Q3 2021 Lumen Technologies Inc Earnings Call
'twenty one earnings conference call.
During the presentation, all participants will be in a listen only mode.
Police.
In addition, certain metrics discussed today exclude costs for special items as detailed in our earnings material all of which can be found on the Investor Relations section of the website with that I'll turn the call over to Jeff.
Good afternoon, everyone and thank you for joining us on today's call I'll provide a few thoughts on our third quarter results and an update on our recently announced transactions a review of our key capital allocation priorities and outline our investment plans as we continue.
<unk> the company for long term sustainable revenue growth.
I'll, then ask Neal to discuss the third quarter in more detail and of course, we will reserve time at the end for your questions.
We're pleased with our third quarter sequential revenue progression. In fact, we showed sequential growth in both <unk> and large enterprise showing the resilience of our business as COVID-19 related headwinds begin to diminish.
Also pleased with the continuation of the strong sales we saw in the second quarter and our growing funnel, which should provide a strong foundation as we drive toward growth.
Overall, it's an exciting time for women as we continue evolving and transforming the company for long term growth.
Our aluminum platform continues to resonate with customers and is the cornerstone of our digital transformation for enterprises. In addition, I believe our quantum fiber platform is unique in the market and not only drives an enhanced customer experience, but also drives revenue growth and even lowers the operating cost for our mass market.
Improving the profitability and sustainability of the business.
I am excited to discuss the investments, we're making to drive enterprise in quantum fiber growth. So let me start with an update on our previously announced transactions.
Both the sale of our 20 ILEC stake and our Latam business are important steps to positioning our company for the long term those transactions materially changed the mix of our business operations, which will amplify and accelerate the positive outcomes for our focused investments in our.
Our retained markets both transactions were executed with strong valuations, which we believe validates a much higher value for our retained portfolio of assets.
Or it's more than $10 billion collectively we're making excellent progress towards closing both deals with.
We currently expect the Latam transaction with <unk> to close during the first half of 2022 and believe the Apollo transaction will close in the second half of 2022.
After considering the transfer of our <unk> debt to Apollo pension and <unk> liabilities tax another transaction adjustments, we estimate that we will receive approximately $7 billion in combined net proceeds from the deals.
Looking beyond the transactions if you turn to slide four in our Investor presentation, you can see our top five priorities for putting to work the significant free cash flow regenerate and the proceeds from these transactions.
As this slide illustrates investing in growth is always our highest priority and we're very excited about what we see as high return high confidence opportunities to invest in both enterprise and quantum fiber growth.
Let me start with quantum fiber first of all the quantum acceleration plan has already begun on our last earnings call I highlighted the attractiveness of our mass market assets and the 16 States. We retained after the sale to Apollo and noted that approximately 70% of our footprint or about 15 million locations.
<unk> will be in urban and suburban areas.
Majority of which are economically attractive for our quantum expansion.
Our quantum fiber initiatives continue to deliver growing third quarter revenue, 25% year over year as we transition from micro targeting to a broader market approach for deployment, we have high confidence in our ability to drive significant revenue growth for years to come.
As I mentioned during the second quarter call, we plan to accelerate quantum fiber investments and our retained markets as of the end of the third quarter. We had approximately $2 5 million enabled locations within the retained 16 states.
Historically, we've enabled around 400000 locations per year, and we expect that pace will continue in the fourth quarter as.
As we accelerate our investment in quantum fiber in 2022, we expect to ramp that enablement tastes over a million new locations on our way to hitting a run rate of one and a half to 2 million enablement per year as we exit 2022.
When deploying quantum fiber, we typically expect penetration rates of 40% or better with average build cost of less than $1000 per location enabled.
After a thorough review of our footprint and given these economics, we expect our total addressable opportunity to be more than 12 million locations. Our quantum fiber plan for 2020 is fully funded and we're very excited about these investments.
But it's not just the excitement born from hope it's excitement born from experience and accomplishment as we built quantum fiber we've done more than simply construct new fiber, we built an excellent quantum experience and product capability that is now ready to ramp aggressively providing higher ARPA lower churn and greater.
Customer lifetime value.
Over the past couple of years, we have executed a successful hybrid deployment program using a deliberate and micro targeted approach.
The approach has enhanced improve and our capabilities and we are positioned to execute on our much more aggressive plan.
Our custom algorithms predict the cost to build and likely penetration levels for our fiber enablement opportunities maximizing the efficiency of our capital spend.
Our experienced and actively engaged workforce is already ramping for our accelerated quantum fiber build plan and we are confident in our employees' ability to deliver on our plan.
We know the supply chain as a major topic currently so let me address that head on we've been in close communication with our diverse and reliable supplier base and have commitments from them on their ability to deliver however, we take nothing for granted and this is an area, where we will continue to closely monitor.
Moving to our enterprise business rest assured this much larger segment of lumen is equally exciting for us and we will continue to invest aggressively in our edge compute and storage platforms, our managed service offerings and our security products as well as continuing to automate and improve our customer.
Digital experience across many of the core networking services.
With our extensive long haul and dense metro infrastructure. Our network provides low latency ultra high capacity resilience and cost advantages over many of our competitors, we have a robust and extensive fiber footprints for enterprises and that allows us to continue to focus our capital.
<unk> on our platform experience higher penetration in existing buildings, new product offerings and win driven by customer opportunities success based fiber expansions.
A few examples of recent wins in our business segment demonstrates the diversity of our customers and the need for our services across virtually all industries.
These wins include a cloud TV, enabling an independent renewable energy clean technology provider and a hyper scaler. All of this is in addition to our recently announced network modernization contract for the U S. Postal service. There is strong demand for the enterprise services, we enable and we continually.
We evolved our product portfolio to leverage our robust fiber network and provide services our customers need to drive success in their businesses.
We believe our growth investments coupled with our streamlined post divestiture portfolio will create tremendous value for our shareholders. The transactions will improve our revenue quality from day, one and allow for focused investment targeting our most strategic highest ROI opportunities. We believe there are.
Tractive opportunities, putting new capital to work driving revenue growth and with returns well above our cost of capital.
You've heard me say this before we will invest for growth and grow where we invest.
Another key priority for women is the importance we place on returning cash to shareholders. Therefore, we have no plans to modify our dividend, which we believe is sustainable at the $1 per share level.
Although our payout ratio will likely rise in the near term as we streamline our asset portfolio and invest in the quantum and enterprise opportunities. We expect our focused operations to provide the underpinnings for top line growth in two to three years, which we expect will drive a more normalized dividend payout ratio.
Overtime.
Our board believes the return of cash in the form of a dividend is an important part of our value proposition and we are focused on supporting our dividend, even as we make the investments necessary to reach our growth objectives.
As I mentioned in our last earnings call and as you can see in priority three we will manage our balance sheet to remain more or less leverage neutral over the next few years as we accelerate our quantum fiber deployment plan, we do expect the timeline to reach our target net leverage ratio of 275%.
Three to five times adjusted EBITDA will be extended.
With our two announced transactions.
Not just using CEO speak when I say, we are open to smart optimization of our assets. We are open minded and we'll continue to evaluate asset optimization. It makes sense for our shareholders, but we've also demonstrated our discipline and driving and working toward the right deal not just a deal to get something done.
There's no urgency for us to divest assets and our thoughtful approach to the ILEC sale resulted in additional years of cash flow from operations, a stronger multiple received and a strong partner in Apollo as we move our business forward.
We will continue the same open minded disciplined approach to assess further optimization, both to improve our business mix and to fund growth in our retained businesses.
Lastly, let me talk for a minute about share buybacks as you've seen we completed the $1 billion share buyback that we announced last quarter, reducing our share count by about 81 million shares or approximately 7% of our.
Total shares outstanding.
I'll also note refunded this buyback largely with our third quarter 21 free cash flow we.
We executed this buyback quickly because we believe our shares are deeply discounted and do not reflect the significant opportunity for Luna and going forward. Our board continues to believe this and is prepared to authorized further buybacks on short notice. If we believe this presents a prudent use of our shareholders' capital.
That I will turn the call over to Neil to discuss our third quarter results Neil.
Thank you, Jeff and good afternoon, everyone.
As Jeff said, we're very excited about the transformation of our company and our plans to drive future growth. Let me begin with our financial summary for the third quarter of 2021 I am in large enterprise sequential revenue performance returned to growth. We again delivered solid adjusted EBITDA and expanded margins year over year cash.
Flow remains robust, providing the flexibility to support our capital allocation priorities.
With respect to capital expenditures enterprise customer demand has been centered around existing on net buildings and less capital intensive higher layer services. We are also seeing benefits from our continued focus on capital efficiency initiatives. As a result, we are reducing our capital expenditure guidance to.
In the range of 2.8 to 3 billion.
Note that as we transition from micro targeting to a market based approach for quantum fiber and enterprise decision, making on new network deployment accelerates, we expect capital expenditures to ramp going forward.
We remain confident in our EBITDA guidance range of $8 four to $8 6 billion and as a result of lower capital spending and lower net cash interest expense, our new outlook for free cash flow is three six to $3 8 billion.
Turning to revenue in the third quarter, our total revenue declined five 4% on a year over year basis to 4.887 billion. It is important to remember that year over year metrics were meaningfully affected by COVID-19 related demand last year, making comparisons less relevant from a sequential.
Perspective, total revenue declined by 0.8% an improvement from the 2.1% sequential rate of decline in the second quarter.
Business revenue in the third quarter declined 0.4% sequentially versus a decline of 2% last quarter.
On a year over year basis revenue declined five 1% to 3.508 billion.
Normalizing for the sale of the production facility business in the third quarter of last year. The decline was four 9%.
Within our business segment I game revenue.
Grew one 5% sequentially and <unk>, 6% on a year over year basis, the year over year and sequential improvement was primarily driven by increased demand for wavelength and dark fiber within fiber infrastructure services.
IP and data services also grew sequentially within IBM.
Large enterprise grew 0.1% sequentially and declined five 9% on a year over year basis.
Sequential improvement was driven by strength in our federal state local and education businesses.
While year over year trends were impacted by the surge in COVID-19 related usage last year.
Mid market enterprise declined two 3% sequentially and a nine 6% on a year over year basis, while sequential performance improved in third quarter trends continue to be pressured by the delayed decision making environment.
Year over year trends were also impacted by the previously noted cell of the Correctional facility business.
Revenue within our enterprise channels now represents about 75% of our total business revenue.
Despite the mid market headwind enterprise channel revenue was flat on a sequential basis in the third quarter of 2021.
Wholesale declined one 5% sequentially and 7% on a year over year basis.
Computer and application services for the enterprise channels declined slightly both sequentially and year over year.
Enterprise sequential performance was impacted by the mid market channel and year over year, primarily by the large IDM customer disconnect we referenced in first quarter.
Computer and application services grew both sequentially and year over year for large enterprise.
IP and data services for enterprise channels declined both sequentially and year over year due to declines in new VPN hybrid network deployments.
We have however seen increased demand for IP on a year over year basis as customers transition to SD Wan and work from home technologies.
Fiber infrastructure services grew sequentially, while declining on a year over year basis the.
The sequential growth was due to dark fiber and wavelength demand primarily for our large customers yeah.
Year over year declines were largely due to timing of equipment sales within our federal business.
Voice and other services and the wholesale channel declined both sequentially and on year over year basis in.
In line with our expectations as we manage these areas for cash.
Keep in mind, our voice comparisons continued to be impacted by higher COVID-19 related usage in the year ago quarter.
Turning to mass markets third quarter of 2021 revenue declined one 6% sequentially.
Our mass markets fiber broadband revenue grew 25% year over year this quarter during the quarter, we added 28000 quantum fiber customers.
Turning to adjusted EBITDA for the third quarter of 2021 adjusted EBITDA, Excluding special items was 2.078 billion compared to 2.132 billion in the year ago quarter.
In addition to $9 million for transactions and separation costs special items. This quarter include a net benefit of $40 million SG&A benefited by $70 million from a real estate asset sale, while cost of service was negatively impacted by about 30 million from our real estate.
Rationalization efforts.
We continue to drive healthy adjusted EBITDA margins during the quarter growing 120 basis points year over year to 42, 5% as a reminder, our third quarter is impacted by seasonally higher utility costs.
Capital expenditures for the third quarter of 2021 were 690 million as discussed earlier.
We are focused on capital efficiencies penetrating existing on net buildings, while supporting our customers' digital transformation efforts with higher layer services.
In the third quarter 2021 the company generated free cash flow of 1.072 billion.
And we have increased our full year, 2020, one guidance for free cash flow.
As a result of our reduced outlook for both capital spending and net cash.
Interest expense.
During October 2021, we completed our previously announced $1 billion share repurchase program.
In total, we repurchased 81 million shares, reducing our annualized dividend obligation by $81 million and reducing our shares outstanding by approximately 7%.
We have also reduced our gross pension obligation by approximately $1 $4 billion by transporting that obligation to an insurance sponsor.
Without materially impacting our funded status.
In conjunction with transferring $2 5 billion of gross pension obligations as part of our ILEC transaction on a pro forma basis, we have reduced our gross pension obligations by approximately $3 9 billion.
At this point, we don't anticipate any required pension contributions over the next few years.
Moving on to the business outlook for 2021. In addition to the previously mentioned free cash flow and capital expenditure changes we are updating our net cash interest expense to now be in the range of 1.4 75 to 152 5 billion.
And our noncash compensation expense to be approximately $150 million.
For depreciation and amortization, we now expect a range of 3.9 to $4 1 billion as we have removed DNA expense related to the assets held for sale.
As Jeff mentioned, we will manage our debt profile to ensure that the recently announced transactions are relatively leveraged neutral and our long term net debt to adjusted EBITDA leverage target of 275 to 3.25 remains unchanged.
As you think about any coverage ratios it is important to remember.
That the announced transactions reduced our exposure to legacy revenues and significantly improved the quality and durability of earnings and cash flows going forward.
Moreover.
A significant portion of capital investments are expected to go towards long low fiber infrastructure with predictable returns.
In closing our company will look very different a year from now.
We have made significant progress this quarter in taking steps to optimize our asset portfolio with a clear focus on positioning lumen to capitalize on the growing and most profitable areas of our business. We are encouraged by our sequential revenue performance this quarter and expect business.
Trends to improve as the economy continues to reopen.
With a strong balance sheet.
We remain very excited about scaling our alumina enterprise platform.
As well as our significant and unique.
Quantum fiber opportunity.
Well that France, we are ready to open it up for your questions.
Thank you if you would like to register a question. Please press the one followed by the four on your telephone you were here at three tongue problem to acknowledge your request.
If your question has been answered and you would like to withdraw please press the one and three.
Our first question is from the line of Brett Feldman with Goldman Sachs. Please go ahead.
Hi, Thanks for taking the question and thanks for all that color you know we've been getting a lot of questions since the last call about this.
I plan to maintain and operate that business in a way that would seem leveraged neutral and I think the assumption a lot of investors had is that it inevitably would meet a very meaningful uplift in.
Investment and as a result might change the way you would approach the dividend if I listened to the comments you laid out for US today I think it may be the interpretation of the ball a little bit or improved.
I think that what youre, saying is youre comfortable keeping your balance sheet at its current level of leverage in order to fund your entire capital allocation program be that dividend potentially buybacks as well as the Capex program and it's not as if you know the balance sheet, specifically funding any one of those things, but the collection of those things combined is that the right way.
To understand what you've articulated it for us today.
Yes, Brad Thanks for the question I think that's right.
If you.
Listen to our comments our prepared comments, we noted that our 2022 plan is fully funded.
And while it's way too premature to talk about things beyond that there are a number of levers that we have we've been improving our capital efficiency you saw that in and this year as a result, we will continue to.
Looking at non strategic.
Assets that we can and we can divest if that makes sense and our capital spend is evolving we're not necessarily spending on certain capabilities, where the heavy lifting is already behind us. So a lot of our transformational capabilities and other things and so so there are a number of levers are but we believe that that the five key priorities.
I outlined earlier in that or in the investor presentation of the key things for our business and we think we have the funds to do them all.
If you wouldn't mind, if I can ask a follow up question.
The fiber deployment I think you've identified something like 12 million locations that you.
Attractive for passing with fiber.
I think theres going to be 21 million locations and the remaining properties. So there should be another $9 million or so they're not part of the immediate plan any views on how you intend to operate that portion of the footprint going forward or would that be on the list of things. He may also explore strategic options for them.
Yeah, we're open to a number of outcomes what I, what we won't do immediately is continue to operate them to provide a great customer experience to retain the business as much as we can and manage it for cash flow and the way that we've been managing some of that and so you are right. There is there is something like 21 million.
Homes in our in our overall footprint and we'll continue to to figure out how best to optimize those homes for free cash flow over time.
And Neel do you want to add to that you've taken them yeah. The only thing I'd add Brett.
Is the 12 million.
Right now based on all the work.
We've done but as the technology evolves, we're always looking at.
Different technologies.
You know that number could grow overtime as we continue to build out.
And the $15 million. This one last clarification was.
The homes that we thought were in urban and suburban areas.
The locations in urban and suburban areas. So we'll continue to manage the overall business for free cash flow like we've done and continue to manage it to provide a great customer experience of it so that we keep our customers happy and they stay with us.
Thank you.
Sure.
Our next question is from the line of Eric <unk> with Wells Fargo. Please go ahead.
Thanks for taking the question.
Just following up on the consumer consumer fiber investment opportunity.
Any parameters you can give us on how quickly you think you could get to 12 million homes five years seven years, and how much that will be impacted by the decision to keep the dividend in terms of your ability to lean more heavily into capex in the coming years.
So I haven't exactly how many years. This is that I can give you. Some some rough figures that I gave in the previous comments, which we do about 400000 homes today with our micro targeting approach, we've been working with to ramp our capabilities and expect to do something like a million homes.
Our next year in 2022.
And then by the end of the year being at a run rate of about a million and a half to 2 million homes per year and so so we will we'll work that out it's going to be more driven by them.
The mundane things associated with building our infrastructure than any other other constraint.
But we think that we've got a great team with experience with capabilities and we have very high confidence in our ability to hit those numbers.
And grow the business aggressively.
Great and just one more for me I think you mentioned correct me if I'm wrong that you expect that you could return to revenue growth in two to three years. So maybe you could provide us some color on your pathway to get there or is there an expectation obviously that you know consumer fiber is growing meaningfully I assume that's the case, but also that some of your legacy declines.
Improve or that you improve the revenue trajectory on the enterprise side as well.
Yeah. So first of all there is the improving mix as a result of these transactions that we've done and and we will look at additional asset rationalization of passport, which we would expect to improve that as well and we believe in our products and our capabilities. We've been working hard for the last couple of years to build out our.
Our capabilities across a broad platform.
Services, and we're focused as a company we're a fiber platform company. If you listen to the earnings calls of of our competitors, you'll hear about theme parks in television networks and wireless spectrum auctions, when you listen to lunar and you'll hear about two things fiber and how we use our.
Platforms to seamlessly integrate our capabilities within our customers' businesses or within our customers' homes. So it's fiber to enterprises, it's fiber to consumer with fiber to small and medium business and it's the platform in which we deliver those they create a unique and differentiated experience for our customers.
Great. Thank you.
Thank you Eric.
Our next question is from Phil Cusick with Jpmorgan. Please go ahead.
Yeah.
Hey, guys. Thanks, I Wonder if you can talk about the enterprise funnel.
Early in the year. The hope was that things would ramp up and help revenue in the back half where are we in any any one timers in revenue this quarter and just to push this a little bit.
Maintaining the dividend you ran through the buyback really quickly.
Accelerating investment over time that revenue this year it didn't come through the way you expected early in the year and it seems like you have a lot more confidence in the improvement in the business and as justified by by the results this year or.
Or investors, believing so just help us think about what youre seeing in the business that that's different than what's coming through in our results maybe thanks very much sure. Thanks Phil.
Yeah, Let me start with the enterprise sales, we're pleased with our sales momentum in the third quarter no nothing.
Nothing is ever linear and and it's a lumpy sometimes in our business and their seasonality or there other factors that go into it but if you look at our gamma international and Gam business and our large enterprise.
You can't learn really strong and so we were pleased with the momentum that we've seen the funnel has been building since about mid way through the first quarter. So you know we've.
We've seen the funnel return to our pre pandemic levels, we continue to augment our products and capabilities. We believe the fiber infrastructure. We have is a unique value proposition brings unique value proposition to our customers and so you know.
We're pleased with our competitive position and our ability to take share moving forward that again moving forward again, nothing is ever linear, but we have high confidence in and our revenue growth and its part of the reason you did see US go through the buyback so quickly.
Absolutely believe that our our business is undervalued and I've got data points that I can point to we've done that we've done the sum of the parts analysis for you before if you look at the sale of 'twenty kind of out of region.
Small ILEC states.
We we solve those places we were not investing so you would expect to be at a lower multiple than the places where we're investing.
We sold those for five and a half times.
Adjusted EBITDA and so we think that was a very good valuation for that business. If you look at Latam, we sold it for nine times.
And we think that's a good valuation.
That business. If you look at the the remain co within lumen and the context of that you can hopefully you can see why I think we are.
So undervalued then if you couple with that our confidence in our ability to grow our confidence in the investments that we're making in quantum fiber our confidence in the investments that we've made and edge computing edge storage managed services the platform to deliver all of our core networking services or security.
<unk> capabilities, if you look at those things combined together.
You can see why we decided it was good.
To be aggressive and the pace of buyback.
Yeah on your question Phil on onetime nothing specific to call out this quarter. If you look at our fiber infrastructure services revenue we have.
Growth sequentially.
All of that is professional services and equipment, but we see that every quarter. So nothing out of the ordinary in fact those types of non recurring revenues were actually down on a year over year basis, so and that tends to be lumpy. So nothing specific to call out.
Thanks, guys.
Sure.
Our next question is from that Yeah Levi with UBS. Please go ahead.
Great. Thank you maybe just a follow up on some question do you expect the sequential improvement that we're telling the revenue decline to continue into Q.
Q and into the beginning of next year and as you look at the sales funnel can you give us a little bit more in terms of the mix, so maybe new customers versus existing and any trends that you could point to in terms of pricing. Thank you.
Yeah, I'll, let I'll, let neel.
And then on this but I'll give you kind of a big picture.
What we don't we don't typically give revenue guidance, so I'm not going to get into detailed guidance there.
But but we have a funnel that's been increasing.
We like the sales that we saw in the third quarter.
Nothing is ever linear, but that's where we're executing and working hard.
And in the fourth quarter to to drive ourselves to drive our revenue growth.
There's another part of your question I was going to address but I can if I can take it yet so I think on the.
On your question on new and existing customers keep in mind that.
When it comes to the large.
Customer if we do some level of business with pretty much most companies.
So a lot of our business growth.
Revenue growth I mean within.
Large enterprise comes from existing customers, we usually.
Have a wedge product initially and then continue to grow the relationship on the mid market side, we do have a focus on new logos, but that environment has been for obvious reasons has been built.
I've been a little challenging.
In terms of your specific there's sequential improvement I'll, just underline what Jeff said, it's not going to be linear, but as Jeff highlighted we do see the leading indicators. In addition to the mix change from the transaction and the growth we see in the areas that we're investing we feel.
And then two to three years, we will see the top line inflection.
Oh and then you also had a question about your on pricing.
You know, we don't really the pipe pricing environment continues to be very healthy we don't see any issues from that perspective, and you can see that in our margin expansion.
Got it thank you.
Our next question is from David Barden with Bank of America. Please go ahead.
Hey, guys. Thanks for taking the questions.
Hi, Neil.
Neel and Jeff I guess, you've talked about kind of how the portfolio will pivot.
More towards enterprise, obviously and away from some of the what you might have described is more challenged kind of consumer business as we look at the consumer mass market business performance right now.
How would you characterize the relative performance of the piece you're going to keep.
And the and the and the piece you're getting rid of.
From from the pro forma look perspective.
I guess the second.
Question is.
Uh huh.
Coming end of of Caf two.
Yeah.
I think you guys said, even though you're cutting capex that you're expecting to spend more on core initiatives next year.
You know maintaining high leverage.
I just wanted to kind of.
Maybe talk about the elephant in the room, which is right. Now you know you are 5% declining revenue company with very high leverage cutting your capex and after three months.
Selling us after reconsidering the dividend now you're definitely going to keep paying it and maybe even spent some more in stock buybacks.
It's a story that it feels like we've seen it before and it hasn't ended well. So I think we just need to talk about it Jeff and maybe just.
Explain it thanks.
Sure.
Tee up and then then why the Hell try there's a lot packed in there legacy consumer versus.
Yeah.
The business that we're selling versus the business that we're keeping we don't really look at it and certainly don't give out information on it separately.
But the legacy business is performing like we've seen it perform and you know our team has done a really good job of.
Managing that business for cash and we have invested as a as we thought it was appropriate to continue to expand our homes passed if you look at the the retained 16 states at the end of the year, we'll have something like $2 6 million fiber enabled homes, you've seen us grow.
Our consumer and mass market business.
Yeah.
Right.
I don't know 45000.
<unk> subscribers over 100 Megabits per quarter, something like 28, 30000 of those on pure fiber and so we continue to to have the parts of the business, where we're investing and we continue to have the parts, but we're not investing we manage those for cash.
Part of the rationale behind the sale to.
Apollo was that they will invest more in those markets. We think there's great opportunity I know, we just weren't going to invest in them at the at the pace that we thought that they deserve and we think that Apollo will do that and gave us good valuation for it and so it's.
Next part that's part of our funding philosophy is how do we how do we find what we want to do part evidenced to sell assets, but part of it also has to shift some of that funding obligation to somebody else.
You can grow that and we don't spend the money that now we have gone through it I can go through it again.
But we have.
Lots of sources, we have significant free cash flow.
With that we generate and we have opportunities to continue to rationalize parts of the business that makes sense for us and parts of that don't make sense for us, but we think that we're in a very good position to do the things that.
You sound, a little dubious about them, but we think we're in a good position to do those things and we'll continue to focus on making sure that we maintain our dividend that we invest in growth first and foremost that we invest in the growth that that we think we can drive.
And we can maintain our dividend and we can stay relatively leverage neutral and I have not made any commitment to doing a share buyback additional share buybacks, but I do want you to know that our board is very prepared.
To authorize one if we thought that was appropriate.
So Neil I don't know if you want to add to that.
Yes.
I'd add David I think on the mass market.
We're scaling up our fiber investment.
So we see that as a significant opportunity I think the economics are fairly well understood.
So you're going to see us ramping that business and it's a long life asset with predictable returns.
On your comment on the $5 you should also look at our sequential performance.
We're talking about Covid last year, where we had a fair amount of COVID-19 related demand on voice performance.
So a better number to look at it sequentially. Yeah, we did decline what we declined 8%.
Yeah.
Large enterprise grew on a sequential basis.
Like I mentioned before it's not going to be linear, but we are encouraged by the revenue trends we see.
And the other thing to keep in mind is the capitalization of this business is rapidly changing and it's going to change rapidly going forward since the level three acquisition, we paid down about $7 billion.
We just announced $10 billion of transaction.
In a quarter, we have 7% less outstanding shares.
So yeah, we will continue to transform the business and try to support the capital priorities that Jeff laid out.
All right all good points. Thank you.
Our next question is from the line of Mike Rollins with Citi. Please go ahead.
Okay, Thanks, and good afternoon.
So I was just curious if you can unpack that.
Why the gross proceeds of $10 2 billion drops to about $7 billion on a net basis on slide five.
Second I was curious if you could just unpack if there were any costs or or dilution that you had to incur to transfer the pension liabilities to another entity and then just finally, while we're on the subject of kind of cash flow.
Curious if you can just talk about some of the moving pieces for 2022 that everyone should be mindful of where they were kind of the cash tax front.
The CAC to friends or any other significant moving pieces that could affect this recurring cash flow and a positive or negative way.
So why don't I try and unpack.
The 10, 2% to 7 billion in annuity might want to talk about cash flow for 2022.
So look in Big Pictures.
It's what I said in my prepared remarks, there are a lot of puts and takes but starting with the embark that we're transferring $1 $4 billion worth of embarked debt. That's a liability that we're eliminating on the alumina side and transferring over so so yeah.
That's actually one of the proceeds of the deal.
We're using that to.
To transfer that liability then there are things like pension and <unk> liabilities and there are a few hundred million dollars and then we have taxes and deal costs and so we can at some point.
Break some of those down but those are the big picture items and and you know.
It goes from 10.2 to seven yes, so I think if I could add yes, I think the big ones are like Jeff said in the purchase agreement has been filed so feel free to look through it.
So there is 1 billion four of embark that we've provided that adjustment. So that's another $100 million.
Pension and <unk> liabilities.
The liabilities, that's another $300 million so thats the bulk of it so like Jeff said just to underline that point, that's a liability transport and the rest of it is basically transaction costs and taxes that we incur on the transaction I'll keep in mind. These assets are very low tax basis, and if you think about we won't.
Are you using on a loss, but at the same time. We are also using Nols for our operating income so it depends on the timing of the deal and so it is an estimate of $7 billion is an estimate that keyword. There is that's discretionary cash flow that weekend.
Side on how we support our capital priorities whether to invest in the business pay down debt and we will do that as we go along so from a cash flow perspective.
That's something to keep in mind also keep in mind that we are generating strong free cash flow today. So if you just look at our.
Fourth quarter.
Guidance based on our updated guidance will generate strong free cash flow, even after factoring in the dividend.
So we feel pretty good about supporting all of the capital priorities that Jeff laid.
Laid out nothing specific to highlight in terms of 2022, I think we've already talked about caf.
Need to make sure you factored in the capital reduction there as well and then we'll have more to say when we provide next year's guidance.
In terms of the pension liability of transport I won't get into the specifics, but like Miss out on the 8-K it doesn't materially change.
Our funded status.
And so just to follow up and I appreciate all that color. So the 7 billion cash.
Not include the $1 4 billion debt reduction so that kind of enterprise value would be the seven plus the one four for eight four is that the way to think about it.
Well the transaction value is the turning point too.
Yeah.
Four would be on top of those seven.
So the southern is truly discretionary cash.
And the $1 four is a debt reduction.
But it's through a transfer of rather than just <unk>.
Discretionary cash flow you're right.
Thanks.
Sure.
Our next question is from Nick del Deo with Moffett Nathanson. Please go ahead.
Hi, Thanks for taking my questions.
First I appreciate the new disclosures on the on the fiber to the home front.
When you point to enablement costs being sub $1000 per location shall we think of that as being well below 1000 in the earlier years and increasing over time.
Or should it be relatively consistent over the course of the project.
And to confirm is the 12 million opportunity inclusive of the fiber locations you have today or is that incremental to them.
So the 12 is.
Total so the incremental would be roughly in the zip.
ZIP code so we have about two and a half.
And the retained states.
In terms of the thousand.
We are building at a significantly lower cost today.
So that's kind of think of it as what we think as an average but the reality is given.
The macro.
Conditions in terms of labor cost et cetera.
I'm trying to give you a number to it.
Yours out.
I don't think anybody has that level of visibility, but what we are confident.
Is the return profile of that business.
We also see a lot of opportunities in terms of continuing to increase our fluid not only just for the base service, but all the things that we're investing in terms of managed Wi Fi security and other capabilities. So we still irrespective of the actual cost we think we have.
Really big margin of error, if you will in terms of generating great returns.
Okay, and then can I ask one EBITDA really question too.
If I look at your implied EBITDA guidance range for Q4.
The EBITA you generate in Q3 is towards the low end of what you did in Q2 in the lower half.
I know you don't give specific quarterly guidance, but is there anything we should be cognizant above.
<unk> EBITDA from coming in toward the lower end of the range in Q4.
Well, we haven't changed our guidance all year so.
What I would say is we do provide annual guidance and our guidance has been the same from the beginning of the year in the range is the range.
Okay, Alright, well thank you Neil.
Okay.
Our next question is from the line of Frank Louthan with Raymond James. Please go ahead.
Great. Thank you so if you're not intending to cut the dividend even after the Apollo deal is there is there a certain point, where you guys can put a line in the sand and say, yes. At this point, we really think we can have positive sustainable topline growth is that is that of a year out two years three years, how should we think about that.
Well.
I said earlier that that you know with the.
Well, we are investing in through quantum fiber for our edge computing all of other capabilities of women platform. We.
We believe that we will and.
The divestiture of certain assets, we believe that we'll return to topline growth in two to three years.
Okay, great. Thank you.
Our next question is from the line of James Ratcliffe with Evercore ISI. Please go ahead.
Thanks, If you have a little more color on the Capex front I know, it's clearly going to ramp next year as you accelerate the quantum fiber build out.
In terms of the and you gave some commentary on the quarter of what our true the decline, but what sort of Rois are you getting on this lower capital level are they you know sort of higher or similar.
And absent the quantum fiber.
Ramp how should we be thinking about the capital intensity.
Essentially the you know the business side of it.
Business going forward. Thanks.
Yeah.
So on capital.
No.
First thing to keep in mind as well.
We are leveraging a fairly large investment right in terms of the infrastructure.
And so we're focusing a lot on net buildings.
Part of that is the current environment.
The economy continues to reopen in enterprise start investing in new locations, we will also ramp up adding.
Adding.
New locations.
In terms of Rois, we continue to see very good rois.
The investment that we.
On the enterprise side.
I think the consumer.
Most folks are familiar with the dynamics there.
That's our ROI is not an issue for us is really managing the legacy revenues for cash that mute.
So if you will from our perspective. In addition to that we continue to focus on capital efficiency initiatives. So we can do is focus on how we get more efficiency in terms of our processes, how we deploy capital.
Unit cost of capacity. So those those things continue to be areas of focus for us yeah, just to augment them.
Neil's answer.
Yeah.
Looking at us from the outside you probably discount that capital efficiency.
At us from the inside we do not discount that that's those are real numbers that we see benefit.
From and if you look at what we've been investing in.
On the enterprise.
Enterprise side, it's been pretty significant well first of all invested in making sure that our cost structure is appropriate that we can deliver a high level of service with a lower cost every year to deliver that and make sure that we're improving our service quality and we've done that we continue to invest in edge computing and edge storage. We think those are great opportunities.
For US we gave you.
At the beginning of the year, we said, we'd have 95% of the U S. Within five milliseconds of our edge facilities by the end of the year.
We finished that somewhere at the end of the second quarter beginning of the third quarter, we actually over exceeded in the coverage and.
And and the timeframe, we were much faster and then and the cost to deliver and so we we are very careful with our our investments we've augmented our adaptive networking our connected security, we're working on our unified communications and collaborations capabilities, we're continuing to augment.
Our platform and our services.
And we see we see success in the market.
With all that in addition to quantum fiber, which we intend to ramp.
I already talked about a couple of times.
Thanks for the question James.
Yeah.
And so we have time for just one more question.
Very good our last question then will be from the line of Jonathan Chaplin with New Street Research. Please go ahead.
Hey, guys. Thanks, Thanks, so much for squeezing me in so.
I just wanted to follow up on the consumer business over the if we think of 2019 as sort of the.
Our baseline year.
It looks like the pace of net adds in the fiber business and even in the non fiber business.
On the consumer side has slowed quite a lot.
And on the fiber business, that's despite increasing your addressable footprint.
And I'm wondering if you could just talk to the what youre seeing in the market.
In.
In broadband what might be sort of creating headwinds for growth there and the reason I ask is you know we're on record of saying if you can.
Put the $10 billion into deploying fiber.
It creates an incredible amount of value for you, but obviously, it's a six.
Six to seven year process, you were asking investors to look.
Many yes, it had before we'll we will see cash flow falling through from.
From this project in a material way.
So sort of gaining.
Confidence in your ability to drive penetration into those markets I think is really key to it.
To get in.
Getting an appropriate multiple for what you're building here and then.
And second question, if I may Jeff.
You sort of you have conviction that the stock is worth a lot more.
And where its trading at the moment and that was reflected in the share repurchase.
You guys didn't hit that quarter.
Why not final all the cash that you're paying in dividends into share repurchases. If it if it's got if it's that undervalued, you're obviously not getting credit for the dividend based on on the yield.
So why not just put it all into share repurchases. Thanks.
Yeah. So so let me take that.
The first question I'll, let Neil go through some of the some of the detailed answers and then I'll come back with the stock price conviction in.
And what we're doing there if you.
Embedded in your question about consumer is kind of a well.
Do you believe that the $10 billion is a good use of investment we agree with that.
With that that's going to go a little bit and why not do stock repurchases. Because we believe they are investments that are good for shareholders. But then you also kind of introduce the notion of there, but you got to prove it but it is good and that's exactly what we've been doing over the last couple of years, we know the building fibers not not.
The hardest thing in the world, we can build fiber, we can build fiber to a bunch of locations, but then how do you deliver the service to customers and so we've been working on our best in the business capabilities, our quantum fiber capabilities to turn up customers with low touch with a digital experience.
The way that they want to to have the experience to be able to layer other capabilities on top of that and then we wanted to prove to ourselves as we moved away from investing in bonding and Vectoring and things you have not heard us talk about for several years, because we stopped doing them as we put all of our focus on on fiber.
We wanted to prove that we can get to the penetration rates that we expect and we can and we have and we are.
He can give you some insights into thinking that should be 40 plus percent penetration in places, where we've been marketing for for periods of time and so we've done exactly what but some of your question implied which is prove that you can do this and prove that you have the capabilities and build those capabilities. So that we can do it quickly.
Not just wait six seven years to start seeing the return.
On the stock price conviction, we're absolutely convicted that that that the stock price is undervalued and it's part of our capital allocation process. But then we have other aspects of the capital allocation that we wanted to do to investing in growth investing in the quantum fiber business investing in our.
Fiber footprint for enterprises investing in our platform and our services that we layer on top of those things in and then maintaining the dividend maintaining our leverage a range and those are those are in some ways competing.
Capital.
Got that.
Several questions that we've already answered we think we're in a good position to deliver on all of those we will be in a position. If we if the board decides that it's appropriate for us to do an additional buyback we will act quickly and we'll do so.
It may not be the same pace.
The buyback that we did in the last one we were pretty aggressive about that but we will authorize one if the board thinks that's the appropriate thing to do.
Yeah.
Yeah, I think Jeff you covered most of it I think you know your quest.
Question on the fundamental thesis in terms of the market and the opportunity.
Yeah, the symmetrical nature of fiber and how it's resonating with customer.
<unk>.
All of that we see.
We're leaning in.
Our fiber net adds were a little softer this quarter than we would like and that is primarily driven by the fact that we're going through a major pivot internally.
Terms of how we go to market. So like Jeff mentioned, we wanted to prove this out first so we had our micro targeting strategy and we've proven it out we've seen.
Uh huh.
How it resonates with customers we've invested in our processes on the capabilities and now we're doing the pivot to go to a more market based approach and that takes a little bit of time to get the organization our size to scale up to a new ecosystem.
And so yeah, we feel very.
Confident that that opportunity is something.
She is creating a fair amount of value and we're not constraining it.
Jeff in terms of the priorities. There's a reason why number one is invest to drive growth.
It's something we will prioritize.
So thank you Jonathan for the question and as you heard in an hour answers jonathan's questions in and all of your questions. Today, we have a lot of optimism and excitement here at looming as we're growing markets investing for growth through quantum fiber, we continue to enhance our already powerful enterprise platform and.
<unk>, we continue to return cash to shareholders, we're bullish on our future and excited for the ongoing transformational work that lies ahead. So I want to thank all of you for joining today's call and as always the interest in women. Thank you all.
We would like to thank everyone for your participation and for using an lumen conferencing service. Today. This does conclude the conference call. We ask that you. Please disconnect your lines have a great day everyone.
Okay.
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