Q3 2020 Lumen Technologies Earnings Call
[music].
Well.
Greetings and welcome to Lumens technologies third quarter 2020 earnings Conference call.
During the presentation, all participants will be in a listen only mode.
Afterwards, we will conduct a question and answer session.
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As a reminder, this conference is being recorded Wednesday November 4th 2020.
It is now my pleasure to turn the conference over to Valerie Finberg, Vice President Investor Relations. Please go ahead Valerie.
Thank you Frances good afternoon, everyone and thank you for joining us for the limit technologies third quarter 2020, <unk> earnings call joining.
Joining me on the call today are Jeff storey, President and Chief Executive Officer, and meal, Dads Executive Vice President and Chief Financial Officer.
Before we begin I need to call your attention to our safe Harbor statement on slide two of our three to 20 presentation.
Which note that this conference call May include forward looking statements are subject to certain risks and uncertainties.
All forward looking statements should be considered in conjunction with the cautionary statements on slide two and in the risk factors in our SEC filings.
During today's call, we will be referring to certain non-GAAP financial measures.
Which are reconciled to the most comparable GAAP measures can be found in our earnings press release. In addition, certain metrics discussed today exclude transformation cost and other special items as detailed in our earnings materials, all of which can be found on the Investor Relations section of the Lehman website.
Finally, I want to remind everyone that the fccs quiet period rules are in effect for the rural digital opportunity Fund auction 94, which began last week. Therefore any comments, we make around our das will be very limited with that I will turn the call over to Josh.
Thanks salary and thank you everyone joining us today for our first earnings call. This morning.
On today's call I'll take a few minutes to touch on the third quarter highlights and then go into the launch of women and the opportunities. We see ahead after.
After that Neil will review, our third quarter financial results and then we'll open up the call for your questions.
We delivered another solid quarter, improving our year over year revenue performance and delivering sequential EBITDA as we continue to transform our business.
Customers rely on London to enable their digital transformation and we're seeing that in our sales trends.
Following a strong second quarter sales for again and enterprise segments were good and sales for SMB customers were in line with our expectations.
We are encouraged by the steady demand, we see that extended sales cycles will continue to be affected by the uncertain environment, particularly for SMB customers.
We delivered another strong quarter for consumer broadband revenues, both year over year and sequential revenue growth and recorded our 11th consecutive quarter of growth in broadband ARPU. This.
This quarter, we added 46000 gigabits subscribers, surpassing the record we said last quarter.
Our results confirm our thesis for the consumer business.
We win customers, where we invest in fiber simplify the experience and use micro targeting in selecting the areas we serve.
We believe our consumer fiber offering the best in the market and our customer satisfaction results are showing consumers value dedicated and reliable bandwidth.
As you heard me say many times, our operational improvements lead to highly satisfied customers more durable revenue and they allow us to reduce the cost of our operation.
Our relentless focus in these areas is delivering results you can see in two ways this quarter.
First spike higher seasonal expenses, we delivered sequential adjusted EBITDA growth.
Second we were recently recognized by Newsweek on their 2021 list of top customer service scores.
Scoring the highest of all named Internet service providers, we've made a lot of progress and see additional opportunities to improve.
Overall I am pleased with our results. This quarter, we are focused on improving topline revenue and driving EBITDA growth.
We also remain committed to the capital allocation strategy summarized on slide four and the leverage targets, we set at the beginning of last year.
Our first priority is to invest in the business driving growth transforming our customer experience and improving our operating costs.
Our second objective is to reduce leverage and we further strengthened the balance sheet. This quarter several capital markets transactions, continuing to reduce leverage and interest expense.
Finally, we remain committed to returning capital to shareholders through our dividend and are very comfortable with a dividend payout ratio in the thirtys one of the lowest payout ratios compared to our large peers.
We believe the balance we achieve this three pronged capital allocation has served us well through the covert pandemic and the uncertainty in the economy, giving us ample liquidity to continue to invest for growth reduce debt and return capital through our dividend.
Within the company, our mostly work from home team continues to excel as a distributed workforce. We have maintained small dedicated teams to drive speed and collaboration on our key product and operational initiatives and continue to use data oriented technologies to operate at the highest.
Levels and service delivery and service assurance.
In fact, we've been using this time and our own experience to understand and develop solutions for the fourth industrial Revolution, and they work from anywhere mindset.
Turning to the launch of Lemon a couple of years ago, we challenged ourselves to chart a bold vision, what kind of company. We wanted to be during that effort. It became obvious that the company was firmly in a position to successfully help our customers acquire analyze.
And to act on their data.
Lumen does this through the use of applications securely deliver to cross a hybrid cloud for massive data centers, all the way to the edge.
In that moment Limon was born.
The goal of delivering the fastest most secure platform from nextgen applications and data.
In September we rebranded to women technologies to introduce this new vision to the market.
Oh that is more than just a new name and logo in a world that is rapidly changing it signals a new era for our company, where we combine an all digital delivery model software defined networking and one of the very best five.
Fiber and network infrastructures into a platform of capabilities designed to drive our customers' success.
Although we've been in a rapidly changing industry for the past 30 years with the advent of the fourth industrial Revolution. The pace of change is accelerating and I believe luminaires uniquely position to enable and benefit from this rapid change.
The lumen platform rounded on a broad fiber based foundation and delivering Virtualized network cloud security and voice services continues to be essential to customers as we see them augment their capabilities to support new work environment and emerging technologies.
Women's capabilities lie at the heart of enabling that demand and as you can see on the slide five the lumen platform is designed to bring together all of our assets IP services and expertise to deliver a world class experience customers expect someone.
We give our customers access to cloud edge facilities hosting critical applications within five milliseconds of digital transactions, enabling aiotv and other next gen use cases.
Software defined networks that can create new connections around the world in seconds.
Network based threat intelligence that protects our customers data and proactively stops malicious actors.
And massive network infrastructure with long haul fiber and IP networks, providing connectivity to private data centers public data centers cloud service providers by GE operators EMEA Ray.
Network, serving end users.
As amazing as our capabilities are today, we continue to invest to ensure our platform offers the fastest most capable and resilient fiber based services to support our customers application and data needs.
This approach enables us to deliver a continually improving platform that will help improve our revenue trajectory and take advantage of the growing addressable markets for these services.
I'm also very pleased with the pace at which we are simplifying digitizing the way business is purchase and consume their networking cloud edge and security solutions from us.
We are driving a digital first culture that allows our customers to configure order and rapidly deploy our services through an all digital self service set of tools.
We are certainly known for our fiber infrastructure, but over that infrastructure, we deliver digital services like lumen hyper land lumen dynamic connection lumen de Dup mitigation that are completely transforming how we serve our customers, allowing them to consume our platform services in ways that are.
Flexible and easy.
Beyond enabling fast secure connections and simplifying our customer experience women is also enabling partners to use our platform to deliver best of breed capabilities, while also speeding our time to market.
As an example is our partnership with them with the COVID-19 pandemic, we've seen an explosion in demand for Internet based collaboration services Zoom is a market leader in this space as well as a longtime valued customer gloom.
We are delighted our platform supports the amazing services they provide.
In late September we announced a new partnership to incorporate into Lumens portfolio of voice and collaboration services and are excited by the early commercial traction weve already seen.
Long term, we think we can develop enhanced customer experiences by further integrating zunes technology with the rich capabilities and deep reach of the lumen platform.
The second example is the partnership we announced with the more significant collaboration covering edge compute networking and security.
Utilizing the Viom, where that's the land by Velocloud solution and the recently announced Viom, where secure access service edge platform, we have the ability to integrate Vmware services to deliver a work from anywhere platform on our global edge infrastructure craves solutions for businesses.
Of all sizes across a variety of industries.
As I've mentioned customers need to move processing capabilities from remote data centers or the core of the cloud to the air very edge of the network quote.
Close to where the data is generated whether providing bare metal as a service or full blown edge computing resources, the cloud edge and network as a service capabilities of the lumen platform are integrated into a single experience for the customer and deliver low latency connectivity to more than 95.
The U.S. enterprises within five milliseconds.
The edge computing market is forecasted to be anywhere from 10 billion to 40 billion over the next several years and we are very focused on leveraging our widely distributed fiber and edge data facilities to aggressively pursue this opportunity.
I'm pleased to say that we are already making great progress on our cloud edge plans. We just turned up the first block of cloud edge nodes and subsequent blocks are well underway, even before we officially launched the product a major media company began using our cloud edge platform to deliver live sporting event.
And is providing them exactly the capabilities and performance they hoped.
A very different type of enterprise customer already deploying on aluminum cloud it.
Sorry.
Cyber reef provide remote learning solutions for public school systems, and the covert pandemic is driving tremendous growth there services side.
Cyber Reese kit Internet since shield required highly distributed compute resources combined with high capacity network connection and deeply peered internet infrastructure, placing their security tools close to the school systems. They support in other words women's cloud edge plan.
And the lumen network, where a perfect fit for this customer and a great example of how high performance networking combined with distributed compute can deliver next generation services.
Lastly in the quarter, we turned up our lumen cloud edge experience center in Denver, where customers partners and vendors can remotely deploy it's compute technologies on our platform and test them went live networking under real life conditions.
Within a couple of days of the launch of the experience Center, a major cloud service provider loaded their cloud extension software to begin testing and we are working with other partners and customers to begin testing their applications as well.
As a result and in partnership with multiple cloud service providers software as a service providers and other key partners, we expect to deliver capabilities like artificial intelligence machine learning and distributed analytics for enterprises.
Over the lumen platform.
As you can see on slide six while women is the name of our company and our flagship brand for serving the enterprise and wholesale markets. We also launched quantum fiber quantum fiber is our brand for serving fiber based services to small business and consumer customers.
And just as with lumen enterprise customers were offering our quantum customers a simplified highly digital customer experience with expanded tools for managing the quantum platform with mass market efficiency.
As we continue deploying quantum fiber services to the small business segment, we intend to utilize our more than 200.
70000 on net fiber fed buildings as a starting point.
Targeting small businesses and tens of thousands of existing buildings. We know that bandwidth is critical for these customers and our simple resilient all digital quantum services are well positioned to meet those needs.
While Lumens primary focus is enterprise, we have a dedicated leadership team, whose sole focus is to leverage our quantum investments to grow the consumer and small business markets.
Finally, the Centurylink brand will remain in place for our consumer and small business customers, who received traditional services over traditional hybrid fiber copper networks.
As a quick recap.
Lumen is more than just a new name we are more excited than ever about the opportunity in front of us and the work we've done over the past two and a half years to capture that opportunity and to launch Lynn.
As our customers embraced the fourth industrial Revolution lumen platform delivers adapted secure and resilient capabilities over one of the world's best fiber infrastructures.
We are focused on enabling our customer success and integrating those capabilities within their own operating environment.
We are very excited about the future.
With that I will turn the call over to Neil Neil.
Thank you Joe and.
Good afternoon, everyone.
During the third quarter, we continued to execute on our plan and made substantial progress transforming and positioning the company for the future.
Jeff mentioned, we rebranded to lumen and made a purposeful shift in aggressively going after emerging opportunities with growing addressable markets. We.
We had solid third quarter results, which highlights the resilience and relevance of the products and services, we offer particularly given the current backdrop of economic uncertainty.
I'll start with our financial summary on slide eight.
Total revenue performance improved compared to the year ago quarter.
We had another quarter of steady progress on our cost transformation savings initiatives.
While we incurred higher costs due to seasonally high utility expenses, a global brand launch and the cost inefficiencies of operating in the current environment. We grew adjusted EBITDA on a sequential basis.
We continue to invest in the business, while delivering solid free cash flow.
During the quarter. We also made good progress on our on our deleveraging and refinancing initiatives.
Turning to revenue on a year over year basis total revenue declined 3.4% to 5.167 billion compared to a decline of 4.8% in the third quarter of 2019. So.
Sequentially total revenue declined 0.5%.
Moving to slide nine in revenue by business segment on a year over year basis International and global accounts or I am revenue declined 3.6% and declined 2.6% on a constant currency basis, primarily driven by cobot resurgence in related weakness in our international business.
On a sequential basis, I am declined, 1.6% and 2.4% on a constant currency basis.
We continue to see good demand from a subset of our largest customers whose business models are benefiting from the current environment.
However, during the quarter, we saw reduced level of activity due to cobot in our international business, particularly across Europe, and Latin America.
Moving to our enterprise segment on a year over year basis revenue increased by 0.8%.
This compares to a 0.9% increase in the third quarter of 2019.
On a sequential basis enterprise group, 0.4%.
Both sequential and year over year performance benefited from strength in our federal business and installs from sales or year to this year.
SMB revenue decreased 5.8% year over year, primarily driven by continued declines in legacy voice services.
As we have mentioned before we expect cobot would likely have a disproportionate impact on this segment and we continue to monitor this closely.
In general while we haven't seen an increase in sharm as you might expect we have seen a decrease in sales both year over year and sequentially.
Additionally, during the quarter within SMB, we sold our legacy Correctional facility Communications business.
The sale of this business of the end of August impacted revenue by about 5 million in the third quarter, and we'll have a full quarter impact of about $15 million in the fourth quarter.
Wholesale revenue decreased 6.7% year over year. This.
This compares to an average decline of 7% over the prior four quarters sequentially.
Sequentially revenue was flat.
As a reminder, in the third quarter of 2019, we did see a benefit from a carrier settlement of the approximately 15 million.
In terms of products this quarter the trajectory of legacy voice revenue returned to pre cobot levels, but as expected customers on meeting that need for higher collaboration by transitioning volume and spend too.
Our other connectivity products and services.
In summary across our business groups and as we have all seen across the broader economy. The acceleration of the digital economy is impacting every business.
While some aren't able to lean into it and we are seeing good demand from those customers others are challenged in this environment and delaying buying decisions.
Turning to consumer on slide.
For the third quarter 2020 revenue declined 4.1% year over year compared to 9.7% in the year ago quarter on a sequential basis revenue declined 0.5%, primarily driven by ongoing legacy voice declines offset by growth in broadband.
Broadband revenue for the third quarter, 2020 grew 1.7% year over year and 0.6% on a sequential basis in the third quarter and speeds of 100, Meg and above we added 62000 subs.
From a mix perspective, 13% of our total broadband subs now have greater than 100, Meg speeds compared to 5% of the beginning of last year.
We now have approximately 2.3 million homes passed with fiber compared to about 2 million.
And 2019.
As we have mentioned before we expect that future performance will be largely driven by our execution.
Around our fiber to the home investment strategy and driving up penetration of our competitive assets.
Our revenue performance has been driven by this focus on our competitive assets, where we can support higher speeds tend to have higher ARPU and generally see lower churn.
Moreover, our digital customer experience initiatives.
Will not only improve customer interactions, but are expected to continue to improve the margin profile of our consumer broadband business.
We also remain committed to supporting our customers that are working through the current economic uncertainty or who have participated in the keep Americans collected blood as a reminder, those customers have been subtracted from our sub counts and where are the primary driver of the change in low speed.
Sub counts this quarter.
Turning to adjusted EBIT on Slide 11 for the third quarter of 2020, adjusted EBITDA was 2.190 billion compared to 2.261 billion in the third quarter of 2019 and $2.174 billion in the second quarter of 2020.
Despite a global brand rollout seasonally higher utility costs and Cobra related inefficiencies as a result of our focus on profitable revenues and cost transformation initiatives. We grew adjusted EBITDA sequentially.
Specific to bad debt our expense this quarter was down 10 million sequentially in roughly 15 million.
Higher than pre cobot levels.
Our dsos have been relatively stable and we continue to work closely with our customers on payment arrangements.
Given our current experience, we expect our bad debt expense to continue to decrease sequentially to pre cobot levels.
Adjusted EBITDA margin for the quarter was 42.4% compared to 42.3% in the year ago quarter.
As of the end of the third quarter, we achieved approximately 730 million of annualized run rate adjusted EBITDA transformation savings.
Compared to 620 million as of.
At the end of the previous quarter.
Given the challenges related to coal, but we continue to be pleased with the run rate savings we achieved this year.
We also remain confident in our three year transformation plans and we continue to expect to achieve the 800 million to a $1 billion in annualized run rate adjusted EBITDA savings.
Integration and transformation costs and special items incurred in the third quarter of 2020 impacted adjusted EBITDA by 78 million and free cash flow by 111 million.
For the third quarter of 2020 capital expenditures were 988 million. This compares to third quarter 2019, Capex of 957 million.
We are investing in the products and services that support the lumen platform.
We also continue to invest in expanding our fiber footprint and our digital customer and employee experience.
In the third quarter of 2020, the company generated free cash flow of 917 million. This compares to free cash flow of $983 million in the third quarter 2019.
Turning to capital markets activity on slide 12 during the third quarter, we paid down 550 million in debt obligations and refinanced 2 billion of debt at lower rates.
We have refinanced 19 billion since we announced the deleveraging plan last year and reduced and extended maturities through 2025 by around 15 billion.
We remain focused on getting to our target leverage ratio of 2.75 to 3.25 times net debt to adjusted EBITDA.
As we move to our financial outlook on Slide 13, we continue to see uncertainty as the level of impact and buyer behavior is very widely across our very diverse customer base.
Over the long term, we think the demand dynamics and the acceleration of the digital economy is a net positive for our business.
However, in the short term, we will likely see customers being cautious as they work through their return to work plants.
Despite the overall market uncertainty we are optimistic about the resilience of our business and for the fourth quarter, we expect sequential growth in adjusted EBITDA from 2.19 billion this quarter.
Additionally, given continued progress in our deleveraging initiatives and aided by current market conditions.
We are lowering and narrowing our cash interest expense to a range of one.
1.62 to 1.65 billion from our previous range of 1.65 to 1.7 billion.
Our net cash interest expense. This year is expected to be about 500 million lower compared to 2018.
To summarize our results continue to highlight that our business and the products, we sell our resilient.
We are delivering strong bottom line results, while we are leaning in and investing to improve our revenue trajectory or.
Our balance sheet and liquidity position remains strong and our continually improving.
We continue to execute on our capital allocation policy, we laid out.
Last year.
We are investing to position the company for the future deleveraging to our target leverage range of 2.75 to 3.25.
In returning over $1 billion to shareholders through the dividend with a payout ratio that we continue to expect to be in the authorities as a percentage of free cash flow.
With that we'll open it up for your questions.
France will you please explain the process.
Thank you if you would like to register for a question. Please press the one followed by the four on your telephone.
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And our first question from the line of Brett Feldman with Goldman Sachs. Please go ahead.
Yes. Thank you for taking the question just a follow up on the EBITDA guidance you gave for the fourth quarter the outlook for sequential improvement I'm.
I'm wondering if you can maybe just give us a little more insight as to what you expect to drive that I'm not sure. If that's predominantly seasonal well. If there are other factors involved and you would also highlighted that the year over year change in EBITDA and revenue I believe had improved this quarter are you expecting a similar dynamic on a year over year basis to play out in the fall.
Fourth quarter and if so what's behind that thank you.
Sure Brian.
So in terms of fourth quarter.
Lastly, we've had a good quarter for our cost transformation savings.
And so we expect that to continue going into fourth quarter.
And.
Offsetting some of that savings.
Some of the investments that we're making so we aren't making you've seen us.
Spend a little bit more on capital we have similarly investment in the brand and investment in our products and services a lot of which Jeff touched on this in his remarks.
Utilities will come down which is seasonal we expect to continue to come down.
And the remainder will be driven by our performance on.
So at a high level, that's that's kind of the primary driver from a sequential EBITDA performance standpoint.
From from a year over year, we did see.
Get improvement in revenue like I mentioned 3.4 versus the 4.8.
We have a good funnel and.
We feel good about the quarter.
The only thing that we're a little cautious about some of the resurgence we are seeing and how that impacts customer activity.
If you don't mind, if I guess, one quick follow up question on that you referenced the funnel.
Last quarter in enterprise, you had called out very strong bookings I think those year on year improvement for what had been a very strong second quarter in 2019.
How much of that ended up actually converting into the revenue run rate that we saw for enterprise in the third quarter is it all there or could there still be a little benefit that would flow into the fourth quarter. Thank you.
A significant part of that was already installed in the third quarter. So you can see that benefit.
The enterprise line item.
Great. Thanks for taking the questions.
Yes.
Our next question is from the line of Simon Flannery with Morgan Stanley You May proceed.
Thank you very much good evening.
Neil on the transformation I think you said you had good progress 730.
You're close to the low end of the range at 800, but despite as you go on the Bill again, perhaps you could just update us on what you think the potential is.
Over the next year or so to get maybe to the higher end or even above the higher end and I know coke. It has limited some of your ability. It sounds like you are back on track, but any color around there and just one clarification on the broadband you were talking about the keep America connected to impact could you just size that for us how much of.
Okay, and what the impact was from that thanks.
Sure so on the cost savings.
Simon I think.
Like we mentioned we were very comfortable with the 802 ability and we'll certainly get better.
But it's not going to be an ongoing effort for us.
So all the areas that we're going after and how we're changing the customer experience and the employee experience that will be a several year efforts.
Similarly on Rightsizing the infrastructure as we see declines in legacy revenues, that's also going to be so.
Our efforts so we don't really see.
You know any limitations in terms of the savings that we can achieve over the next handful of years.
In terms of your.
Question on keep America.
Yes, correct.
Connected Americans connected.
What we're doing is really for the non pay customers, we're working closely with them we're reserving.
The revenue and you don't see it on our own units either so incrementally.
Packed at our units by about 35000 units.
Okay, Great and just one clarification on the lumen here.
Hey, your.
New business divisions or are you kind of gave us some color around what the quantum quantum kind of fun entresto or how the different businesses split out along that kind of those.
Those silos thanks.
Yeah, we'll have more to say about that when we report fourth quarter, but certainly we're thinking through what is the best would have given you visibility to where were seeing traction.
Great. Thank you.
Our next question is from the line of Eric Chow with Wells Fargo. Please go ahead.
Great. Thanks for taking the question. So I was curious about resume partnership that you mentioned that was announced in late September.
How much should we expect that to positively impact your voice and collaboration revenue line item and then also should we see an incremental benefit as well and your network transport business.
So it's still early days, but if you think about the zoom partnership we view it as a synergistic partnership where are the capabilities that we bring to bear really enhances the experience and it also helps us have an app that we can utilize to.
Elliott Ross, what our customers want.
From a voice and video capability.
So over the long term it will help us have an alternative for our voice on collaboration and we hope.
The use of that.
Mitigate some of the churn in that business also keep in mind.
Customers use.
Yuzu more micro sales teams or any other voice out there is a corresponding demand on the underlying network infrastructure and with our broad set of products and services.
Really lean into those upgrades as well. So there are several benefits and I'll just add if you think about our approach to partnering and our approach to the platform. That's an important capability the hat for us to have on the lumen platform and so we're working with them, but it's not something that we just started over the last couple of months.
It's been a great partner to us we've been we've been a good provider to them I I hope.
Over the past few years, so we've got a very good deep relationship.
And think they do an amazing job for their customers and we're happy to to have the ability to add those capabilities to our platform.
As we go directly to enterprises with with a variety of services.
Great and then I'd said, one more follow up you mentioned that Europe is flat and reduced sales activity in the quarter. So wondering if you could provide some more color whether you think thats a temporary phenomenon and if you see any signs in next quarter due to that that will reverse and sales will return to a normal cadence. Thanks.
Yes. It is.
It was a little hard to hear the question, but I think it was around the weakness we saw in EMEA and a lot of them. So if you think about it.
The cobot related shutdowns in Latin America, or about a quarter or so behind North America.
So really impacted third quarter in terms of reduced levels of.
Tivity.
And and for EMEA, there's the resurgence maybe.
Through the quarter. If you will so we really think thats really the primary driver and and we'll see how it goes over the next handful items.
But really that's what we see as the primary driver as things return to normal we expect things to pick back up and I think thats, a comment certainly that applies to Europe, and and lifetime, but really our overall business theres near term uncertainty associated with.
The economy and with Cove, it and all of those things, but the fundamental drivers of our business our customers need to acquire analyze and act on data, we don't see that changing.
So as as we couple the lumen platform with one of the world's best fiber infrastructures. We think those capabilities are very relevant going forward very important to our customers and this near term uncertainty will get passed.
Great. Thank you.
Our next question from the line of Nick and don't deal with Moffettnathanson. Please go ahead.
Great. Thanks for taking my questions.
Yes, Jeff limits CMC, making it through the recession in better shape than many would have expected when we when were going into it.
Yes, as we look ahead, how does that influence your view of the likely trajectory that business and your goal to be an EBITDA growth of the company.
Well, we're investing 30, that's one of the things that we were very pleased about is is that as a result of some of the decisions. We've made over the last couple of years, we're in a great position to keep investing so if you look at our cloud edge strategy, we're deeply investing that Neil referenced and one of his answers a minute ago.
Now that we're investing in people, we have hundreds of people dedicated to cloud that to make sure that we have the right capabilities in place for our customers. So were investing through the cycle looking at how to continue to grow the business and again, we see the lumen platform as exactly what our customers are need.
Thing.
To help them.
Sure in the fourth industrial Revolution, but really deal with the quantity and the amount and that and the distribution of data we know that they want the advantages of being able to.
Have compute resources within a few milliseconds of where that data is created and sorry, it's compute capabilities, but we also know that they want to be able to transport that data to any cloud service provider.
The software as a service provider and Thats, where our dynamic connections, which is essentially a network as a service.
Product.
NAMIC connections helps them and so from a from a going forward perspective, we think that the products the capabilities that we're layering on top of the great fiber and network infrastructure that we have in place today really position us to grow revenue and and we'll continue to focus on that.
Okay, and then I also have three quick housekeeping ones for Neil.
So first last quarter, you said the pandemic related costs are playing the low tens of millions that those decline in this quarter and what are you expecting next quarter.
Second what was the rebranding costs this quarter.
And third looking at enterprise in Enterprise transport infrastructure revenue is up about 10% sequentially is that just a function of the installs you called out or something else going on.
Okay.
So like I think on the pandemic related it's it's really a high level estimate if you think about it theres a lot of inefficiencies all operating in this environment. So I think tens of millions is probably right.
Low tens of millions.
It's a similar amount on the branding side, but the important thing to keep in mind is that.
As you can see without a sequential EBITDA growth that these are not net incremental we're offsetting that with other savings. So similarly on the branding far Brian.
We're not going to slow down we're going to continue to invest in the brand for next several quarters, probably have similar levels, but we'll be offsetting that with savings elsewhere. So so that's been our our approach.
In terms of the products.
It's mostly installs, there's always a little bit a onetime than settlements on wholesale and another especially in the wholesale segment. So there are some fluctuations driven by that.
Okay, Thanks for that detail.
Our next question from the line of Phil Cusick from JP Morgan. Please go ahead.
Hi, guys. Thanks.
First Jeff I think you sounded a bit ominous on SMB in the prepared remarks, Neil said the churn hasn't picked up by Q. It can you expand on what you see in in payment trends and new Activations.
And then second of all to to hit it.
Topic, we hit a bunch of times in the past, but but the fiber buildout in consumer are you talking about micro targeting but theres a difficult history for companies that have cherry picked parks of their markets.
Adding to their target penetration and an increasing number of those are post bankruptcy pushing fiber much harder and building planning to build their entire footprint.
Why does this make more sense for limon. Thank you.
Sure first of all I don't want any of my comments around SMB to be.
Interpreted as ominous.
So if I said something that sound ominous I Didnt mean that let me tell you what I would I Didnt mean, which is we're not seeing massive churn pickup in SMB.
We're seeing that the infrastructure, we provide is absolutely critical to keep them in business and to support their businesses, but we're not seeing a lot of sales activity either if you look at our plan to grow quantum fiber.
Outside the legacy Centurylink footprint and brand new buildings.
You know, where we're going to have to wait for some of those customers to get back into the buildings.
Before selling new services, Tom So so theres nothing ominous going on but we do think it creates uncertainty in the near term for them from a sales cycle.
We're very pleased.
With the the churn level that we're seeing and and our activities to support those businesses and were being cognizant of the fact that they're going through a hard time.
But but nothing nothing more than that Neil before I go to the Cherry picking do you want to answer that.
I would just note that if you look at our third quarter or a year over year revenue it was down 5.8%.
And if you look at the average of the prior four quarters. It was roughly about sex so.
You really have to put jeffs comments in the context of the turnaround plan that we have for US on me. So we're a little disappointed that we're not making as much traction.
Because of the focus and investments we've made on SMB not so much from a performance standpoint.
As because somebody has been holding up fairly well and also on the payment terms question. I think you know we're there's no issue there we feel good about that.
And with respect to Cherry picking up I know I wouldn't describe what we're doing is cherry picking we're looking at where we can get the greatest return on our investments and the fastest return on our investments to drive penetration and so that's a smart strategy for building out rather than just going out and building out an entire.
Print, let's look at what makes sense for our business to help us prioritize how to grow and where to grow that investment and so so I don't I don't view this cherry picking.
On the on the small business side, we have 170000 buildings that are lit and and our footprint I definitely want to go to every one of those buildings and focus on our business customers in those those buildings and so we'll take advantage of where our network is strong.
And where we can make it even stronger to support those types of customers and and we have plenty of market opportunity to do that there is not a limitation right now and thats on on where to go and build for our quantum fiber business, whether it's consumer or or business customers.
Thank you.
Thank you so.
Our next question is from the line of David Barden.
From Bank of America, you May proceed.
Hey, guys. Thanks, so much for taking the questions I.
I guess the first question I have is related to kind of the the voice collaboration.
In aggregate I think that last quarter. This was the most surprising category of revenue to be up side. It seems to have.
Contracted I wonder if you could kind of give us a sense as to the color of.
Weather.
This contraction from quarter to quarter from the peak in Twoq you is it like how that is going to evolve for how do you think it will evolve and then I guess the second question is.
Specifically related to the biggest upside surprise this quarter was in transport and infrastructure and enterprise I know there was some.
One timers, but could you kind of a.
Elaborate a little bit about how old that outperformed.
And what the outlook for that division might be thank you.
So David I think if you.
Voice and collaboration there is not a surprise to us if you look at our.
Back and look at our comments from last quarter, we said that we expect.
Got it wouldn't last because lot of a ramp up in volume.
Was quoted related as folks started working from home et cetera, but but the key point is the environment that we're in needs more collaboration and that is more traffic. So when folks they're up their traditional voice networks on see.
A huge spike in volume they figure out how to support that in different ways, whether that traffic transitions to microsoft's teams or zoom et cetera, yet, but there is an underlying need to upgrade their network infrastructure and that's where we come in with a broad product portfolio. So we have been helping so you'll see that transition within.
Our portfolio in terms of more connectivity needs the customers need now it's not one for one but it definitely drives.
Demand for other products and services.
We would expect that to continue going forward as folks attrit off of legacy voice and into other infrastructure products.
In terms of transport infrastructure there is.
For given the broad product portfolio that we have in any given quarter, we'll see fluctuation in one versus the other but in general.
That sort of business products are doing very well for us.
Thanks, Gail and Jeff if I could ask you one kind of follow up question.
I know you went through this process, but there's been an extraordinary interest in fiber assets.
Hey.
Very healthy level of transaction volume in.
The companies and assets themselves I know you went through this process in 2019 to try to identify whether there was a.
Way to extract value are you open to reserves in that process and and do you think that there's a maybe a renewed opportunity to try to extract value from the company in that way.
We're always open to whatever makes sense for our business I won't make any comments on a particular piece or not but yeah. We're open to it we continue to look at it. We think we have great assets. We think that we have the ability to invest to grow these assets, whether it's on the consumer side or on the enterprise side and so we're going to continue to do that.
That there's something.
There's some other structure at some point it makes sense, we'll look at that too.
Great. Thank you guys.
Thank you our.
Our next question is from the line of James Ratcliffe with Evercore ISI.
You May proceed.
Mr. Ratcliffe. Your line is open Sir you May proceed.
Hello can you hear me.
Yes, yes, yes, yes.
Great.
Thanks for taking the question.
Jeff you talked a good bit about any opportunity there and let me just your take on what truly is.
Page can queue and edge opportunities and how much of that breaks down to really.
Well they have to sell site versus neighborhood city state et cetera, and how you're looking to position your network against that thanks.
Sure first of all from from this is third party stuff. So you can take it.
However, you take their third parties its estimate it's a broad range, but it's estimated to be somewhere between 10 and $40 billion worth of opportunity over the over the coming years.
So we think its that what it means though is.
We've centralized computing for a very long time moved it into the cloud, which centralizes. It even more moved it away from where that data is actually acquired.
And what we see from from enterprise customers, they need to move that compute resource back closer to where the data is required so that they can analyze and act on it faster without having to transported around and move it around and so so I look at the edge and think it gives us the benefit.
On premise computing, we're very close we can serve 95% of the U.S. enterprises within five millisecond delay. So we're very close to where that data is actually created and where where it needs to be analyzed. So is the benefit of on premise computing with.
Also the benefits of cloud computing, because we can move it into a cloud environment. They don't have that data center. We can do it virtually we can do it on physical machines and we can do we can provide their compute resources in a variety of ways. So if you looked at the presentation on slide four we can orchestrate four hour.
Customers and.
Help then.
Control their applications and operate their applications very close to where the data is created in a very efficient and effective way. So that's what edge as really means and our lumen platform is focused on that that Ireland. The platform is focused on providing those capabilities, whether it's an edge or in that.
Network itself. So if you think about dynamic connections dynamic connections is that network as a service capability that I mentioned.
If you're an edge compute customer and you want to redirect your.
Sure compute resources from one datacenter to another or one club cloud provider to another you can use that if you're not in edge compute customer, but you're using other capabilities.
Lehman you can use that same capability to control your network in a very seamless very effective way.
Great. Thank you sure.
Our next question from the line of John Atkin with RBC capital markets.
You May proceed thanks.
Thanks, very much so a couple of questions on the very last topic I wondered.
If you are entertaining or how far along you are in terms of actual product partnerships with.
You know, we need to be west wavelengths or if there is how poster azure stack.
Like some of your other kind of fiber and.
Wireline rather than our you talked a lot about these themes that I think is very good the.
The medical explanation for your approach, but when it comes to privatization where are you on that road map.
Secondly on the fiber front theres been some change.
In the industry at one of your.
Yes National Hydro peers organizationally and does that has that created any sort of opportunity to take advantage of any of the disruption to possibly gain share in the enterprise segment those would be less your questions.
Sure let me take the.
First question, Neil you might want to comment on the second one from a part product in partnership we are.
Continually developing the capabilities of the lumen platform, making sure that we are bringing Brett best of breed.
Partners to the table I mentioned xoom.
In the prepared remarks, but also mentioned Vmware in Velocloud and our capabilities that we're delivering with that so we will continue to partner with companies that we think bring.
Kind of a dual advantage to Lehman one they utilize our services, but secondly, we can drive network capacity and.
Success in the network business from them selling through the lumen platform. But then also we can provide the same capabilities to our customers and product ties those capabilities with our customers I am not ready to announce other partnerships, but thats a key part of our strategy.
Just to go out and build relationships with companies and partners that are doing these things and I expect us to be able to offer artificial intelligence and augmented reality and and various capabilities on the lumen platform through partnerships and relationships with other companies.
John on your fiber question, we didnt completely here, but I think it was around the competitive landscape. We haven't really seen any change in terms of the competitive landscape for fiber as you know we you know we have really good assets, there and we were doing very well from that.
Standpoint, so was that your question or do you want to.
You have a follow up now that that then that's fine I appreciate to appreciate your perspective.
Thank you. Our next question from the line of Michael Rollins with Citi. Please proceed.
Thanks, Good afternoon, two questions if I could just first a clarification on the consumer broadband business can you roughly segment out the subscription mix that 4.6 million roughly broadband subs.
We did get paid speed tiers to kind of put into context the different so.
Thanks, Phil changes that you experienced in the quarter and then secondly, just looking back at history in the business market can you review for us.
How and when during the last recession.
For your business revenues meaningfully impacted from that environment, and maybe how the current environment could be similar or different to what you saw I realize it is a long time ago, but you know that.
Probably yes.
Imagine when it a frame of reference is that.
You may consider as well as you navigate the current environment. Thanks.
Sure so.
So I think your question on consumer broadband.
I think what I would say is if I just step back.
We have been really focused on really improving the quality of the overall revenue base for consumer and you can see that in our revenue numbers. Our revenue has been growing and as Jeff mentioned, our ARPU has been growing at.
And I mentioned in my prepared remarks.
400, Meg and above.
We're now up 13% of the base is at that speed compared to it was.
Beginning of last year at about five so that part of that business, where we're investing and we know that's a very competitive asset is growing very fast.
And we continue to invest in fiber if you look at our average ARPU for that entire revenue base. It's in the mid Fiftys and the new sales that we have at 100 plus mine is at the very least come in at 30% or more higher from a new salad perspectives.
We continue to focus on improving ARPU.
You layer on top of that.
Caf two subs that we have where we see high penetration as we build and penetrate and you layer on top of that our rural Sobs, where there are a lot of alternatives overall the quality of the revenue be base keeps improving every quarter. So we'll be can do well.
We continue to focus on that and continue to focus on improving the revenue trajectory not to mention the like I mentioned in my prepared remarks, we're investing in the customer experience and self service capability. So the margin profile of that business will also continue.
In terms of your question on the last recession.
You know, we've gone back and looked at it but the reality is that environment. Today is very different if you think about conductivity and how important that is to businesses. We just don't think theres early that many parallels to draw from any prior recessions. So we think even in a risk.
Fashion jewelry environment.
Connectivity for businesses will continue to be very important.
And actually if you look back I remember sitting on calls.
With you guys and ladies back then and answering the question that you know it creates near term choppiness in near term uncertainty, but theres no change in the demand for our products and services. That's how it worked out last time, that's how I expect it to work out this time not because it worked out that way last time, but because we see the same dynamic we.
See the same experience from our customers.
Thanks.
Our next question from the line of backend Levine from you before.
Great. Thank thank you couple of questions first a quick one on cash taxes has remained very low can you remind us when you expect to be a full taxpayer and I'm a little bit more high level.
Batch to grow and transform the business can you provide a bit more color on yours on our starting point for the revenue mix do you still look at the current mix today as a certain mix coming from legacy products and we will continue to decline, but you were investing in new capabilities, which is growing.
Substantially what where are we in terms of that present mix difference and and also as you look at your new segment can you talk a little bit about how the network cost will be allocated between the segments do they stand on their own or did they will they have a shared infrastructure.
So I'll start with your question, but on the cash taxes.
We don't expect to be a material taxpayer for the next two to three years. So we have done a loss there so that that's.
Outlook right now.
In terms of revenue mix.
The dynamic you describe is absolutely right. We will continue to see erosion in the legacy products and that will continue.
But what we are doing is given the infrastructure that we have no fiber infrastructure that we have we're investing in products and services with close affinity to that infrastructure that leverages that infrastructure all the things that Jeff described with emerging growing addressable.
Market opportunities that we hope to gain good traction on that will.
Be a different vector in terms of driving our revenue performance going forward. So that in essence is what we're focused on.
In terms of the segments, we'll give more thought.
In terms of how we report next year and we'll have more to say on our fourth quarter earnings call.
Okay. Thank you.
Thank you.
France, I think we have time for one more question.
Very good our last question will be from the line of Frank Louthan with Raymond James. Please go ahead.
Great. Thank you how big can the quantum get in terms of revenue what sort of the Tam there is that mostly I like footprint strategy.
Or is it also out of footprint at the data footprint, how aggressive will you be expanding yes would be out of territory. Thanks.
Yes.
Without getting into specific tams.
It's a strategy in footprint and out of footprint, where we have the the ability to win and where we have the ability to build infrastructure. So if you think out of footprint for consumer.
To use or unnatural for us we've done some work with with cities that are outside our footprint to grow.
That works with them and so it will be opportunistic from a consumer basis outside of our legacy like footprint and then obviously inside our legacy.
Footprint, if you look at quantum from a business small business perspective, that's about that's looking in the.
The legacy like networks and that the customers that we serve there and it's looking at the all the buildings that we have that are lit and could be let to provide services to those customers. So it's a little bit of a mixed bag.
Between the two.
Yeah.
All right great. Thanks, Mike Thanks for the last question.
Yes. Thank you everyone for your questions actually and before we conclude the call today now ill summarize.
A few thoughts about the future of Lehman.
First of all we believe the lumen platform in writing on our deep and extensive fiber infrastructure positions us really well to help our customers navigate the fourth industrial Revolution, we are investing in growing addressable markets that we believe will improve our revenue trajectory over time.
Our capital allocation strategy continues to strengthen our balance sheet producer interest expense and is aligned with our guiding principle to grow free cash flow per share our strong liquidity position enables us to invest through this cycle and through all of this activity our dividend remains in a very.
Comfortable position with a payout payout ratio in the Thirtys I appreciate everybody joining the call today and thank you for your interest in lumen.
Operator that concludes the call.
Thank you we would like to thank everyone for your participation and for using the lumen technologies conferencing service. Today. This does conclude the conference call. We ask that you. Please disconnect your lines and have a great day everyone.
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