Q2 2022 Lumen Technologies Inc Earnings Call
Greetings and welcome to Lumens technologies second quarter 2022 earnings Conference call.
During the presentation, all participants will be in a listen only mode.
Afterwards, we will conduct a question and answer session at that time, if you would like to register for a question. Please press. The one followed by the four on your telephone if at any time during the conference you meet you reach an operator, Please press star zero.
As a reminder, this conference is being recorded Wednesday August 13 2022.
At this time my pleasure to turn the conference over to Mike Mccormack.
<unk> Vice President Investor Relations. Please go ahead Sir.
Thank you, France, good afternoon, everyone and thanks for joining us from Illumina technologies second quarter 2022 earnings call. Joining me on the call today are Jeff storey President and Chief Executive Officer, Chris Stansbury, Executive Vice President and Chief Financial Officer.
Before we begin I need to call your attention to our safe Harbor statement on slide two of our second quarter 2022 presentation, which notes that this conference call may include forward looking statements subject to certain risks and uncertainties.
All forward looking statements should be considered in conjunction with the cautionary statements on slide two and the risk factors in our SEC filings.
We'll 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 costs were special items as detailed in our earnings materials, all of which can be found on the investor Relations section of the website.
Before turning the call over to Jeff. Please be aware that we will not be able to discuss our active cash tender offers for certain of our outstanding debt Securities. These tender offers are expected to expire later this week with that I'll turn the call over to Jeff.
Thanks, Mike Good afternoon, everyone and thank you for joining us on today's call I'll provide some thoughts on our second quarter results as well as our plans for the second half of the year, Chris will discuss the second quarter in more detail and we will reserve time after Chris's remarks for your question.
I want to begin today's call by thanking our team for the hard work and closing of the Latam divestiture just don't Pete.
Cited for the team in theory, but we'll certainly miss her Latam friends and colleagues are ongoing partnership will allow us to continue working with this extremely talented team.
We're also looking forward to the upcoming closes an hour I like transaction with Apollo.
We're working hard towards early fourth quarter close.
Bind these transactions streamline our focus on the most strategic opportunities for lumen, which we believe will drive significant long term shareholder value.
Chris will provide more detail on our new business product group formation, and what that would mean on a go forward basis, but I can tell you that our teams are energized by a clear focus on managing product lifecycle.
Our reinvigorated approached product lifecycle management will help customers transition to go forward technologies and allow Luna to maximize the contributions and more mature offerings.
All helping to drive our number one priority profitable growth.
Now, we're calling them fiber build is ramping with second quarter enablement is more than doubling since the fourth quarter of last year and we expect further acceleration in the second half of 2022 and into 2023.
Permitting processes for quantum fiber builds havent improved as much as we would like and we see supply chain challenges across our business we.
We have not changed our target of a million or so enablement by year end.
Beyond accelerating fiber enablement. We're also excited to announce the launch of our multi gig quantum fiber offerings, which I'll discuss shortly.
Although not yet where we want to be we remain encouraged by our trends with our second quarter revenue performance, improving both sequentially and year over year we.
We saw strength in areas, where we are investing to grow such as security cloud IP products wavelengths and fiber broadband offset by anticipated declines in TVN voice endeavor.
As we look toward the second half of the year, we see the same macroeconomic pressures as everyone else.
We're actively managing through supply chain constraints, which did cause some installation delays and our strong relationships with our suppliers are proving invaluable in a challenging environment.
We are also not immune to the inflation impacting all industries and we did see increased pressure in the second quarter.
It said, we believe the critical nature of our service offerings and more durable as our customers grapple with what the current economic uncertainty means for their businesses.
Customers are certainly being more thoughtful and buying decisions, but we are not seeing any meaningful change in customer cancellations. Those of you who followed US know, we often see opportunities to win new business with new technologies during economic downturns.
Fundamentally we believe these risks are temporary in nature and do not impact our long term strategy or opportunity.
Inflation, driven cost increases, particularly labor costs put pressure on our full year EBITDA guidance. However, we are amplifying our cost management strategies to offset this impact and are maintaining our full year EBITDA guidance based on our current expectations for performance in the second half of the year.
We continue to execute on our transformation plan and remain focused on driving efficiencies in our business that will both improve our customer experience and helps sustain operating margins as legacy services decline.
Pace of these efforts has certainly been affected by the work required to prepare for the stone peak and Apollo transaction.
But as we complete these transactions, we believe we have meaningful opportunities to continue driving automation simplicity and efficiency into our delivery model.
As luminous seeking to drive automation simplicity and efficiency in our business. Our customers are also pursuing their own digital transformations I wanted to spend a little time today discussing lumens enterprise segment and the unique capabilities, we bring to support our customers in those efforts.
As we all know today's enterprise customers operate in a very dynamic data environment.
Thing is now a connected device and enterprises generate enormous amounts of data from a seemingly endless number of sources.
Innovate and to keep pace with their own market enterprises need next generation data intensive applications to quickly acquire analyze and act on that data all the while there's never growing threat landscape.
Whether it's augmented reality cloud based gaming artificial intelligence and machine learning. They use cases driving today's enterprises are predicated on the availability of highly secure large bandwidth connectivity and low latency to their data intensive applications.
These applications run in a hybrid compute and store environment.
Orchestrating centralized cloud remote data center edge cloud and on premises resources is increasingly important.
The fiber rich lumen platform delivers on these needs by offering a massively scalable and resilient architecture that together with the service solutions, we provide help customers as they continue to innovate and deploy the next generation applications today's market demand.
And the key point of latency and I've mentioned this before the lumen platform conserve 97% of U S enterprises within five milliseconds of latency in an increasingly all digital way with API and machine to machine interfaces we.
We believe this sub five millisecond proximity of our computing storage edge cloud provides enterprises alternatives to move workloads, where they can be optimized for efficiency and cost.
Let me give you a couple specific examples of how our capabilities are winning large retail enterprise and public sector contracts.
On the enterprise side, we are helping global supermarket change transition to store of the future models across thousands of U S locations.
We are leveraging our extensive network assets, along with our network design and consulting expertise to deliver these complex solutions, including private cloud Mpls SD Wan LTE backup fixed wireless and a host of security services with both onsite implementation and data management.
Of course. This is just an example within one of the many enterprise verticals we serve.
And public sector, we've announced several recent wins, including the U S. Postal service, the USDA and the U S customs and border Protection Agency. These solutions encompass a wide range of products such as edge computing Zero Trust networking unified communications hybrid VPN and SD Wan as well as man.
<unk> network services as these agencies modernize their infrastructure and their capability to deliver services to U S citizens.
Well at the same time, they secure and protect critical data and infrastructure against destructive individual state actors.
Our strategic wins together with broader market demand and the capabilities that the lumen platform.
<unk> confidence that we're well positioned in our enterprise segment.
These larger customer wins, coupled with the improving mid market sales provide both near term and long term revenue opportunities as we drive toward growth.
Moving to mass market. We are excited to update you on our progress with quantum fiber, which is the critical growth engine for this segment.
As I mentioned earlier in just two quarters, we have doubled our pace of new quantum enablement with further acceleration coming our net promoter score remains above 50, demonstrating the quality of our products and the easy to use nature of our all digital experience.
<unk> seen our exciting announcement this morning that the architecture. We've developed in the network. We are deploying enables multi gigabit services in select areas. We now offer a three gigabit per second $150 per months solution and an eight gigabit per second $300 per months solution.
The vast majority of our new builds will have this capability beyond the superior speed, our quantum fiber experience provide some metrics service, which is critical for the future applications and use cases, we believe these products are industry, leading and delivering incredible value to our customers and in fact, we've already begun taking.
Waters well.
Well, it's early in the adoption phase of this type of capacity, we know where bandwidth demand is growing and we've developed our architecture well ahead of the curve and are prepared for ever increasing demand for higher speeds and greater capacity.
He is multi gig offers will enable future consumer and small business use cases, such as D. R.
Our gaming work and learn from home Ultra high definition video streaming and other high bandwidth services.
The investments we are making quantum fiber are building long life assets with the capacity to meet current demand and the ability to meet future demand for fast symmetrical capacity.
Coupled with the all digital experienced an excellent customer experience, we provide we expect quantum fiber to deliver significant returns for our shareholders well into the future.
We believe we have a very large and ripe opportunity to grow our mass markets broadband business through our quantum of investment and with very low market share currently in our copper footprint, we have the ability to grow our embedded base of broadband customers by taking market share, we expect to accelerate taking share as we ramp our innate.
We'll move and deploy best in class add on capabilities, such as network security Wi Fi and the multi gig offerings, we announced today.
We believe profitable revenue growth as a principal long term driver of shareholder returns and we continue putting the right assets to work to drive towards that goal, our new business reporting categories provide clearer line of sight into our efforts to drive revenue growth enhanced profitability and generate sustainable.
Free cash flow.
As we invest the capital required to execute on our growth plans. We are also returning cash to shareholders through our dividend.
Remaining committed to a healthy balance sheet.
With that I'll turn the call over to Chris to discuss our second quarter results in more detail.
Chris.
Thank you, Jeff and good afternoon, everyone.
And it's been about four months since I joined Illumina team and I am more excited than ever for the opportunities that lie ahead.
Been working with our leadership team here at lumen to rethink the way, we manage our business and products you will find a change in the way we plan to report our revenues of our women business segment in today's materials. After closing the ILEC transaction, which is expected early in the fourth quarter, we will provide a pro forma historical revenue view of these products.
Routes.
I want to emphasize that these new categories are not simply a re cut of our external reporting but a significant internal change that addresses how we manage the products that reside within each category. This will drive enhanced efficiency and discipline as we drive towards our key strategic initiatives of attaining profitable topline growth.
<unk>.
As Jeff discussed we face some macro headwinds and we are actively working to address these challenges through cost reduction and other initiatives. We will keep a watchful eye on these issues that are and will likely continue to impact nearly every industry in the near term.
With that I will begin with a financial summary of our second quarter.
We are very pleased to have closed the Latam divestiture to stone peak on August 1st for approximately $2 $7 billion and we are on track for an early fourth quarter close of the ILEC divestiture. Our revenue performance has improved across all enterprise channels with overall business revenue growing sequentially.
We continue to see fiber broadband revenue growth, which is helping to improve our mass markets revenue trajectory and supporting our expectation for mass market broadband revenue and subscriber growth in the second half of next year.
We reported adjusted EBITDA of $1.811 billion in the second quarter and generated a 39, 3% margin.
Recall that year over year comparisons will continue to be impacted throughout 2022 by the Caf two program that ended in 2021 and note that we did not recognize any caf II related reserve release this quarter.
We will update you in future quarters. If there are any significant additional caf II related reserve releases.
With respect to the art off program, we recognized approximately $6 million in the second quarter of 2022.
Our reported revenue was down six 3% year over year on an adjusted basis revenue declined three 4% in the second quarter, an improvement from the 5.5% adjusted year over year decline in the first quarter of this year.
Our free cash flow was $668 million for the second quarter we.
We returned $254 million to our shareholders during the quarter through our quarterly dividend. Additionally, we reduced net debt by nearly $900 million year to date and exited the quarter with leverage at three seven times.
In the second quarter total reported revenue declined six 3% on a year over year basis to $4 $612 billion year over year metrics were materially impacted by the end of the Caf II program at year end 2021.
When adjusted for Caf, two foreign currency and the sale of our Correctional facilities business the year over year rate of decline was three 4% versus a decline of five 5% last quarter sequentially revenue was stable in <unk> 22 on a normalized basis.
Within our two key segments business revenue declined 3% year over year to $3.416 billion, when excluding foreign currency headwinds and the sale of our correctional facilities business revenue declined two 3% year over year and was up 6% versus the first quarter of 2022.
Mass markets revenue declined 14, 7% year over year to 1.1 dollars $96 billion adjusting for the Caf II impact mentioned earlier mass markets revenue was down six 6% year over year.
Wholesale revenue grew 6% year over year wholesale revenue benefits from professional services provided in connection with pending divestiture transactions and separately from carrier re rates remember this is a channel that we expect to decline over time and one we manage for cash.
Within our enterprise channels, which is our business segment, excluding wholesale reported revenue declined four 2% year over year when adjusting for the impacts of foreign currency and the sale of the Correctional facilities business revenue was down 3.3% year over year, an improvement from the five 1% decline.
In the first quarter on the same basis, our exposure to legacy voice and other revenue continues to improve and we expect the closing of the 20th state ILEC divestiture to provide further benefits for our enterprise revenue mix.
Hi, Gam revenue declined 1.5% year over year on a constant currency basis I Gam revenue was flat year over year, we had strength in our managed security cloud services IP and dark fiber services, we've discussed large complex transactions, taking longer to turn up and I'm happy to report.
That I guess benefited this quarter from additional revenue related to a large contract we signed last summer.
Large enterprise revenue declined six 5% year over year, the sale of the Correctional facilities business as reflected in this channel normalizing for the sale large enterprise declined five 4% an improvement from the six 9% decline in the first quarter.
We had growth in managed security and IP services overall large enterprise growth was negatively impacted by our it solutions business, which tends to experience quarterly fluctuations.
Mid market enterprise declined five 3% year over year, we had growth in cloud solutions, and IP services offset by lower voice and equipment revenue.
Moving on to our new business reporting we are providing a view of our new revenue reporting structure today, and we'll formalize our new reporting starting in 2023, which will provide a pro forma post transaction view.
We will continue to update you through the remainder of this year on a total company basis.
We are grouping our business revenue reporting into four distinct product categories grow nurture harvest in other or grow category features products, such as IP wavelengths security cloud SD Wan Sassy unified communications and voice over IP, our nurture category includes products like VPN.
<unk> and Ethernet.
Our harvest products include legacy services, such as voice private line and Unis.
The other products our equipment in it solutions, which tend to fluctuate quarter to quarter and our low margin contributors.
As you can see our grow group is the largest group followed by nurture with harvest being the smallest group when looking at historical trajectories be aware of a few key things Covid had a significant impact on our growth over the last couple of years, but we see that is largely behind us now.
Within the nurture group, we see meaningful opportunities to migrate customers to new product sets residing in the grow group, which will continue to dampen the nurture growth rate.
These are relevant products that we continue to sell in real time within our harvest group, we will continue to manage the declines as well as take price to retain profitability. This could provide a buffer for some of the decline, but many of the products. In this group did not have a migration path back up the group stack.
I also think it's important to reiterate that these product groups are not simply a change in product groups for external consumption, but rather a holistic change in the way we manage products internally.
This will fully align what we present externally to how we manage internally with a significant focus on where we spend our opex and capex to provide the best possible returns for our stakeholders.
While we have provided five quarters of historic revenue for these product sets you should consider this day one of how we are managing our new product groupings, increasing efficiency to drive revenue growth as our primary goal and we look forward to providing you with our progression as we continue our transformation journey.
Moving on to mass markets as I mentioned earlier on an adjusted basis mass markets revenue declined six 6% year over year and 1.6% sequentially remember that we recognized a onetime noncash revenue benefit in the first quarter related to a caf two reserve release of $59 million in there.
Second quarter of 2021, we recognized $122 million of Caf II revenue.
Our mass markets fiber broadband revenue within our remain co footprint grew by 16% year over year in the second quarter represented more than 16% of our total mass market revenue with.
With the anticipated close of our ILEC sale, our exposure to legacy voice and other services will improve and reduce our annualized voice and other revenue by over $600 million based on our second quarter 2022 results.
During the quarter, we added 28000 quantum fiber customers roughly in line with last quarter as we continue our pivot to a market based approach and adjust our go to market strategy.
This brings our total quantum fiber subscribers to 858000 with 788000 of the subscribers within the 16 retained states during.
During the quarter total enablement, we're approximately 205000 with approximately 185000 of those enabled locations and our 16 retained states, bringing the total enabled locations in the retained stake to $2 9 million as of June 30th with approximately 270.
Additional locations enabled in the Selco footprint.
Our pooling they retain states was approximately $59 and we see our pool expansion opportunities with the adoption of in home Wi Fi solutions up speeding and with today's announcement of the multi gig speed offerings that Jeff shared.
As of June 30th our penetration of legacy copper broadband subscribers and our retained 16 states was less than 13% highlighting the significant share taking opportunity as we accelerate the quantum fiber build.
Within the same footprint, our quantum fiber penetration stood at approximately 28%, but we expect that to fall in the near term as we ramp enablement, our twenty-twenty quantum fiber vintage penetration increased 500 basis points to approximately 27% at the 18 month, Mark a solid improvement.
The 12 month, Mark and continuing to ramp supporting our expectations for the longer term penetration opportunity.
Our quantum fiber NPS score within remain co is greater than positive 50, an indication of the quality value and superior service that quantum fiber delivers quantum fiber is an all digital prepaid product that features simple pricing with no contracts, helping reduce call center volumes and bolstering our M P.
Scores and mass markets and across the overall business, we are continuing to see trends towards pre pandemic levels in our allowance for credit losses, which is reassuring and not having any notable impact to our business.
The prepaid nature of our quantum fiber product helps reduce our bad debt risk.
Turning to adjusted EBITDA for the second quarter of 2022, adjusted EBITDA was 1.811 billion compared to 2.1 O $9 billion in the year ago quarter recall that our adjusted EBITDA in the second quarter of last year benefited by $122 million from the Caf II program.
Special items this quarter totaled $47 million and were related primarily to transaction and separation activities for the Latam and 20 state ILEC divestitures.
When comparing margins to the year ago period.
Consider the $122 million benefit of Caf II support in the prior year period, when adjusting for this impact our second quarter 2022 margin of 39, 3% when compared to 41.4% in the year ago period, we are seeing some cost pressures from inflation and our addition to our opex.
Investments to drive growth. In addition, our wholesale related network expense has increased more than our additional revenue associated with carrier re rates.
Capital expenditures for the second quarter of 2022 were $761 million, we continue to focus on capital efficiencies, but expect ramping quantum fiber build cost to drive higher spending in the second half.
In the second quarter of 2022, the company generated free cash flow of $668 million.
Moving onto our outlook our guidance metrics remain unchanged from the update we provided last quarter. The closing of the Latam divestiture on August 1st was one month later than our guidance assumed that timing difference had a minimal impact on our full year outlook.
We continue to expect a closing of a 20 state ILEC divestiture early in the fourth quarter.
Recall that in terms of special items for 2022, we expect a ramp up in costs compared to prior years, primarily driven by dedicated third party costs to support transition services for the divestitures.
The cost for these services are removed from adjusted EBITDA. The reimbursement for these services will be in other income with no material net impact to our cash flows and reflected in our schedule of non-GAAP items impacting net income.
In closing we are pleased with our improved revenue results as well as our progress on the quantum fiber acceleration as I mentioned, we are not immune to the macroeconomic environment and are managing through those headwinds our team remains focused on executing on our growth initiatives to drive long term profitable revenue growth.
As a reminder, in addition to free cash flow generated from the business. We expect a total of about $7 billion and discretionary cash proceeds, including the recent Latam divestiture as well as the pending closure of the 20 state ILEC divestiture with that we are ready 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 won't hear about three Tom prompt to acknowledge your request. If your question has been answered and you would like to withdraw. Please press the one followed by the three.
Our first question is from Simon Flannery with Morgan Stanley . Please go ahead.
Great. Thank you very much.
Thank you for the new disclosure on the.
So.
The nurture and grow et cetera, or are we going to get profitability metrics can you give any sense of how the margin is distributed and then on capital allocation you had a few months now to look at this can you just give us an update on timing when you'll give us more thoughts on where do you stand today on.
The thoughts about leverage, particularly given the inflationary pressures dividends buybacks as we go into 'twenty three and beyond on the Capex ramps. Thanks.
Sure.
In terms of the product categories.
We will continue to look at at how much we disclose around that I want to be careful obviously, we don't want to.
Disclose.
Competitive information I can tell you that broadly speaking if you look at the margin profile of the different buckets, while they differ.
Not drastic so at a gross margin level.
All of those buckets.
Do have strong margins, obviously on the Opex side will invest more and grow because we're.
Really trying to get those products moving along and we're going to invest a lot less.
And harvest as we're managing for cash so.
Well, we'll think about it I think for now this is a good start but.
We'll see what we can do around more color going forward.
As it relates to capital allocation.
Say look the discussion on the buckets, and obviously getting more aggressive on things like harvest and managing for cash those are all inputs.
Closing the.
The divestitures are inputs the macro environments and input. So we continue to evaluate that I think it's the right question to ask I would say at this point.
No change and we will continue to monitor that as we go forward.
We feel good about that.
Work that we're doing to finalize.
The divestitures and focus on growth.
We'll keep you updated as we go forward.
Great I'm, just I guess, one just to follow up on that macro 0.1 of the other telcos was mentioning yesterday some notion of the delayed decision, making by enterprise longer quote to contract signing are you seeing much of that yet.
We don't see.
It's early to say okay.
Ryan answered the question Simon that it's early to say, we don't see necessarily a slower decision, making to the technology choice to picking up we might see a little bit of slower signing there may be more people and the process flow per site.
Correct.
But we don't we aren't seeing necessarily yet.
Slower decision, making on picking the technology picky on a winning team.
But it could be it could be a little bit.
More thoughtful per mile are our customers and how they sign and when they sign.
Great. Thank you.
Our next question is from Brett Feldman with Goldman Sachs. Please go ahead.
Yes, thanks, and actually I'll follow up on that Jeff could you maybe elaborate on.
What continues to be a priority for your customers I mean, it would be very easy to say that theyre, just going to put things on the backburner. It would sound like from your answer is that there are elements of their network transformation that they fully intend to pursue Andrew maybe just being extra careful with how they select vendors and so if you can give us some centers too.
What those big projects are and why you remain confident.
That theyre going to move ahead with it that would be helpful. And then just a follow up question you'd made at the.
The point earlier in the call that while you're seeing some inflationary cost pressures you are identifying ways to cut other expenses and youre keeping your outlook for the year. The reason I ask about that as you imply youre going to do a little less in terms of cost transformation. This year. Because you were more focused on investing in areas that would support the company's growth as you move through there.
These transactions and I'm just wondering are there any areas, where you've had to make a trade off in terms of managing costs. This year relative to what you had hoped.
Order to make sure Youre still coming into your financial commitment. Thank you.
Sure sure so.
So back to.
What are we seeing from customers.
That one first.
We see customers. Unlike Curt when Covid hit people just said, we don't know what's going on we got to stop.
Unlike that what we see today is people are looking customers are looking at their networks and recognizing that they have to continue to transform and they have to transform in the products and services.
We built the lumen platform to deliver so fiber based services through API, where they can they can use.
Hedge computing to augment their cloud computing and storage to augment their on premises storage.
They are moving towards those solutions embedding security into them, whether they can as you've heard me say before.
It'd be very nimble and adaptive and.
And and innovative in the way that they acquire analyze and act on their data and so we see that continuing as customers continue to upgrade and in fact in some.
Historically, we've seen that during economic downturns customers will accelerate some of that so that they can gain.
Gain efficiencies within their own business and so that's kind of what we're seeing today with respect to expense reductions in the end.
Right.
The question is did we give up anything as a result of the acquisition.
The divestitures that we have we did delay some of our ongoing transformation because the same people that were preparing for the divestitures.
The people that drove our growing transformation, we talked about that early in the year those are coming to a close.
And so we're continuing to look at the transformation of that Chris.
So the fact that we're actually doing more than that it's not just.
Sure.
Going back to the past that we had we continue to look at everything and we make sure that we figure out how best to deal with.
With the environment that we've got I'll give you kind of an ancillary example.
We have CW a district seven that.
It represents.
About 5000 of our employees, it's the largest union represented groups that we have and.
Our contract with them expires I believe its April of next year.
Right around that time, we started months ago, working with them and are trying to give predictability into our cost trying to get predictability into our workforce and how we can align jobs and that sort of thing.
And last night.
The Union Union members voted to ratify the agreement that we had made to so we have much better visibility into our cost structure for the coming three years beyond three years beyond April of next year and so those are the types of things we do on a very regular basis.
To make sure that we're looking at our cost structure that we're looking at that.
But how do we invest in growth, but at the same time from that group.
Okay. Thank you.
Sure.
Our next question is from Phil Cusick with J P. Morgan. Please go ahead.
Yeah.
Hi, guys.
I Wonder if you can talk about any sort of one times, we should be considering either in the in the SG&A or the cost of service side costs.
Costs were a little bit higher than we expected.
Then it looks like from this quarter's EBITDA youre trending at the low end of guidance, you've talked about the costs that need to.
Get done to get there.
Anything else that really needs to get done to get you to that low end of guidance or.
Or alternatively.
Things that could come through in and really take you well above that thank you.
Yes.
Yeah.
Hey, Phil it's Chris.
Look at the quarter and just some of the cost pressures that we faced.
I'd say that the bulk of it really relates to what other companies are seeing in terms of inflationary pressures.
On things like energy.
And labor and obviously just as a reminder.
Our Q3 is seasonally always one of our toughest for energy consumption. So I think near term those those pressures obviously continue we did have some.
Some one time.
Activity that hurt us a bit as it relates to a little bit on on re rates and then we do have some of our transition costs I mentioned that that hit above the line and then we recapture below the line and that was in there too, but I'd say the bulk of it relates to inflation. So we've we've gone in and I wouldn't see.
Say that theres any kind of major shift in how we're managing the business. This is I would say business as usual in terms of how we respond to macro events like this so we are working as a team to take cost out look for things that arent going to have near term impacts.
On our ability to grow in and those are the things we're going after in terms of being able to do better than that.
I think thats really where again the new product portfolio focus can help us I think the harvest teams are looking at a lot of different things.
That probably don't have an immediate benefit but you know.
In the relatively near future could have a benefit but they are just getting started so I'm optimistic about that but more to come as we go forward. So right now we feel good with the guidance because of our ability to respond.
To the external environment.
With cost cuts.
Okay. Thank you guys.
Our next question is from Eric Let's call with Wells Fargo. Please go ahead.
Oh, great. Thanks for taking the question.
I wanted to touch on the supply chain, Jeff you brought that up earlier in the call. It sounds like there were some pressure points. There maybe you could provide some more color, whether that's related to equipment or materials or labor availability and does it change at all kind of the plans to accelerate the rate of quantum fiber up to a million and a half.
New fiber passing us by the end of this year.
And then secondly, I just wanted to touch on.
The some of the inflation pressures again.
Just wondering to what degree do you think like you have the ability to maybe raise pricing on some of your products.
You are selling to maybe offset some of that just wondering in the enterprise outlook, how the pricing equation looks versus.
The volume equation on growth. Thanks.
Sure I'll take the first half of that question and let Chris talk about the second half on supply chain, Eric you asked there.
Is it equipment labor or materials the answer is yes.
All three of them, we deal with each of them differently.
But.
You know the inflationary pressures that you see that the rest of the market sees it the same ones that we see and they come in those three main areas. We've got we've got great.
The question I am sorry, the supply chain pressures.
We've got great relationships with our large vendors, so whether thats material vendors or equipment that is you've got great relationship ships with whom we're working through their challenges.
With them and we feel pretty good about that.
And we think it is improving slightly.
But.
But it's too early to call, whether that's a blip or a trend.
We will continue to stay very focused on that working closely with our our large suppliers and their large vendors.
And we will continue to work on labor costs for example.
<unk> CWA, but one of the things that we've also done with.
Our employees as we brought we plan to bring all of the quantum fiber splicing in house.
Wanted to do that with Super qualified technicians very capable people that that's very important to get done right. So we'll continue to look at how can we how can we do some of these things ourselves as opposed to going out and.
In the outside market with respect does it slow decline in fiber Bill I have not changed my expectations that I've given our team.
Okay, I I still want to get too close to a million homes. This this year. It certainly does affect us we've talked about permitting I've mentioned it in the comments there labor shortages and permitting departments causes problems for us labor challenges in our <unk>.
Electric companies cause problems with us for pole attachments and so there are other other peoples peoples labor challenges that do cause us to slow, but I have not changed my target.
Given our team internally at this point.
And Eric to the second question on the pricing environment look I think the pricing environment is favorable right now and certainly we will adjust where we can and be at market rates were going to.
Make sure that we're maximizing.
The value to our shareholders by pricing where the market is.
That's certainly part of our plan as we move through the current environment.
Great. Thank you both.
Our next question perhaps.
Next question is from David Barden with Bank of America. Please go ahead.
Hey, guys. Thanks, so much for taking the question.
First I guess, Chris I think last quarter.
In preparation for retooling, how the reporting for.
For the business segment happened there was a conversation about <unk>.
And the idea that that one of the <unk>.
Missing links between the market and your guys' internal view of the business is that we don't have a buildup to get to these revenue categories.
So I know.
I'm, just asking earlier about the profitability, but I'm asking if there is an ability.
<unk> and retention and the ability to to share something like that with the market I guess the second.
Question would just be on broadband.
Kind of two factors in there one the transition from the <unk> program to the ECP program little less money out there a little less government stimulus, helping the broadband segment.
And then fixed growth axes, looking like theyre going to come in with 100% market share in broadband this quarter could you comment on the impact of those two things are having on your kind of run rate business and your outlook for fiber.
And before you answer David would you repeat the second part of that I didn't catch it.
Sorry, the second question was the impact on the broadband business from the twin forces of fixed wireless access and the reduced.
Reduced government stimulus in the system. Okay part I missed was fixed wired actually I just didn't understand that thanks.
Yeah, So David I'll certainly.
I will certainly spend more time looking at this I do want to walk before we run I think the biggest gap at least that I saw between how lumen was reporting in the way we were talking about the business was really giving you insight into how we're going to grow. So I think this was the first big step.
And we will certainly continue with that as we go forward I do and I.
I base. This off of my previous experience I do want to be careful about.
<unk>.
Telling too much to our competition about where and how we make money I think that's.
And a lot of ways that can provide more harm to lumens shareholders benefit. So we'll certainly consider that as we go forward, we'll certainly try to give more color, but I do I don't want to over promise on that at this early date.
And you do have my commitment we will continue to certainly talk about.
The revenue pieces and try to give more color around that as we go forward on on how we're going to grow.
With respect to stimulus and what does that effect on the broadband the transitioning from one stimulus program to another when investment program.
As to the program.
It's too early to say these programs are just being established we will see what they look like and how they come out we do think there are.
Opportunities for women in quantum fiber to two.
Engage with those government programs to make sure that we're bringing.
Our capabilities to the largest footprint that we can but our strategic focus is also a part of that if you look at our fiber build.
We are focusing in on areas, where we have network advantage, where we have scale advantage and where we are.
Where we can invest in dense.
Ways to make sure that we have.
The low cost advantage on building out networks, and so our strategic focus and honing in on the places that make most sense for quantum fiber.
As part of as part of that whole equation.
With respect to fixed wireless access I don't know, if you were meaning an enterprise or if youre, meaning and.
Mass market and mass market.
I'd love to.
Compete with fixed wireless access is it going to have an application of course is the fiber when we announced this morning that we're going to build that we have the capability on the platform that we're putting in the ground today.
The platform delivers a gigabit.
Solutions.
Three gigabit solutions. We can go we can go to where our customers need us to go.
And I think fixed wireless access runs out of scale much quicker than that.
And you've heard me all heard me say this many times communications data once to get the glass as quickly as it can.
So we strongly believe in our ability to build quantum fiber in a way that competes with fixed wireless access if you look at the enterprise side.
I have some of the same comment that I see it more as an opportunity for us as we do campus area networking for our customers. We take the traffic again, we've carried it out to our edge storage, we may use fixed wireless access to help them with their campus area networking and so.
That's kind of my comment on on that.
Great. Thank you if I could ask one quick follow up.
On wholesale AT&T guided down their enterprise segment for the rest of the year based on higher re rates cost you mentioned that even though wholesale was the benefit on the revenue line that the costs were actually higher than the revenue benefit.
Who's on the other side of these transactions, that's making all the money.
Well I.
Hum.
I'll try and answer that.
I mean, I can only really speak for Luna.
But I'll try and be as complete and my answer is possible.
You look at women.
We have.
Our vendors are off net providers have been raising our rates to market rates.
As they can.
<unk> and we've been.
They are dealing with it shielding it from our business by being very aggressive in our off net to on net transition.
Why pay anybody anything if you can do it yourself and so since certainly since the level three transaction, but really long before we have been very focused on making sure that we move off net to on net and manage our cost that way. We also get the manage the customer experience, we give them a much better customer experience when we can.
Control it end to end and so we'll continue to do that we've seen that but we've seen rate hikes.
Over many years as either contracts expire or specific thing will expire we see R V.
Vendors.
Moving to market right now we intend to do the same thing we do the same thing and in our business and we'll continue to do that we raised.
Our customers' rates to market rates, if they're below and some particular deal expires in I'm not addressing any particular, one of our vendors or any particular, one of our customers, but we do the same behavior who's making money at it.
I can't answer that part of it.
The impact is on us.
I would just add and I'll be quick just a just a nuance here that.
Wholesale as well as other.
In our new classifications.
Were impacted by an it solutions contract it was about $25 million.
So that's why you see.
The variances that you are seeing in both of those two two buckets.
Oh got it okay, well, thank you, Chris and Jeff.
Sure. Thanks, David next question Chris.
Our next question is from Nick del Deo with Moffett Nathan Cheng. Please go ahead.
Hey, Thanks for taking my questions first.
First Chris just on that last $25 million you mentioned.
So that's a one timer, it's not going to persist as the transition continues and that's that's why we as we mentioned in the prepared remarks that you know it solutions and equipment, we're pulling into that other bucket because.
They are spiky.
It's also a lower margin business. So we we pull those out and that was.
It was in the wholesale bucket.
Okay. Okay, and then earlier in the call you also talked about how there are certain costs that you're incurring for the transition that you didn't build to customers.
I guess, that's $30 million net income reconciliation that you have in your supplement.
Is it fair to say that there was roughly $30 million in opex that youre bearing in about $30 million that you are taking back and we should think about that as we contemplate your margins yeah, that's right and what it is is that where we were rehab non 100% dedicated resources theyre doing their day jobs for lumen.
But there also if you will part time or part of their time on supporting a transaction service agreements.
All of the Opex hits, our Opex line.
We'll adjust that out and adjusted EBITDA, but then we recover it in other income.
Okay. Okay.
Finally.
In the past you've given some rough numbers for the contribution from the Latam assets the Apollo assets.
I think you've been hesitant to give those with any specificity, but given given you just closed the latam deal getting that a tiny been working to close the Apollo deal any chance you could share kind of more detailed.
Figures for revenue EBITDA capex whenever it might be to help us as we model the business after the divestitures close yeah. So after we close.
The ILEC sale, we will give restated numbers and that I think will give you the visibility you need, but we're going to wait until we close both.
Okay. So the restatement will have or the recast numbers will have both the impact of Latam and the like.
That's correct Yep, Okay. Okay, great. Thank you Chris.
Thanks, Nick next question please.
Our next question is from batch at Levy with UBS. Please go ahead.
Great. Thank you.
You signed a lot of deals within the public sector lately and some of your peers are talking about pressure in that segment can you provide more color. If we should think about these deals as incremental to our base.
What type of trends Youre, seeing and maybe a rough estimate of what percent of your enterprise large enterprise comes from the public sector that would be helpful and.
Just another question on the competitive environment in broadband are you seeing any response from cable right now head of your quantum launch in terms of pricing or marketing anything that you would call out. Thank you.
So let me take as many of those as I can back to you and then I'll, let Chris chime in if I Miss any of them.
With respect to government look.
We don't give out the percentage of any of those types of things for Chris.
Chris mentioned a minute ago, we don't want to.
Educate competitors and that sort of thing. So let me talk again about lumen and and what what I see from our public sector. I think we have a great public sector team that does a great job of selling excellent products that fit.
Our customer needs and if you look at the.
The deals that I that I mentioned.
USDA.
Yeah.
Border and protection Agency USPS.
Just looking at those deals those are all new to us, but we took share from somebody because those are not new deals themselves. So.
So if you look at our business, we're a share taker in the government and its because of the quality of the products the lumen platform and the excellent team that we have supporting the government and the track record that we have supporting them.
So I feel very good about our government business I think it's.
Represented in our large enterprise customers too.
The same way for them that yes, sometimes others look to large enterprises declining and we certainly have challenge with it as well but.
But we take share from people.
More than.
Yeah.
Brand new thing that never existed before.
So I feel good about the government business with respect to cable.
Please do something.
Two to kind of.
Lead.
And preempt some overbuild in overcapacity capability in and we saw a little bit increase in DSL declines, but not not anything substantial once we get our quantum fiber product in front of them.
I think that the.
We will more than hold our own.
You have multi gigabit symmetrical capacity with layered on capabilities.
I think we will.
Andy anything they do in the meantime.
It won't really matter.
Okay. Thank you.
I think the yogurt alright. Thanks. Thank you next question please.
Our next question is from James Ratcliffe with Evercore ISI. Please go ahead.
Hey, Thanks for taking the question and we look forward to aluminum you know post the.
The Apollo divestitures and the like how should we be thinking about with the EBITDA margin profile of this business looks like.
You can't some of this declining areas are pretty high margin revenue, but she also has her presumably the.
On the wholesale side can you just take your ongoing saving money there to continue to build out the fiber network right now you're running margins started up we can't play above at&t's business, our consumer broadband segments.
How do we think about remain co where that looks like going forward. Thanks, Yeah again, I don't want to get too far ahead of ourselves here I think we will give you as I as I just mentioned a few minutes ago.
A good remain co.
Footprint P&L and how those financials play out once we're closed with the divestitures what I would say is that as we go forward, though with our our growth opportunities in both segments.
We feel good about where our margin profile.
And our abilities to grow topline as well as EBITDA. So I think I'd leave it there Jeff did you want to add anything yeah. James the other thing is.
We believe that we are transforming our business and a big part of that.
Our reductions in our cost structure and improvement in our customer experience and we think that we have opportunities ahead of us.
And we will continue to focus on those things our business is evolving.
And we are very good at.
Evolving with it and modifying the way that we deliver our services. We've got the lumen marketplace. We got to the lumen platform. We've got all sorts of capabilities that we're putting in place to make sure that we can deliver an outstanding customer experience with the lowest cost.
Great. Thank you.
Thanks, James I forget time for just one more.
Our last question will be from Bora Lee with RBC capital markets. Please go ahead.
Thanks for taking my questions.
So fiber infrastructure services revenues posted a sequential growth in each of your sales channels.
To call out there in terms of products or services that drove that and if you think that trend is sustainable.
And then regarding the change to the business reporting structure can you talk about how you envision this.
Change might impact your sales force.
Organizational structures sales force incentives as well as your go to market strategy sure.
Sure. So let me let me take the first one is.
Slightly.
There's nothing special to call out that comes to mind.
And fiber infrastructure services.
But we're a fiber based company.
And that is the core of who we are and what we do so I don't have any kind of special one time, it's always it's always lumpy.
Those.
A lot of our business is lumpy.
The fiber infrastructure tends to be.
Lumpier than most.
But it's who we are and we're really really good at and so.
I don't have any special thing to call out and on the on the second question look.
Look I mean broadly speaking it does not not true for every product, but broadly speaking if you look at the <unk>.
Harvest category those are products that really aren't being sold anymore certainly not at any in any major quantity. So so that really becomes a focus on how do we maximize the long term value of existing customers and that can be through cost management as well as pricing.
And the cost management, frankly, Kevin can cross multiple technologies and frankly beyond that bucket. So so it's a complex.
Thing to go after but we've got the right people to tackle that as it relates to incentives I mean again I'd say that the whole organization is focused on growth.
We'll constantly look at how we incent ourselves and our teams to make sure we maximize that and that's certainly something that we do every year as we as we plan for the next year, but.
The real benefit of the buckets is a sharper focus on for lack of a better term who gets what the way we deploy capital the way we deploy opex.
And our internal resources will be delineated around those buckets, right and I think that clarity.
And focus is a benefit to the organization and I think we'll see that.
And future results as we go forward.
Alright, thank you.
Sure. Thank you looking closing there has been a very active year for us in addition to seeing that grow through cross multiple.
Multiple strategic enterprise product offerings, when we close the Latam divestiture.
Ease of closing our ILEC divestiture, we've ramped quantum on fiber.
While launching new product capabilities.
We see significant opportunity ahead for both our business and mass market segments as we focus lumen on the most strategic and best return opportunities. So I look forward to updating you on our progress as we execute our plan.
Thank you for your participation in today's call with that we'll end the call. Thank you again.
We would like to thank everyone for your participation and for using the lumen conferencing 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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Okay.
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