Q4 2020 Lumen Technologies Earnings Call
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Greetings and welcome to Lumen technologies fourth 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.
If you have a question. Please post the one followed by the four on your telephone at any time during the conference.
If at any time during the conference you need to reach an operator, Please press star zero and an operator will assist you.
As a reminder, this conference is being recorded today Wednesday February 10th 2021.
It is on my pleasure to turn the conference over to Valerie Finberg, Vice President Investor Relations. Please go ahead Valerie.
Thank you France.
Good afternoon, everyone and thank you for joining us for the lumen technologies fourth quarter 'twenty 'twenty earnings call joining.
Joining me on the call today are Jeff storey, President and Chief Executive Officer, and Neil that 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 four Q 'twenty 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 two and the risk factors in our SEC filings.
We will be referring to certain non-GAAP financial measures reconciled to the most comparable GAAP measures that can be found in our earnings press release.
In addition, certain metrics discussed today exclude transformation costs and other special items a day.
Tailed on their earnings materials, all of which can be found on the Investor Relations section of the lumen website.
Finally, we are announcing changes to our reporting categories, beginning with first quarter 'twenty 'twenty one reported.
These changes can be found in our earnings presentation and press release with additional details and pro forma reporting for prior periods in the earnings supplement on our IR website.
With that I'll turn the call over to Jeff.
Thanks, Valerie and thank you everyone for joining us today on.
On today's call I'll provide a summary of 2020 and an overview of our growth priorities for 2021.
Neel will then review our fourth quarter financial results Guide you through our new reporting structure and provide our outlook for 2021 after that we will take your questions.
We delivered solid execution in 2020, as our employees quickly pivoted to a new operating environment and empowered our customers to meet their own rapidly changing environment.
It was challenging year for our customers and our employees for 2020 also highlighted the power flexibility and scalability of our fiber based offerings and the agility of our employees I'm exceptionally proud of the team's performance during difficult times.
I'd like to cover a few highlights from the year and this is on slide four in the presentation.
For the last three years, you've heard me talk about the integration of level three and the digital transformation of our company. Many of our efforts culminated last fall with the introduction of the Lynden platform.
I'll discuss the details in a moment, but for now we'll say that we see the launch of the platform is a key milestone and I am excited about the gross who can enable.
The primary purpose of digital transformation is to improve the customer experience, but when done right improving the customer experience also enables cost savings our results reflect the dual benefit of our transformation efforts in 2019, we announced 800 million to a $1 billion on cost.
Improvement associated with our transformation initiatives through a combination of digitalization simplification and other transformation programs, we achieved $830 million in savings as of the fourth quarter of 2020, a year ahead of our original schedule.
The benefits of that work are seeing and the fact that we grew both adjusted EBITDA and adjusted EBITDA margin in the fourth quarter.
These efforts.
To enable more efficient digital interactions also drove improvement in our net promoter scores, particularly in those areas, where we have invested for growth in fiber based services for enterprise and consumers. You can also see the benefit of the better customer experience and our improving revenue trajectory, which is up 150.
On the basis points compared to 2019, well I know, we have more to do I'm encouraged by that improvement.
We are returning to growth in those parts of the business in which we are investing and are managing our declining businesses with disciplined focused on preserving the free cash flow they generate.
Our foundation for future growth comes from our investments in the lumen edge cloud infrastructure, expanding fiber for enterprises and deploying new in building technology for greater security service resilience and speed of delivery and increasing the number of gigabit enabled consumer customers in 2012.
We added 400000 homes passed to our fiber to the home footprint, we now reach more than $2 4 million homes and are very excited about the digital customer experience, we're providing through our quantum fiber brand.
We also continue to pay down debt and refinance maturities, reducing interest expense and strengthening our balance sheet.
Lastly, we've expanded our commitment to ESG initiatives and recently issued our first sustainability linked bond. Additionally over the last year, we increased our focus on diversity and inclusion, adding the number of new programs naming a chief diversity officer to spearhead our efforts and <unk>.
Handing the leadership teams accountability and engagement in our diversity and inclusion goals.
We remain committed to continually improving our approach to ESG and I encourage you to review our annual ESG report.
Looking forward, we believe the launch of the aluminum platform sets a strong foundation for growth Slide five gives you a sense of how we view the progression of the business.
Over the last several years, we've been focused on integrating transforming and operationalized the capabilities, we bring to market.
With much of that work behind US 2021 is about revenue growth and expanding adoption of our platform more customers in more areas accessing more services in a seamless automated and real time basis as the vision for the women platform.
Of course, given the pandemic and macroeconomic implications uncertainties remain in 2021, and we're keeping an eye on that but we are excited about the coming year, we feel good about our sales funnel and customer engagement for both <unk> and enterprise, but we do see lengthening sales cycles as companies continue to evaluate.
The new infrastructure needs.
Turning to slide six the onset of the fourth industrial Revolution creates market demands for more capacity more distributed computing resources, lower latency and higher resilience than ever before lumen and aluminum platform purpose built to meet those needs.
Start at the bottom of the slide with the physical infrastructure layer. This physical infrastructure is obviously, a foundational requirement for everything driving our economy. Today I believe lumen has the best local and long haul fiber infrastructure in the World. Let me touch on a few points as to what that means for our customers.
First of all we cannot customers in more than 180000 on net buildings directly to our infrastructure with secure and reliable fiber, we have deep and robust interconnection and peering facilities to the world's eyeball networks, and Isps acquiring and distributing traffic to and from.
Millions of endpoints.
We have a direct fiber connectivity to cloud service providers hyper scaler and more than 2200 global data centers with tremendously scalable capacity.
Over our global fiber network, we operate one of the world's largest internet backbones and carry a significant portion of the Earth's internet traffic each and every day.
The role we play in enabling the global Internet uniquely positions, our black Lotus labs team to quickly gain visibility and insight into emerging cyber threats, which we then used to secure and protect our customers' networks and applications.
As the team likes to say, we see more so we can stop more.
In a nutshell the lumen platform has the scale security ubiquity and resilience necessary to meet the needs of the fourth industrial Revolution.
Moving up on later in the slide lumen dynamic connections is the result of recognizing that our customers needed software based agility to consume and interact with our infrastructure.
We meet this need by utilizing software defined networking to allow customers to consume on the fly everything from basic network connectivity to more advanced services like SD Wan Hyper Wan and hyper Ddos.
With this network as a service approach our customers can add capacity and reconfigure destinations for that capacity as needed.
Eglin instantaneous consumption of additional network services.
This contrasts with the old model of interacting with a sales person scheduling the service delivery timeline enrolling trucks.
Our platform approach not only improves the velocity with which customers can respond to their application needs, but also the velocity, we experience and capturing and converting opportunity to revenue.
Moving beyond the dynamic network. The next layer highlights the capabilities of the lumen hybrid cloud access to multiple clouds over an agile seamless and secure communications fabric is as critical to our customers as the physical layer network connectivity.
They operate in dynamic environments that requires the ability to adapt to the daily minute by minute or even second by second shifting of their workloads from one compute resource to another.
The lumen hybrid cloud combined with our dynamic connections capability allows customers to locate compute resources in their on premises data centers lumen private and public cloud offerings or within one of the major cloud service providers all with full control.
Thousands of SaaS providers or a specific use case, the lumen hybrid cloud capabilities allow them to leverage our peering networks and our own ISP to enhance their application performance by locating compute resources and our edge cloud facilities and bypassing much as the best efforts Internet use.
You saw on example of this with our recent S&P announcement.
<unk> is working with lumen to take advantage of these capabilities and other aspects of our platform to improve their customer experience reduce their costs and enhance their service offerings.
The aluminum edge initiatives on previous calls as of today, we have fully enabled edge facilities, covering roughly 60% of U S enterprise locations within five milliseconds of latency.
Combining our unique fiber capabilities with our widespread edge infrastructure by year end, we expect to have more than 95 per cent of U S enterprises within that same latency performance.
We believe the lumen edge cloud offers a compelling solution for many of our customers latency sensitive applications and are encouraged that it will contribute to our improving revenue trends as it is more fully deployed and adopted.
The final layer the lumen Orchestrator is the set of software tools that orchestrate all of these capabilities to give our customers greater control a simpler operating model and the lower cost of ownership and an increasingly complex environment.
We recently announced the partnership with Vmware, which combines their orchestration capabilities and secure work from anywhere solutions with an increasingly dynamic robust and automated lumen platform.
We're excited about this partnership and expect to work with Vmware to bring new services to market through our joint innovation lab initiatives.
Both S&P and Vmware are tremendous companies, we look forward to these relationships and believe they can be an important part of driving growth for lumen, we expect to announce additional strategic relationships in the coming months.
I'll now take a moment to walk you through our 2021 priorities outlined on slide eight.
The first priority is to drive growth over the aluminum platform simply put the aluminum platform combines the control flexibility latency and performance of on premises solutions with the efficiency economics and simplicity of cloud based solutions, we will continue to expand the digital market.
Place, we've developed and the products and services available to customers to that end, we anticipate new products like lumen <unk> bare metal luminary private cloud luminaire edge V N and an expansion of locations where customers can leverage the aluminum capabilities to enhance their applications with low light.
Yeah.
Together these capabilities are unique to lumen and would be difficult to replicate let me give you a couple of examples to tie. This all together, we're working with a major auto company on their autonomous vehicle program, helping them train their machine learning systems by building an accelerated data access network.
Decreases David transfer times between the metro areas, they're testing with their headquarters.
We're also working with a financial services company to update their computing architecture to meet exacting specifications for performance with financial counter parties around the world.
We're managing the computing and storage infrastructure, along with the network connectivity to their broad digital distribution footprint for market data the benefit to the customer is the standardization of centralized computing for efficiency and flexibility and simplifying their long term digital distribution across the software.
On a defined network.
Our second priority is to improve the penetration of our robust product portfolio on our existing assets over the last few years, we have invested in and adding new on net buildings deploying the latest in fiber technology on our long haul network and expanding our fiber to the home footprint.
We have begun to grow where those investments have been made but we believe we can do better and short as customers return a portion of their workforce to the office, we are well positioned to provide their work from anywhere solutions as employees and students continue to work and learn remotely we are excited about our symmetrical broadband.
<unk> for the home, increasing our customer base and gaining wallet share with existing customers is a key priority for 2021.
Our third priority is our ongoing transformation to make it easier and easier for customers to consume our services and for our employees to support them expanding our digital marketplace and increasing the number of digital interactions are key goals. We believe this allows lumen to continue to improve the velocity.
At which we moved from opportunity to revenue and further enables our ability to improve customer experience and reduce operating costs.
Fourth is the continuation of our balanced approach to capital allocation, we remain committed to our capital allocation strategy to create shareholder value through investment in growth returning value to shareholders through our dividend and reducing debt.
Neel will provide the details, but we believe the changes we are making in our reporting categories properly reflect the evolution of our products and services and our focus on growth. We hope. These changes will provide better visibility into how we are performing where we are investing for growth as well as how we're doing in managing voice and other.
<unk> businesses for cash I'll wrap up by saying that I'm encouraged by the progress we've made and fully focused on the work that lies ahead, we leave 2020 with improving revenue trends better EBITDA margins and a strengthened balance sheet. I believe we have demonstrated that we can take out costs to meet the pressure of legacy revenue loss.
Going forward, we will continue to implement customer centric operational improvement, but our feature isn't about EBITDA stability through cost management, rather it is about EBITDA growth driven by revenue growth.
I believe the lumen platform is the right solution for our customers and will help us drive revenue customer experience and ongoing operating efficiencies.
We are excited about the opportunities ahead, but on an earnings call. It doesn't allow us enough time to discuss the numerous programs. We have underway, we intend to host a virtual analyst day in late spring during that event, we will share in greater depth, our go to market strategies exciting alliances and new solutions, we bring to the market.
Stay tuned for the detailed information about this event and I look forward to providing you additional insight on our roadmap for future growth.
With that I'll turn it over to Neil.
Thank you, Jeff and good afternoon, everyone.
We have a lot to cover so I'll start with a few highlights turning to slide 10, despite the macro environment. We delivered solid results for the full year, we improved the total revenue trajectory by 150 basis points generated $8 9 billion and adjusted EBITDA expanded our adjusted EBITDA margins.
And generated $3 1 billion of free cash flow.
We continued to invest on the business with capital expenditures of $3 7 billion.
Over the course of 2020, we reduced net debt by approximately $1 6 billion and refinanced approximately 13 billion in long term debt.
Further reducing interest expense extending maturities and strengthening our balance sheet.
Finally as of the end of 2020, we achieved approximately 830 million of annualized run rate adjusted EBITDA cost transformation savings.
Reaching our targeted savings range more than a year ahead of our expected timeline.
Moving to revenue.
For the full year 2020 total revenue declined three five per cent to 20.712 billion.
As I mentioned in our highlights. This is 150 basis point improvement from the 5% year over year decline in total revenue from 2018 to 2019.
Turning to slide 11 total revenue in the fourth quarter declined three 4% to five $1 billion to $5 billion.
Moving now to our business segment.
On a year over year basis international and global accounts or <unk> revenue decreased one, 6% or 0.7% on a constant currency basis.
Moving to our enterprise segment on a year over year basis revenue decreased 0.3 per cent.
We continue to feel good about our growth prospects in IBM enterprise, but during the quarter, we did see some lengthening of sales cycles.
SMB revenue decreased seven 1% year over year.
As a reminder, during the third quarter of 2020, we sold a significant portion of our legacy Correctional facility Communications business.
The sale of this business impacted revenue by about $15 million in the fourth quarter on a year over year basis.
Excluding this business from prior results year over year revenue would have declined four 9%.
Wholesale revenue decreased six 2% on year over year.
In summary for the full year, 2020, I gamma and enterprise, which on a combined basis represents 59% of business revenue grew slightly on a constant currency basis.
In a year of macro uncertainty facing most enterprise customers. This highlights the relevance of the products and services we offer.
Our turnaround plans for us on B were impacted by the pandemic, but relatively low churn and improving macro conditions gives us confidence that SMB represents a growth opportunity for us over the long term.
Wholesale will continue to decline.
Overall, we remain focused on improving the revenue trajectory across all channels.
Turning to consumer on slide 12.
For the fourth quarter of 2020 revenue declined to four 1% on year over year.
Broadband revenue for the fourth quarter of 2020 grew one 8% on year over year.
The revenue performance has been driven by our micro targeting efforts, our ongoing focus to improve customer experience and driving up penetration of our competitive assets.
For the fourth quarter and speeds of 100, Meg and above we added 54000 subs.
From a mix perspective, 14% of our total broadband subs now have greater than 100, Meg speeds compared to 5% at the beginning of last year.
Ending the year, we now have approximately $2 4 million homes passed with fiber compared to about $2 million at year end 2019.
Turning to adjusted EBITDA on Slide 13.
For the full year 2020, adjusted EBITDA was 888 8 billion, which compares to 9.070 billion for 2019.
For the fourth quarter of 2020, adjusted EBITDA was 2.281 billion compared to 2.278 billion from the year ago quarter.
Given the difficult macro conditions, we are pleased with the year over year EBITDA growth on the fourth quarter.
Along with the sequential improvement in adjusted EBITDA in both third and fourth quarter of 2020.
We expanded our full year adjusted EBITDA margin to 42, 9% compared to 42 three per cent for the full year 2019.
For 2020 capital expenditures were 3.7 to 9 billion and for the fourth quarter of 2020 capital expenditures were $758 million.
We continue to lean in and invest 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.
For the full year 2020, we generated free cash flow of $3 131 billion.
And 1.004 billion for the fourth quarter of 2020.
For the full year, we reduced net debt by approximately $1 $6 billion and refinanced more than $13 billion.
For the fourth quarter of 2020, we reduced net debt by more than $650 million and refinanced $1 billion of debt at lower rates.
We exit 2020, having materially improved our maturity profile.
Further strengthening our balance sheet lowering our cost of debt.
Enhancing our ability to invest in the business.
Our net debt to adjusted EBITDA leverage ratio is now at three six times.
As of the end of the fourth quarter, we have achieved approximately 830 million of annualized run rate adjusted EBITDA transformation savings.
Putting us on our targeted range a year earlier than planned.
We will continue to lean into transformation efforts on the future.
But it is becoming increasingly difficult to separate cost transformation initiatives with most of our initiatives now focused on improving revenue performance, while delivering significant cost savings.
We will not report transformation savings in 2021.
However, we do have line of sight and expect significant cost savings for the next several years.
Transitioning to 2021 reporting on slide 15.
The changes were making better reflect our go to market strategy and where we are investing for growth.
Our two segments going forward our business in mass markets.
I'll focus on business segment first.
We will continue to serve our business customers through for customer facing sales channels.
I am large enterprise mid market and wholesale.
IBM is now our largest business sales channel.
For the global accounts or Gam portion of this channel, we evaluated customer buying behavior and expanded the customer list with customers that we deem as high potential.
As a result some customers.
That had been in the enterprise channel have now moved into Ikea.
Our enterprise channel narrows, its focus and becomes large enterprise and we now have a sales channel focused specifically on mid sized customers, which we are calling the mid market channel.
Based on buying patterns on support requirements. Some smaller customers previously included in the enterprise channel have moved to our mid market channel.
Okay.
Within our wholesale channel changes were limited to realignment of our few customer accounts.
Slide 16 describes the segment changes in more detail.
Over the long term, we are optimistic about the growth potential for <unk> large enterprise and mid markets.
Moving now to slide 17, and our product categories by business segment.
Computer and application services includes many of the solutions that Jeff referenced in his remarks. In addition products like edge cloud services CDN data Center and security are an integral part of our success with alumina edge.
This category will also include revenue from our increased focus on ecosystem partnerships leveraging the aluminum platform.
IP and data services include products that are core to providing enterprises with hybrid networking capabilities and include products like high speed IP, VPN SD Wan and our dynamic connections capabilities.
Fiber infrastructure service.
Is largely on dark fiber and optical services business.
Our voice and other category represents the bulk of our legacy and primarily Tdm services.
We continue to invest and expect growth from computer on application IP and data and fiber infrastructure services.
Together.
These three categories represent over 70% of business for Albany.
As you think about the intersection of channels on products for our business segment. Excluding wholesale these three product categories in aggregate grew slightly year over year on a constant currency basis for the fourth quarter.
Mid market, which currently is a headwind represents a turnaround and eventually a growth opportunity.
Turning to slide 18, the mass market segment is a combination of the consumer customers plus. The addition of small business customers. We had in the form of our SMB channel.
We are now calling these customers the small business group or S. B G.
As we looked at the buying patterns support model and product needs for both our SPG and residential customers. We believe that combining the go to market approach provides efficiencies and potentially improvements in revenue trajectory.
Within the mass market segment, we will report revenue in four categories consumer broadband SPG broadband voice on other in Caf two revenue.
Additionally, we are updating our product reporting and enhancing our disclosure around our quantum fiber business and brand.
In addition to fiber enabled locations, we are now reporting fiber subs and ARPA.
Quantum fiber represents a growth opportunity for us along several fronts.
Fiber enabled homes are less than 15% of our footprint and we continue to invest with our micro targeting strategy.
Given that a significant number of enabled units were added in the past couple of years driving up penetration represents on near term addressable market opportunity.
Moreover, we have deemphasize low speed offerings over fiber and our typical new sales our pool now is generally higher than our base, representing another potential opportunity to improve the business.
Finally, we are breaking out SPG broadband, which until now hasnt been a large focus for us and we expect to improve the trajectory like we have for consumer broadband.
I'd like to take a moment to summarize the transition from Caf II to the rural digital opportunity fund or Argos.
As most of you are aware our subsidy revenue will step down from about $500 million a year to roughly $26 million in 2022. These.
These changes do not impact 2021 results.
We took a very disciplined and ROI based approach to art off.
In fact, even after factoring in the subsidy, we see better returns from the fiber to the home investments, we are making with our micro targeting strategy.
As we wrap up Caf II.
We intend to further accelerate that strategy by shifting resources and organizational capabilities now focused on Caf two.
Moving to slide 19, as I mentioned earlier, we are no longer reporting transformation costs.
However, we will continue to transform the business going forward and expect similar levels of expense, which are incorporated into our 2021 guidance.
We will continue to report special items, which include expenses, such as severance material legal settlements or other unforeseen material expenses that are onetime or unusual in nature.
With this adjustment full year 2020, adjusted EBITDA would have been 866 4 billion and free cash flow would have been 2.979 billion.
So turning to slide 20.
And an overview of our financial outlook, we expect adjusted EBITDA to be in the range of $8 four to $8 6 billion for 2021 compared to 866 4 billion in 2020.
As I just mentioned our EBITDA now includes costs.
To continue to transform the business.
Our guidance also incorporates significant success based investments focused on continuing to improve our revenue trajectory.
These incremental investments are primarily in the areas of product development marketing brand and go to market sales initiatives.
For the full year of 2021, we expect capital expenditures in the range of three five to $3 8 billion.
We expect to generate free cash flow in the range of $2 $8 billion to $3 billion for the full year 2021, compared to $2 97 9 billion in 2020.
As you bridge from 2020 due 2021 keep in mind, we had about a $175 million working capital benefit from the cares Act that reverses in 2021 and 2022.
For 2021, we do not have any required contributions to the pension fund and our free cash flow guidance does not include any discretionary contributions.
Given strong market performance, our funding status of the end of the year was 86%.
We will continue to monitor and may make contributions in 2021.
Also as a reminder, our first quarter our house typically high working capital use.
Driven by timing of bonus payments and other prepaid expenses.
We expect net cash interest expense in the range of.
1525 to $1 575 billion for 2021.
The midpoint of guidance represents almost $600 million and lower net cash interest compared to 2018.
We are pleased with this outcome enabled by our aggressive deleveraging plan.
We embarked on in 2019.
We have significantly strengthened our balance sheet improved our credit profile and our coverage ratios and remain committed to getting to our $2 75 to $3 two five net debt to adjusted EBITDA leverage target.
Consistent with our execution in 2020, we will continue with our balanced approach to paying down debt and investing in the business focused on improving our revenue trajectory.
In summary.
Despite the uncertainty and challenges faced by our customers and our company, we delivered solid full year results.
With our continued success based investments in the business our focus on profitable growth focus on new and growing addressable markets.
And ongoing digital transformation initiatives, we are well positioned for 2021.
With that we'll open it up for your questions.
France.
Would you please explain the process.
Thank you Neel, if you would like to register a question. Please press the one followed by the four on your telephone.
We hear a three pronged to acknowledge your request. If your question has been answered and you would like to withdraw your registration. Please press the one followed by the three.
And our first question will be from the line of backend Levy with UBS. Please go ahead.
Great. Thank you, maybe starting off with your EBITDA guidance for 'twenty one.
It looks like you're expecting it to be flat to down can you help us maybe quantify how much you're planning to spend on the transformation side of it and with the outlook for potentially improving revenue trends on continued cost cutting efforts.
Why would we still see a decline in EBITDA and maybe finally.
You did mentioned that you are.
I don't get a focus will remain to lower leverage I believe with this guidance you will still be above your leverage targets at year end can you can you help us think about your capital allocation policy going forward. Thank you.
Hi, Bobby.
So I'll start with your question on on EBITDA.
So on EBITDA I think there's a page in our earnings presentation that lays out the <unk>.
Pro forma view so from the starting point of 866 for our guidance is eight 4% to eight six.
Like you alluded to it I think.
Guidance includes the cost to continue to transform the business. So we're not going to be slowing down. So we expect similar amount of cost in 2021 like we did in 2020, so youll see there excluding severance in 2020, we had about $224 million in costs. So we.
We expect about a similar amount of cost.
In 2021.
The other.
Thing impacting EBITDA.
In 2021 really are the investments we're making.
In growth and really changing the revenue trajectory on the business. So if you think about all the things that Jeff mentioned those investments on just not capital there both capital and operating expense.
Some of the product initiatives, we're working on.
Product development cost there is ecosystem initiatives with partners.
<unk> marketing brand expenses sales training sales overlay initiatives from quote to cash. So all of those things are incorporated into our EBITDA guidance. So we're really focused on long term EBITDA growth.
On a big part of our focus in 2021 is really improving the revenue trajectory over the long term with all the investments that we're making.
So your second question was around leverage leverage target.
So we're already at three point.
Six times and so if you look at our guidance.
Still committed to paying down debt and.
You know our target ratio is our target leverage ratio is still $2 75 to three to five.
We will likely exit the year somewhere around three on a half or slightly better and within a quarter on all of our target range. So we're committed to it like you've seen US do in 2020, we will balance between paying down debt and investing in growth.
So that'll be the balanced approach going forward.
Got it thank you.
Yes.
Our next question from the line of David Barden with Bank of America. Please go ahead.
Hey, guys. Thanks, so much for taking my questions.
I guess two first for Neel.
Within the cash.
Capex guidance that you've given could you kind of.
Carve out how much of that is going to be related to the caf two commitments.
Such that we would assume that that would then disappear in 2022, and then I guess following up on on <unk> question, a little bit Jeff.
Slide five you've got this kind of aspirational.
Trajectory towards gross but then on slide 11.
Looking at declines in almost every business unit.
So what are the you know.
What are the biggest moving parts, both headwinds and tailwind theyre going to get us from turning slide 11 from a lot of negatives to looking more like slide five which is this trajectory towards growth on the fourth industrial Revolution.
Sure Hi, David So on cash.
Capital guidance for Caf two.
Just to give you a sense of cap to capital.
Over the last three years.
We've averaged over $300 million.
Spending against Caf two.
And this year, we're working on a series of initiatives to actually bring it down. So we don't know exactly where that's going to end up but it will be likely be it be less.
In terms of.
No head wins on pain tailwind on the way I would think about it is if you look at our new reporting.
For the business segment.
The top three product categories.
Viewed on applications IP and data on fiber infrastructure those are the ones that we're really investing for growth.
And voice on other will really manage manage for cash now when you look at the channel lens.
There is some challenge with SMB and we're working on that turnaround.
And eventually grow that at some point.
So if you look at it from a per.
<unk> 70, plus percent of the business, we're focused on driving growth for the business segment and if you look at even from channel lens perspective, excluding wholesale business was about 75%. So that just kind of gives you a sense of the part of the business that we're focused on driving growth.
And in terms of mass markets.
Really is about broadband and our focus on investing in fiber and driving up penetration.
Yeah and.
That's what we'll be focused on.
And David how how we accomplish that.
Is by our investments by our focus on where we're leaning in over the last couple of years, you've seen us invest heavily in improving our customer experience.
And our digital interactions with customers and the way that our employees support them, but at the same time, we've been building and investing in the lumen platform and the capabilities that we wanted to deliver to the market Neil talked about the three big product categories that are growing but if you look inside some of those things like edge compute.
We announced last year that we were going to invest heavily in edge today, we have about 60% of the U S enterprises within five milliseconds. So as you look at the services that we've been developing lumen.
Cloud the lumen.
Ed.
On the alumina edge bare metal all of those capabilities, we see us as gross capabilities and we've been investing heavily in on this as well as things like hybrid Wan and dynamic connections and new cash unified communications as a service we continue to invest in the products and services and the capabilities that we need to deliver.
We continue to invest in the infrastructure, making sure that we are expanding fiber to businesses building out our edge cloud facilities and capabilities and we've also been investing in our partnerships and making sure that we're partnering with world class companies that we can take and put on the aluminum plant.
Companies like zoom companies like SAP companies like Vmware and we can we can partner with them and provide unique innovative solutions all over the lumen platform and so we'll continue to do that.
Continue to invest in the Opex as well to drive those products and services. So Neil talked about that and is this mask Barry's question about.
EBITDA, so I'd say that what we.
We've been doing for the last couple of years have been investing in those things.
Really building the platform at this point and now it's more about rolling that platform to our customers and expanding the products and services they buy from us.
The thing I would add David is I think we're not pleased with the $3 five per cent decline year over a year, but we're very pleased with the 150 basis point improvement from the 5% decline.
Last year, so we're really focused on improving the revenue trajectory.
The other thing you you know you can see from our profitability metrics, hopefully, which is hard to see with the top line metrics are that we're making the revenue more profitable and more durable.
Got it. Thank you so much Neil Thanks, Jeff.
Sure.
The next question is from the line of Eric <unk> with Wells Fargo. Please go ahead.
Great. Thanks for taking the question.
So neel I wanted to follow up on that on the Caf two roll off I think as you said it sounds like potentially next year, there could be a several hundred million dollar impact to free cash flow and you'd probably reinvest some capex into fiber to the home. So curious.
How do you think about your dividend payout ratio beyond this year pro forma some of those initiatives.
And whether that changes your capital allocation initiatives at all and in addition, if you could maybe frame up the outlook for fiber to the home, but on your consumer segment.
How many homes, you think makes sense to build two and.
Maybe some more color on that would be helpful. Thanks.
Sure so.
No.
You think about.
Caf two like I mentioned, we were you know.
For the last three years, we average more than $300 million of capital.
The other thing to keep in mind is that we through end of last year. We have enabled about one 1 million units.
And these are really in underserved areas.
So we are selling into that and that you know.
Revenue and penetration is.
Picking up every quarter. So there is also a cash coming in from the footprint that we have enabled so when you look at the puts and takes going into.
On next year of the subsidy the capital going away and cash coming from customers in that footprint. When you add it all up it is not a material impact to our free cash flow, so really doesn't change anything.
From a capital allocation perspective.
And in terms of.
Art off like I mentioned in my prepared remarks.
It took a very very disciplined approach.
So even when you net out the subsidy.
Our returns that we see on fiber to the home is significantly higher.
Just to give you another data point.
One of the largest winners of art off just announced that it's $5 billion price tag.
To build out to Oh.
On a 1 million homes, if you compare that to the 400.
On the homes that we just enabled last year, we certainly didn't spend a couple of billion dollars.
So we have a different profile in terms of where we're investing fiber to the home and will be success based on that front, we're not setting any specific targets.
And our new disclosure, we are providing the enabled homes and we're giving you penetration. So you can see that we have a fair amount of addressable opportunity to sell into.
It will ramp up on a success based basis, if that makes sense and I'll just add from a market perspective, we're super excited about our quantum fiber brand and the capabilities that we bring to the market. The digital experience is in my opinion second to none.
Sure.
NPS scores reflect a very high satisfaction the quality of the product the bi directional nature of the quality of the products in the cemetery of that capacity.
<unk> networks that we tie that into we're extremely excited about the about the the.
The capabilities that we give to the customers and their acceptance of it.
Okay. Thank you guys sure.
Our next question from the line of Tim Horan with Oppenheimer. Please go ahead.
Thanks, guys can.
Can you give us a little bit more color around the lumen platform.
How differentiated do you think you are now versus your peers on I know, it's not just a platform it's wholesale your infrastructure.
Maybe just talk about.
It sounds like you're excited about revenue growth improving just maybe about the flow shares that youre seeing with some of your larger customers out there and then lastly, you know where are we with implementation of the platform I guess more bolt on from enabling new revenue growth, but also lowering your own kind of internal expenses. Thank you.
Sure. So so over the last couple of years, you've seen the expense impact of the platform that we've been building. If you. If you think back and I referenced this in the prepared remarks in 2019 per.
For 2019, we said we were going to save at $802 million.
And transformation expenses.
On the quarter fourth quarter, we reached $830 million and so you can see the benefit benefit in our cost structure of the platform, but but let me tell you a little bit more about what the platform is and why it's different than everybody else first of all it's built and I'm kind of referencing slide six in the presentation.
It's built on what I consider to be the world's best fiber infrastructure. The ubiquity of our fiber of the density of our fiber to reach the stand.
Polity.
On the ability to upgrade capacity, which we saw on 2020 with Covid.
Is second to none and will continue to invest in building that infrastructure, but not only that we've been able to locate our edge compute nodes with that fiber and with the peering connectivity within.
Five milliseconds of the majority of the U S enterprises by the end of the year, we'll be at 95%, 98% of U S enterprises, and so there's that coupling that nobody else has nobody else has that ability. But then we also have the again the peering networks, but the connectivity and the cloud service.
<unk> the 2200 data centers on net and our dynamic connections capabilities really a network as a service where we integrate into our customers' applications and they get to control that entire footprint that entire connectivity all the way from there.
They are in location to wherever they want to do the computing on it to wherever they want to distribute it via our software defined network. They don't have to call us we don't have to engineer a solution. They can just have their software send a message to our software and the network configured the way that they want when you can.
Find that with our lumen hybrid cloud and the.
Some of the orchestration services that we bring to customers take the connectivity to any major cloud service provider the connectivity to any hyper scaler, we've got more connectivity more connectedness than virtually anybody and so our customers get to take advantage of that and so ultimately.
The advantage to the customer.
On the lumen platform is that they get to acquire <unk>.
Analyze and act on their data better than any other platform and more uniquely because we're more connected more capable and we give them better orchestration services across it now we've also got great partners partnering with Vmware partnering with SAP. We think those are great partners for us to continue.
To rollout these services partnering with zoom on our on our collaboration services. So we've got great partners that we bring their capabilities and we've created this digital market place that the.
Platform.
It comes for our customers to access different types of technology that they need for their specific applications.
And how unique is this platform do you think versus your competitors.
Well I'm biased I don't think anybody is in a position to do what we do.
There are certainly some people that have good fiber networks. There are certainly people that have great cloud capabilities.
Really a few people that have some orchestration capabilities I don't think anybody can bring those things together in the way that we do.
But that we certainly have very good and strong competitors, but we just think we're unique and we think it would be hard to replicate per others.
Thank you.
Sure.
Our next question from the line of Frank Louthan with Raymond James. Please go ahead.
Yes.
Mr. Larson Your line is open. Please go ahead with your question Sir.
Sorry got it you learn that you learn to use the mute button a little better.
So back to the gross issue just wanted to discuss that a bit I mean, your your fiber network in the region and so forth debt you have I mean, I think most of us are well aware of that and that's not necessarily.
New what what tactically from a tactical perspective or from a sales perspective, do you think youre going to be doing differently to be able to monetize that network capability and reach than maybe you have been in the past to be able to achieve that growth that you are calling for.
Well it is the lumen platform. It's the combination of all of these things and it's the intersection with our customers' needs with the fourth industrial Revolution, the need to process massive amounts of data with very low latency is really critical and so we we view our <unk>.
Infrastructure. This is another application of how we can utilize the fiber infrastructure.
To deliver that capability of the customers the ubiquity of it and the density of it allows us to give that five millisecond performance. It was very low latency to our applications. The global nature of it allows us to carry that traffic to anywhere in the world.
Activity of it allows us to carry it to any place in the world. So if you want to go to them.
That particular.
On cloud service provider, we can deliver to that one if you want to go to a different cloud service provider, we can deliver to the other one and so so the fiber network as the core foundational piece for the lumen platform that sits on top of it and then all of those other capabilities come in now we've continued to do things.
Frank that debt.
Our intended to increase the value and the usefulness of the fiber network. If you look at our building adds if you look at that our fiber to the home expansions those are about expanding the footprint last year, we talked about the <unk>.
Use of the latest and newest technology and fiber capacity or excuse me fiber technology that we're deploying building the world's largest deployment of that type of technology.
<unk> there was our existing conduit infrastructure, because we can build fiber at a very fast pace and at a low cost because of our conduit infrastructure, but we use that fiber for super high scale capabilities capabilities in delivering the world's internet traffic, but also <unk>.
The Hyperscale and cloud service providers and great Big software as a service companies those types of things.
Okay, great. Thank you very much sure. Thank you.
The next question is from the line of Simon Flannery with Morgan Stanley. Please proceed great.
Thanks, very much Jeff you've talked a lot about brought on today, we've got a new administration a lot of focus on the digital divides theres money set aside for art off to those other programs being proposed in Congress on infrastructure bills etcetera. So what are you hearing from your folks in Washington, what sort of opportunities do you think this might per se.
Sent for lumen and then perhaps you could just expand a little bit on the lengthening sales cycle. We're obviously still in the kind of pandemic what is anything particularly changed over the last month or two where things gradually getting better or any color there would be great.
Sure on the what do I expect out of Washington, or any opportunities I don't really have any particular expectations.
Something out of women I expect us to follow a disciplined.
Actually driven.
Logical approach to what we serve on what we don't serve and as Neil pointed out we think we have lots of opportunities to put our money to work inside of our existing footprint.
And outside to some extent that debt inside our existing footprint at better returns than some of the the Argos dollars, even with the subsidies and so we will follow a very disciplined approach to whatever comes out of Washington, and and we will work within the footprints that we have to deliver the best service for our.
<unk> with the best digital interactions so that they can.
Overcome the digital divide in and have the best capabilities and that's one of the things that we think we stand out on as more people work from home and and educate from home. We think the symmetrical nature of our fiber footprint is a huge advantage for four consecutive.
<unk> customer or a small business customer.
And then another question sorry.
On the sales of the lengthening of the sales cycles is there anything different here probably not.
What we've found is people arent resolving what is this post pandemic world look like yet because we're not in a post pandemic world. We're still on the middle of it and so I think that this is not terribly that much different but we thought it would be getting better by this point and so we see this lengthening of sales cycles as.
People are really trying to resolve what does it look like.
Post post Covid and how do we think that the world is going to run now I'll tell you my opinion, which is we wont go back to the way the world was in that work from anywhere with with reasonable capacities and security and expanding the enterprise edge not not the cloud is not the.
Illumina has been expanding the edge of the enterprise to thousands and thousands of different locations is something thats going to create management challenges for customers and security challenges challenges for customers are actually good for lumen, because we can bring solutions to their capacity needs their security.
Needs their orchestration needs and their control needs for how to manage these complex networks and so while we still we see this lengthening in cycles long term, we think that the.
And I hate to say that the outcome of that.
The pandemic is but I don't mean that the outcome of the way we will work after the pandemic is fairly good for Luna.
Great. Thank you.
Sure.
Our next question from the line of Nick del Deo with Moffett Nathan. Please go ahead.
Great. Thanks for taking my questions.
First you highlighted the improvement in the growth rate this year versus last year.
I understand it's hard maybe impossible to tease out, but as you look back over 2020 do you think COVID-19 ended up being a net revenue benefit in the year from higher voice and capacity Augmentations and so on were a drag or about neutral.
From my perspective.
Within a segment that's kind of hard to tell but overall I think it was a net negative just because we had fairly robust plans in terms of turning around mid markets.
And that got delayed so it's hard to tell whether it's our execution or the environment.
But from that perspective.
If I were to handicap, it I'd say overall net negative mix.
Nick It I'd say this thing there are pluses and minuses, probably more minuses and Plusses. If you think about some of our international customers that were there.
Our markets were particularly hit hard there was a negative if you think about some of the emergency capacity upgrades. We did for people that was a positive overall more negative than positive, especially as it affected people's decisions to do something going forward.
<unk> capacity by networks by solutions.
So overall I'd say, it's a net negative.
Okay. That's helpful and then maybe turning to the outlook for 'twenty, one maybe it's a bit of a loaded question, but how would you characterize the level of conservatism in your outlook.
The economic situation and the effect on sales cycles and whatnot.
Or maybe stated differently, how do you think that the different puts and takes and how did you incorporate that into your guide.
So one of the things we've seen.
In 2020, the services, we offer are fairly resilient.
Obviously in 2020, we pulled guidance because there was so much uncertainty, but as we went through the year.
We saw minimal impact even in some of the industries that were heavily impacted by the pandemic.
So on balance I would say, we're fairly comfortable with the range.
Yes.
We also you know we have robust plans in terms of continuing to take cost out of the business.
So from an EBITDA on a free cash flow perspective, we feel pretty good about the range.
And I'm going to answer your question slightly slightly a different question than you asked.
As I think about the optimism of our investments going forward I'm very optimistic about our investments, we we know what the outcome of the <unk>.
On the capabilities that people need to look like not always sure about the timing. We can we can miss on timing a little bit we know where the market is going on what the capabilities are and so we're optimistic and we're investing both in opex and capex with that optimism driving our behavior.
Alright, Thank you both.
Yeah.
Our next question from the line of James Ratcliffe with Evercore ISI. Please go ahead.
Thanks, two if I could first of all on the <unk>.
Cash interest side, how much room do you think you still have to go on that brought down 600 million Bucks over the last couple of years.
And how much runway would you still have on that front and secondly on the fiber to the home expansion you had 400000 homes. This year can you give us some color about what those homes were previously or are these.
New construction or places, where you already operating broadband.
Additions to your wireline footprint. Thanks.
Yes.
So on the cash interest.
You know I would say that.
From a milestone perspective, we're significantly ahead of what we thought we were gonna be when we kicked off the deleveraging plan. So it really is dependent on market conditions.
So we think there's more opportunity.
And we will continue to focus on it.
Yeah and.
And but it really is dependent on on market conditions.
Yeah, and just to add on.
On the fiber to the home question. James You asked is this new construction is it where you already operate.
Overbuild the answer is yes, it's all of the above and I'll give you.
Some examples we build we build new new homes, all the time as a part of our.
As homes grow in a market.
We focus on making sure that we're building into those subdivisions with fiber, it's a big part of our fiber expansion plan, making sure that debt.
When it's cheap to build in and before homes get there that we build the right infrastructure and to grow them is it in our footprint most of the fiber expansion is in our footprint, but not all of it. If you look at MD use outside of our footprint. We think we have great fiber penetration in markets that the.
That we don't have consumer customers today, and so we go to those in to use though and say we want to serve you in this market and then we've actually partnered with them.
On communities like Springfield, Missouri, where we went on an overbuilt. The two providers that were there in conjunction with the city to expand our capabilities. So it's a little bit of all of the above all of the above has one characteristic and that is maybe two characteristics that we think we can drive.
Revenue growth at a low cost of capital and a low opex to do it and so we review every opportunity through that lens, how do we make sure that we use our capital efficiency efficiently and how do we make sure that we get the penetration that we want and Neill touched on that as an opportunity for us we still have an opportunity.
Need to improve our penetration in our fiber markets, but it is a little bit of all of the above.
New construction.
Overbuild in existing areas.
And then some expansion outside our traditional footprint.
Great. Thank you sure.
Our next question it sounds about right Andrew.
Nick.
Okay. Thank you I think that.
This will be our last call or last question. So thank you operator.
Very good.
Our last question then will be from the line of Phil Cusick with Jpmorgan. Please go ahead.
Saved by the Bell.
And then ask every question I have left.
So just a few housekeeping ones from me.
What's the penetration in those caf areas now and how much revenue is this contributed.
So Phil I think we don't disclose that but I would say part of it is it's a moving targets on where we have finished building.
We are seeing relatively high penetration, but keep in mind a lot of the units.
We are building every.
Every quarter.
But we expect fairly good penetration on that significantly higher than what we're seeing everywhere else.
Okay, and as you finish up those builds this year. It sounds like you expect to spend maybe a similar amount on on <unk>.
Fiber broadband construction going forward, but in maybe in higher return sort of micro targeting areas is that the right way to think about it.
That's absolutely right, but we're gonna be very success based about it.
We're going to calibrate between how our penetration is going up.
How much.
Footprint, we're converting to fiber or adding fiber like Jeff mentioned.
So we will continue to have that micro targeting approach, but the pace at what.
Which we go in and bust will be.
Jeff.
We will calibrate that to our execution on driving up penetration.
While we are more than capable of focusing on two customer sets at the same time, we've talked a lot on this call about fiber to the home and consumer I don't want to lose sight of our investments that we're doing for enterprise. That's the vast majority of our investments in fiber and then moving platform now we've got great benefits of the lumen platform that we bring.
The two consumer customers because of our our digital interaction approach to working with them, we see it in our in our net promoter scores surveys we've got great benefits that we're bringing to small business mid market business enterprise business I can and will continue to leverage all of those.
Investments.
To drive the trajectory of each of those groups to the best we can.
So thank you.
It's going to go there go ahead.
I was just going to say it sounds like that frees up capital for you to spend not necessarily on consumer but maybe on a.
On a higher return enterprise fiber opportunities as well.
Well look the way I would say that as we're not constraining capital today.
And so we're going to even in a year with a fair amount of uncertainty in 2020, we spent $3 7 billion.
And so we're not really constraining capital will be success based about it we don't want a lot of standard capital.
But you know as we see opportunities, we will lean in and bust, but well calibrated to our to our execution.
And we have a very dynamic process to Jeff's point, I think we dynamically allocate capital between enterprise and consumer between edge on fiber to the home we will do that on an ongoing basis to make sure we're getting the right financial outcomes.
Well. Thank you all for the for the engagement and the questions before I four I conclude the call. Let me summarize a few a few thoughts on 2021, and how you should think about our business, but in the face of an uncertain environment last year, we made significant progress in evolving the company we delivered for our customers.
<unk> improved our revenue performance and continued to pay down debt and improve the balance sheet.
Following several years of work, we launched the lumen platform and expect to drive long term growth by meeting the changing needs of the fourth industrial Revolution. In 2021, we're fully focused on driving growth through expanding the reach and the capabilities of the lumen platform penetrating our existing.
Sting fiber investments leveraging our edge strategy and expanding the alliances that we're working on within the industry.
As always we locate growing free cash flow per share is the guiding principle and believe we're doing the things we need to drive growth and long term shareholder value through the growth in free cash flow per share. Thank you all for joining us today and look forward to connecting with you at our upcoming analyst day.
France. Thank you very much that concludes the call.
Thank you Mr storey please I'd like to thank everyone for your participation and for using lumen technology service. Today. This does conclude the conference call. We ask that you. Please disconnect your lines have a great day everyone.
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