29%, but we would expect that to fall in the near term as we ramp enablement. That said, today we are pleased to announce that our Quantum 2020 vintage penetration is greater than 22% and ramping nicely, Supporting our expectations for the longer term penetration opportunity. This is bolstered by our current quantum NPS score within RemainCo, which is greater than positive 50, Highlighting the quality, speed and customer friendly nature of our fiber offering. Quantum is an all digital prepaid product that features simple pricing with no contracts, helping reduce call center volumes and bolstering our NPS scores. Turning to adjusted EBITDA for the Q1 of 2022, adjusted EBITDA excluding special items was $1,966,000,000 compared to $2,165,000,000 in the year ago quarter.

Speaker 3

Our adjusted EBITDA this quarter benefited from $59,000,000 from the CAF II revenue release mentioned earlier. Special items this quarter totaled $52,000,000 and were is related primarily to transaction and separation activities. Our adjusted EBITDA margin was 42% this quarter. When comparing margins to the year ago period, you should consider the non recurring CAF II benefit of $59,000,000 this quarter and the $123,000,000 of high margin CAF II subsidy revenue in the prior year period. When adjusting for these impacts, Our Q1 2022 margin would have been 41.3% compared to 41.6% in the year ago period.

Speaker 3

Capital expenditures for the Q1 of 2022 were $577,000,000 We continue to focus on capital efficiencies. However, when you think about our capital spending, be aware that we had a meaningful year end 2021 spend ahead of our quantum acceleration. Lower capital expenditures this quarter does not change our outlook for the year. In the Q1, capital expenditures represent accelerated investment in engineering and reconstruction activities. Future quarters will represent accelerated construction results.

Speaker 3

Also note that there will be timing differences with respect to reported CapEx based upon payment terms for our purchases. Our full year capital guidance remains unchanged. With respect to our maintenance capital spending, as we look at the average over the last few years, it has been in the $400,000,000 to $500,000,000 a year range. In the Q1 of 2022, the company generated free cash flow of $846,000,000 which was positively impacted by the timing of capital expenditures, as I mentioned. Moving on to our outlook.

Speaker 3

We are adjusting our expectations for both EBITDA and free cash flow to reflect the expected closing date of our ILEC transaction as Jeff highlighted earlier. Our capital expenditure guidance range is unchanged given the relatively small impact of the new expected ILEC closing date on that metric. We now expect 2022 adjusted EBITDA between $6,900,000,000 $7,100,000,000 and free cash flow between $2,000,000,000 $2,200,000,000 In order to provide a bit more detail on the other category within the waterfall chart in our earnings presentation, you should consider 3 main moving parts: Investing in OpEx for growth, the synergies expected related to transactions and lower transformation cost savings is expected in 2022 as we focus resources on separating the pending divestitures. I think it's fair to consider these three items as roughly equal in the conference call. Also, be aware that we expect both the synergies as well as the pause on transformation savings to be transitory in nature.

Speaker 3

Recall that in terms of special items for 2022, 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 cost for these services are removed from adjusted EBITDA. The reimbursement for these services will be in other income with no material net impact to our cash flows and reflected in our schedules of non GAAP items impacting net income. In closing, I look forward to engaging with all of you and our analyst and investor communities and hope to have an opportunity as the year progresses to meet many of you in person to discuss what I see as a tremendous opportunity for shareholder returns here at Lumin. Our team is focused on executing on our growth initiatives for for Lumin Enterprise and scaling our Quantum Fiber business, which we expect as we drive our return to top line growth.

Speaker 3

As a reminder, in addition to free cash flow generated from the business, we expect about $7,000,000,000 in discretionary cash proceeds later this year from the transactions after the transfer of debt, taxes and transaction related costs. The combination of free cash flow from the business and proceeds from portfolio rationalization efforts to support our 2022 capital allocation priorities. With that, we are ready for your questions.

Operator

Our first question is from Batya Levi with UBS. Please go ahead.

Speaker 4

Great. Thank you. Two questions. First, can you provide a little bit more color on the enterprise trends that you're seeing, maybe the sales funnel versus bookings? And when would you to see a trough maybe in the revenue decline in that segment.

Speaker 4

And Chris, maybe a question for you. You did provide Priorities for capital allocation with investment on the top of the list, can you talk a little bit about how you would weigh The shareholder return, the dividend payment versus the debt pay down if the revenue decline persists? Thank you.

Speaker 2

Sure, Batya. I'll take the first question. I mentioned in the prepared remarks that we see strong forward indicators. And what that looks like to me is number 1, sales. If you look at our Q1 sales, it's very solid Sales in the quarter much in line with the strong sales we talked about in the 4th quarter.

Speaker 2

I get that We don't always see this in revenue yet and so I'll talk a little bit about that. But the sales for large enterprise in particular is the first area that I point to. Now there's good news and bad news in that fact. We've seen great success in very large complex deals with large enterprise customers. These aren't single product plays.

Speaker 2

We integrate more closely with the customer's environment with multiple products. It makes it very strategic sticky relationship, these deals shift our revenue mix and move up the stack with Managed Services and Security and Edge Capabilities. So they're good margin products moving up the stack and make those relationships is much stickier. Some of the bad news associated with the fact of these big deals is they convert to revenue slow more slowly. They have thousands of locations takes months months to coordinate with the customer to turn up the locations.

Speaker 2

And so they don't convert to revenue Quite as quickly as some of our mid market type deals. The other thing is we need to make sure that we can as Chris and I both said, we need to make sure that we are driving More success in our mid market sales. That's more of the flywheel business of Lumin and we need to make sure They were driving that. Now lastly, I'll point out that we discussed this in the Q4 call And that is seasonality tends to impact Q1 more than it does other quarters and we've seen that for many years. It's not new to us And we've talked about it for many years.

Speaker 2

Looking at the Q1 2021 sequential revenue comparison is pretty typical to what we've seen in previous years. And so those are some of the things that I look at, Not really to predict where a trough is and we don't give revenue guidance. No. I'll tell you that we are looking at what type of information we provide and it may be something that we look at in the future to provide, but we really don't give revenue guidance this point. Chris, you want to answer that?

Speaker 3

Sure. Yes, Batya, on the question regarding investment versus Dividend. Obviously, that answer is growth is the priority and dividends are a close second to that. But we do have flexibility around the CapEx. It's dynamic.

Speaker 3

We can adjust as we go. And as Jeff mentioned, the dividend payout ratio will move around as we move through the investment phase. So when you look at all the variables that go into the capital allocation, I think the investment and the dividend are both Absolutely things that we can do and we have got other choice points that we can make along the way as needed.

Speaker 4

Maybe just a quick follow-up. Do you also have a target on when you would like to take the leverage down to the original target, I guess closer to 3

Speaker 3

That's a longer term goal. I think it's the right goal. But obviously, as we move through The current investment window, having a strong balance sheet is critical, and that's something that we'll have a mindful eye towards. But I do think we'll be more in the neighborhood of where we are now. That's I know what we've talked about in the past, is relatively net leverage neutral and that's what the focus will be as we go forward.

Speaker 1

Thanks, Pancha. Next question please.

Operator

Our next question is from Simon Flannery with Morgan Stanley. Please go ahead.

Speaker 5

Congratulations, Chris, on the new role. I wonder if you could just, for housekeeping, just explain to us what happened with the CAF II. I think most people had assumed we were done with that at the end of last So what exactly is going on there? And why did you have to release it? And is there any more to go for the rest of the year?

Speaker 5

And then just Any comments on the macro environment? There's certainly been concerns about consumers and businesses suffering from Higher fuel prices, rising interest rates, etcetera. Are you seeing anything as you go through March April, the uncertainty Around the war, you referenced the supply chain, but any comments there on just the general operating environment would be great.

Speaker 3

Sure. On the CAF II, this was something that was contemplated in the guidance for the year. And as the program winds down and audits are completed by various states. There were reserves that we had in place and We've been able to release some of those reserves as those have been closed down. There's only a bit left to go, smaller than what we've is released here, but that's really the impact that you're seeing in the quarter.

Speaker 2

And you never know what those reserves exactly are going to be until you go through those audits and things. So that's the process that we have to go through. On the macro environment, we see some impacts of the war With certain customers or government customers and some things slowing down, making sure that aren't doing upgrades to the network while you You've got something that critical going on. So we see some impacts of that. Haven't really seen impacts of inflation on customer buying habits.

Speaker 2

We still see some impact on from COVID on customers not being fully back into the office or having slowed evaluations of new solutions during COVID, just now getting back up to speed on those. But really No macro comments that we would make about inflation or Other things like that.

Speaker 5

And what about cost control within your own business from inflation, your exposure to energy and labor cost inflation?

Speaker 2

Yes. So we work really hard on controlling inflation within our own business. If you From a fuel standpoint, we have worked over the past few years Through our ESG efforts to really reduce our fuel consumption and we've been pretty proud of what we've done there. So it's got an impact, but it's got a smaller impact than it would have had 4 or 5 years ago. With respect to supply chains, we do have trouble with supply chains.

Speaker 2

We see that lingering effect from vendors being able to deliver equipment to us, Wanting a little more money for what equipment they are delivering, but we've got great relationships with them and we're working through all of that to mitigate the risks and the pressures that come from inflation.

Speaker 1

Thanks. Operator, next question.

Operator

Our next question is from David Barden with Bank of America. Please go ahead.

Speaker 6

Hey, guys. Thanks so much for taking the questions and welcome, Chris. I guess my first question, Chris, going back to your answer, I think Batya's question, I think that when we look at the pro form a organization in the 2023 from a free cash flow standpoint, Basically all the money is spoken for when we look at CapEx investments and dividends and it doesn't really leave anything for deleveraging. And if we do something on the stock buyback program, it means we're willing to take leverage up from where it is currently. So I guess I'm wondering kind of as you come in with fresh eyes on the balance that we're trying to strike With a fairly narrow margin for error in 'twenty three on cash, kind of how you perceive the willingness of the company to take up or the ability to take down leverage.

Speaker 6

And then I guess, if I could on kind of a second question Just on the comments, Jeff, that you made about the progress in Quantum, the expansion of of the footprint and availability, your comments about maybe not getting credit in the stock for some of these investments you're making. I think that people would love to kind of get a sense as to where the time in the future is that we see a crossover, where the fiber net adds Are beginning to turn the corner on the legacy broadband net add decline? Thanks.

Speaker 2

Yes. So I'll take the first one out of the second one first. And Chris said in his prepared remarks that that time is the second half of twenty '23. We see subscriber broadband, overall broadband subscriber net adds growing in the second half of 'twenty And we see overall broadband revenue growing in the second half of twenty twenty three. And so Chris gave those comments In his prepared remarks, Chris, you want to try to add that the leverage?

Speaker 3

Yes, sure. And I would just add to that, that we made a real effort this quarter to will provide more disclosure and transparency around mass markets and we will continue to do that. Obviously, as we go forward, we'll work on the enterprise side. As it relates to 2023, obviously, we're not in a position The guide 2023 right now and I guess the good news is that by the time we're ready, I'll have more time under my belt To have had input into that process. We hear you on the math.

Speaker 3

The reality is there's other things that we've got to look at as well In terms of what assets do we keep, what assets do we not keep, are there are the new assets we would add to the portfolio. There's also the opportunity, I think, to continue to drive cost efficiencies as we go forward. So, there's a lot of things that go into baking 2023 guidance. And as we move through the year, that'll be part of my focus.

Speaker 6

Great. Thank you, guys.

Speaker 1

Thanks, David. Next question please.

Operator

Our next question is from Eric Lukow with Wells Fargo. Please go ahead.

Speaker 7

Hi, thanks for taking the question. Jeff, I was curious on the supply chain commentary. First of all, how much Of a revenue impact did you see from, I think, you said some lower non recurring equipment sales. And are you seeing these supply chain issues, Is that contributing to some of the larger longer install cycles from some of your customers? Or is that largely related to some of the large complex deals You talked about recently.

Speaker 7

And then second question maybe for Chris. You called out some of the transition costs As transitory, I think it was the separation cost, the synergies and the transformation savings. When do you think we'll kind of get past those and we'll see those actually had a positive net impact to the current run rate of EBITDA. Thanks.

Speaker 2

Sure. On the supply chain issues, It does have an impact on our CPE sales. We don't quantify that number generally, but It's not insignificant. So we look at it pretty carefully. It does not drive EBITDA does not drive cash flow, but it does have a fairly significant impact on revenue in the quarter.

Speaker 2

So we'll continue to focus on it, but not worry about it from a free cash flow or EBITDA perspective. Within the service delivery, it absolutely creates bottlenecks for us, especially with customer premise equipment. If the customer wants a particular vendor's product and the vendor isn't shipping it. Those are challenges that we have to deal with. It's not an insurmountable challenge.

Speaker 2

It's not something that I'm pointing to, to say, oh, service delivery isn't delivering. I think we're doing a great job of managing through the Supply chain issues, but it is something that I want you to be aware of that we do see it and we do face it. And I hope that it's getting better. It seems to have improved a little bit over the last month or so, but we'll continue to stay focused with our vendors. Now the last point is We have great relationships.

Speaker 2

And so I talk to our major vendors pretty regularly and we work with them in Good times and in bad to make sure that they have accurate forecasts for our services. And so during COVID, I worked with a lot of these vendors to make sure they knew what they could expect from us. And now we're working with them to make sure what we can expect from them. So we'll continue to work through the supply chain issues. It's a warning flag that I want you to hear, But I don't want you to overemphasize it in that either.

Speaker 3

And just on the transition costs, We expect those to go on probably for 1 to 2 years. Now again, we'll recover A lot of that in other income and you'll see that as we go forward. Transformation savings, I think we can ramp up sooner. Obviously, in the near term, we got a People working on the divestitures, but we can refocus on transformation savings next year. But I do think the other thing that will impact OpEx increases is really the growth in Quantum and frankly I hope that continues.

Speaker 3

That's That's a positive reinforcement mechanism because we'll be driving the revenue that goes with that. So we'll continue to provide insight on that as we move forward, but that's how I see it unfolding.

Speaker 2

All right.

Speaker 7

Thank you both.

Speaker 1

Thanks, Eric. Next question,

Operator

Our next question is from Greg Williams with Cowen and Company.

Speaker 8

You spoke about portfolio optimization and alluded to 2023 and the way you're going to deal with the balance sheet. There's some media reports suggesting that Lumin is exploring a sale of the European assets. Just wondering if that's something that you would be considering. And can you remind us how much revenue and EBITDA those assets do generate? The second question is just on the mid market weakness, if you can elaborate a little bit.

Speaker 8

Is this really COVID related or is this more voice attrition or are they adopting lower for ARPU SD WAN and the technology risks there. Just help us think about the trajectory going forward. Thanks.

Speaker 2

Sure. Let me Just the first question on asset sales. I never speculate on any particular asset sales I never comment on anything, but I'll point out that we've demonstrated an openness to smart Optimization of our assets. We've also demonstrated the discipline to get the right deal done, not just get a deal done. And so we'll continue to do that.

Speaker 2

There's no urgency for us to divest anything, but we're always interested in figuring out the best ways to generate strong returns for our shareholders. I'll also add that any acquisitions or dispositions really must meet 2 fundamental criteria. And the first is attractive valuation And the second is strategic benefit to Lumin. And so anything we do, we'll have to meet those two requirements. As you look at Our LatAm sale and our I Like sale in the 20 states to Apollo, both of those transactions meet the attractive evaluations and providing strategic benefit to Lumin.

Speaker 2

And so that's the context in which we'll look at any type of Acquisition or disposition? I'm sorry, Greg. What was the other question?

Speaker 8

Just the mid market, the trajectory and elaborate on the weakness?

Speaker 2

The mid market weakness, I really think is still just a lingering effect of COVID. I look at our products and services and our sales motion with them and our digital experience and think that it is that we've got all the right capabilities for the customers. They're is just not yet back into the office or just now getting back into the office and starting to look at And our ability to win in that group, we just need to make sure that we do and execute on the plan. It's a relatively small number of our Overall Enterprise Business, I don't have the exact percentage in my head, but it's a relatively small number.

Speaker 8

Got it. Thank you.

Speaker 1

Thanks, Greg. Next question please.

Operator

Our next question is from Michael Rollins with Citi. Please go ahead.

Speaker 9

Thanks and good afternoon. Just curious if you could dive a little deeper in the subject of legacy And is there a way to frame whether it's by product or by customer vertical of how investors should think about what's legacy or at risk over time and what's strategic? And then maybe how when legacy converts to strategic, like what that average algorithm is to understand like Longer term, the current revenue power of the company?

Speaker 2

Sure. So, great question. And I'll ask Chris to answer it because that's what he spends a lot of time over the last month that he's been here, just thinking about how How do we give appropriate disclosures, better disclosure, clearer disclosures on our business? And so Chris, I'll let you

Speaker 3

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

Speaker 3

We didn't have enough time to get through that before this call, but you can expect more visibility on that going forward.

Speaker 9

And just another quick follow ups. So, you adjusted the guidance for EBITDA. Was there a reason that the CapEx didn't get adjusted for holding on to The wireline assets for another quarter?

Speaker 3

Yes. It's just the differences there are so small. We wanted to keep it simple. And that's why you saw the flow through the ways you saw it presented. So it's really The big variable is just time and there's not going to be a significant change in CapEx because of that.

Speaker 9

Thank you.

Speaker 1

Thanks, Mike. Next question please.

Operator

Our next question is from Brett Feldman with Goldman Sachs. Please go ahead.

Speaker 10

Thanks for taking the question and welcome to Chris. 2, if you don't mind. The first one is, we're now at this point where every single major wireless carrier cable company is offering bundle of mobile and broadband. And as you ramp your investment in your own advanced fiber broadband service, I'm curious how you think about the importance of incorporating mobile into the bundle. You obviously already have an enterprise partnership with T Mobile and I'm curious whether it would make sense to maybe expand that.

Speaker 10

And then the second question here, some of the other large telcos that are a bit more consumer facing like the wireless carriers have has been talking about looking at pricing as a mechanism for offsetting some inflationary cost pressures in their business. And even yesterday, AT and T announced that they would start taking price on some legacy plans. You're obviously not exposed to the wireless market, but you're exposed to literally every other telecom market And so Jeff, I'm curious how you're thinking about pricing power and whether there's an opportunity or to what extent you think you can move price higher if needed if inflationary pressures persist. Thank you.

Speaker 2

Sure. The first one, Bundling mobile and broadband, candidly, we haven't seen that it has been all that important. And so we will continue to evaluate and continue to look at it. I know we're never going to go out and build We're not going to go out and buy a whole bunch of spectrum and build a network ourselves. So it would be through partnerships obviously that we would Consider doing it, but we haven't seen the bundle.

Speaker 2

We didn't see the bundle between Prism TV pay off in subscriber growth. We think our broadband capability stands on its own. I mean, we've just announced that we're going to do multi gigabit Services, we think that's an incredible capability. We think our all digital experience provides a customer experience is unmatched in the market, layering Wi Fi and home Wi Fi and layering security on top of those types of of capabilities, we think our product is second to none and stands on its own. So I don't think that we'll really Not anytime soon look at mobile bundling, but I don't say never.

Speaker 2

We'll always keep it open, Open mind to it if we thought that it added value. From a pricing perspective, we look at rerates pretty regularly and see if there are opportunities to do rerates. And so I'm not going to get into our specific strategy on what customers, what types of customers, what types of products. But when we look at the market and we feel that our prices are not where they should be, we do rebates. Has historically not been a huge number, but it's something that over the past couple of years, for 3 or 4 years, That we've paid a lot of attention to and we'll continue to do so.

Speaker 10

Great. Thank you.

Speaker 1

Sure. Thanks, Brett. Next question, please.

Operator

Our next question is from Phil Cusick with JPMorgan. Please go ahead.

Speaker 11

Hey, guys. A couple of follow ups and maybe a real question. First, can you break out for us what the revenue and EBITDA were for the planned asset sales this quarter? And then Did last quarter's outlook anticipate the $59,000,000 in non cash CAF benefit that you got this quarter? And And then the 3rd follow-up, talk again on the mass market growth in the second half of twenty twenty three.

Speaker 11

Was that on a year over year or quarter to quarter basis, that growth number? Finally, a real question. Have you seen any shift in copper broadband churn in markets where fixed wireless has launched versus markets where it hasn't. Thanks very much.

Speaker 2

Yes. I'll try and take a couple of those and leave whichever ones I've forgotten, Chris. I don't know the number on asset sales, what the revenue is. So Chris, you can.

Speaker 3

Yes. So for the ILEC sale, the revenue number for the year was 2,500,000,000 Sorry, for 2020, it was $2,500,000,000 and for Latin America is $800,000,000

Speaker 11

Okay. But nothing for the quarter. Thanks.

Speaker 2

Yes. The second question you had was on the CAF II release and was it is contemplated in the guidance and what we said last quarter. And the answer is the CAF II the opportunity The cash to release has always been contemplated in the guidance. I won't give details on how much when or any of that. But yes, it's is contemplated in our guidance.

Speaker 2

It's a little bit of a fuzzy number moving forward because we don't know what the audits conference will result in and until you go through that process, you don't know whether there is a release Or how much of a release or if there's some sort of makeup that has And then on top return due to fixed wireless, we're not seeing it. I'm sure there's a little bit, but we're not seeing it. If you think about fixed wireless Moving forward and the broadband capabilities of Quantum, I look at it and think We have exactly the right solutions for fixed wireless. And we use fixed wireless in our enterprise business as campus area and networking technology. There are always multiple technologies to deliver similar services.

Speaker 2

And so we use it in our campus area and networking Solutions to provide mobility within a campus. But as soon as you want to have traffic that wants to leave the edge of the campus, It moves to fiber and we think that is ultimately the answer for all communications, whether it's leaving the edge of the campus For fixed wireless type communications, whether it's leaving the edge of the campus or leaving the edge of the home, It wants to leave best on fiber. And so we look at it and think there's certainly some application probably more applicable in rural environments than in Dense urban market clusters that Quantum Fiber is targeting, but I don't know that we Any particular churn as a result of it.

Speaker 11

Okay. And then on The mass market growth, just to clarify, was that year over year or quarter to quarter revenue growth I think it was?

Speaker 3

Sorry, which number were you referring to? I want to make sure.

Speaker 11

You had said you Was it I think you said you expected mass market revenue growth

Speaker 3

in the

Speaker 11

second half of twenty twenty three?

Speaker 3

Yes, that's right. And so that's year over year.

Speaker 8

Is that

Speaker 11

That's year over year. So you expect it to start growing sequentially more quickly than that?

Speaker 3

That's tougher to call, but I would expect that at that point in time, you would see year over year growth and sequential growth. I wouldn't say cumulatively it would be growth at that point. So you got Careful with that, but the key message is that we see a light at the end of the tunnel and an inflection point where that segment starts to grow again in the second half of next year.

Speaker 11

Got it. Thanks very much.

Speaker 1

Thanks, Bill. Next question.

Operator

Our next question is from Nick Del Deo with MoffettNathanson. Please go ahead.

Speaker 9

Hey, good afternoon. Thanks for taking my questions.

Speaker 11

First, a high level one for Chris.

Speaker 9

What if Jeff and the Board charged you're accomplishing in the role. And can you describe any high level philosophies that you bring with respect to value creation, financial KPIs you focus on and so on. And then second, I think you guys disclosed $400,000,000 to $500,000,000 annual maintenance CapEx. How are you defining that since everyone seems to do a little bit differently? And how do you think about a more holistic maintenance CapEx number when you kind of bake in the cost of churn replacement?

Speaker 9

Thanks.

Speaker 2

So Nick, I think I should answer the question about what am I charging him with, but I'll let Chris answer.

Speaker 3

Thanks, Nick. I mean, really the conversations that I had with Jeff and the Board When I was considering this opportunity, we're really around helping Lumin transition to growth. And if you look at My experience with Arrow, Arrow was in a very similar situation when I joined and went through a big strategic shift is focused to drive growth and I think that's something I bring to Lumin. And quite frankly, the reason I came is I saw all the hard working people and the initiatives Inside the building and I think it's a tremendous opportunity. So that's job number 1.

Speaker 3

But moving through These windows is obviously tricky. And some of the questions today obviously get to that. Maximizing EBITDA while we're navigating that transformation, I think, is critical and that's going to be A close second to helping drive growth. I'd say that on that journey, obviously, I'm going to learn more as I get closer to the business. But one thing near term that I think is critically important is giving more transparency to the investment community Around what's under the covers.

Speaker 3

And I think that's a real opportunity for us as well. And I've talked about that earlier. I'll touch on the CapEx. When we say $400,000,000 to $500,000,000 that's keep the lights on CapEx. That's what we need to do To keep the business running, where that goes as we move forward, that's a little trickier.

Speaker 3

But the reality is when you look at a lot of the capital that's going into the ground No, those are very long lived assets. And so I don't expect a ton of maintenance associated with that, certainly in the near term, Longer term. I have got to educate myself a little more before I can answer that. And then Really, when you think about some of the things that Jeff talked about on the enterprise side, a number of those initiatives become less capex Intensive, right, when you're talking about complex solutions. There is CapEx involved, but the face of that looks different perhaps asked in some of the more historical motions.

Speaker 3

So that's how I'd address that.

Speaker 2

Thanks, Nick. Okay.

Speaker 1

Next question please.

Operator

Our next question is from James Ratcliffe with Evercore ISI. Please go ahead.

Speaker 12

Thanks for taking the question. 2 if I could. First of all, Chris, just to clarify, in the guidance changes, there is no organic change in EBITDA, just adding another quarter of the U. S. Selco EBITDA And just rounding on CapEx.

Speaker 12

And secondly, Jeff, can you give us a little color around what you think you need to do better in mid market? You highlighted that scenario, you're not satisfied, What's the blocking and tackling there? Thanks. Sure.

Speaker 3

Yes, you're correct. On the guidance, it's Just the timing shift and that flows through to free cash flow as well.

Speaker 2

And what do we need to do better in mid market? I'll give you a short term answer and a long term answer. The short term answer is we need to get people back in the office. We need to get them looking at new technology solutions for their businesses and that's is obviously beyond our control to some extent, but we need to keep working with those customers as they come back from the past 2 years. Longer term, we need to keep investing in an all digital experience.

Speaker 2

Last week And I guess this is your turn to, but last week we launched the Lumin Marketplace and the Lumin Marketplace is ideal for our mid market customers to go in and explore and learn about our capabilities to configure things that they want and to place orders that we can then will turn up very quickly because we've been standardizing our building platform in which those customers exist. And so we need the customers to get back in the office and start buying, but we also need to make sure that we're driving utilization of the capabilities that we've been building and have recently launched for those customers. So we're excited about that business. And if you look at our security business, our DDoS mitigation, our excellent broadband, SASE, SD WAN, all of those capabilities, We think we have the right answers. We just need to continue to execute on the plan.

Speaker 8

Thank you.

Speaker 1

Thanks, James. Next question please.

Operator

Our next question is from Walt Piecyk with LightShed Partners. Please go ahead.

Speaker 13

Thanks. Sorry, I have a bit of a Small specific question. You talked in February about 1,000,000 new fiber homes passed for 2022. Your pace Really for the past 4 quarters is only is very small. Is this impacted by supply chain?

Speaker 13

Is there a specific ramp that's going to occur and then when you talked about 2023, I think you said maybe more than that $1,500,000 on homes passed. If you can get momentum in these fiber builds, does that carry into the first half of twenty twenty three? Can you just talk about that a little bit? Thanks.

Speaker 2

Sure. First of all, everything's affected by supply chain, but I don't point to that as any major obstacle in our fiber ramps for this year at this point. So I don't want to discount it entirely. Again, I don't want to over highlight it either. If you look at our process, We have shifted from micro targeting to a more market based targeting.

Speaker 2

That means more engineering upfront, longer permitting times and all of the things that we have contemplated in our build schedule that make it nonlinear. Not going to see the same number in 1st quarter that you see, the 2nd quarter, it's not always as efficient as you Would want it to be and you certainly can't divide a 1,000,000 by 4 and think that that's the right number. So I talked is about capital in my remarks and I think that we are on track for what we're wanting to accomplish in 2022 from a fiber build perspective and we should be continuing to ramp throughout the year.

Speaker 13

Thanks. And then on Slide 11, you referenced hitting, I think if I'm reading this correct, 22% Penetration at the 12 month mark for the 2020 vintage. When you think I mean, obviously, there's small builds in 2021. Are you seeing similar performance as you continue to build in terms of a 1 year target of 20% plus penetration?

Speaker 2

We've always been very excited about the success that Quantum Fiber brings to the market. We've got a great digital experience. We handle the sales and turn up and all that through the digital experience. So we think that we and we have a great symmetrical High Speed Product. And so yes, we're very pleased with what we see.

Speaker 2

We haven't reported specifically what we're seeing in 2021, but we think that 1 year mark is a good place to look at it. And so that's why we talked about 2020.

Speaker 13

Great. Thank you.

Speaker 2

Sure. Thanks, Walt. Thank you, everybody. Look, in closing, I just Want to say that Lumin is a company undergoing rapid and exciting change in 2022. We've been on a transformation journey for the past several years and it's really coming to a focal point in 2022.

Speaker 2

We see a broad Opportunity set across our business and mass market units as we streamline and position them for revenue growth. In addition, I look forward to Chris, Chris' new leadership of our finance organization and the powerful skills that he brings to the team. So Chris, I'd like to add my Welcome in front of everybody. With that, we will end the call. Thank you all for joining.

Speaker 2

As always, thank you for your interest in Lumin.

Operator

And we would like to thank everyone for your participation and for using the Lumin conferencing service today. This does includes the conference call. We ask that you please disconnect your lines and have a great day everyone.

Earnings Conference Call
Lumen Technologies Q1 2022
00:00 / 00:00