Q3 2022 Lumen Technologies Inc Earnings Call
Okay.
Greetings and welcome to Lumen technologies third 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 do have a question. Please press the one followed by the four if at any time during the coffee.
You need to reach an operator, please press star Zero as a reminder, this conference is being recorded Wednesday November 2nd 2022.
It is now my pleasure to turn the conference over to Mike Mccormack Senior Vice President Investor Relations. Please go ahead.
Thank you, France, and good afternoon, everybody and thank you for joining us for the lumen technologies third 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 third quarter 2020.
Two 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 cost of special items as detailed in our earnings materials, all of which can be found on the investor Relations section of the limit website with that I'll turn the call over to Jeff.
Thanks, Mike Good afternoon, everyone and thank you for joining US as you know this is my last call as CEO I wanted to begin today's call by welcoming Kate Johnson as our new CEO Kate starts Monday I.
I think she is an exceptional leader with strong skills commitment to customers and the direct pragmatic nature within lumen. We are all excited to have her join the company and have high expectations of the great things she will accomplish.
These are obviously very dynamic times in the broader market and our industry and for our company and while we have not accomplished all that I would have liked we have accomplished quite a lot and I pass the baton to Kate and confidence with the foundation. We have built a dedicated team we have in place and the refreshed energy of new leadership.
Puts alumina in a great position to deliver on its objectives of driving growth and creating long term shareholder value.
At the outset of this call I want to say a word about the illumina team all of whom have been on a challenging yet exciting journey. During the five years. Since women was formed following the acquisition of level three and my final days as CEO I wanted to tell you and our employees how extraordinarily proud I am of our team.
I've seen them rise to every challenge with confidence pride and commitment to each other and our customers.
First example is certainly their response to COVID-19 they attack the challenges with tenacity and determination throughout the pandemic, we had 10000 or so employees that continued to work for them work safely doing their jobs and 10000 more than we ever met with just a few days' notice together and within the first few weeks.
They turned up the many emergency augment our customers needed for their own remote Workforces. We all know we stayed in that environment is much longer than we'd hoped that the illuminate employees performed throughout.
As I think of all that they have accomplished over the last five years. It really is remarkable.
I appreciate the excellent work they did integrating two large businesses and digitally transforming our company between the two efforts, we enhanced our customer experience and realize close to $1 7 billion in synergies and transformation savings.
This summer we completed the $2 7 billion dollar Latam transaction in October they completed the $7 $5 billion I like transaction, focusing our mass market business on high growth and more densely clustered markets.
And we announced today, we've entered into an exclusive arrangement for the proposed sale of our EMEA business to cope for $1 $8 billion.
As the most recent example of our team's focus on our customers and their talent for delivering I want to acknowledge their work in the aftermath of hurricane in 98% of our high speed Internet customers were back online and connected within three weeks, our thoughts in effort to remain with our employees and customers.
<unk>, who were affected by this event.
That's all great work.
I'd like to talk more specifically about our digital transformation and the foundation, we've laid for our business going forward. The digital transformation is not a destination, but it's a journey I'm very pleased with the significant strides we've made in driving simplicity and automation into our business. We are now easier to do business.
With have greater efficiency and are evolving the way our customers interact with and experience our capabilities.
Our customer experience is better than ever and continues to improve as demonstrated by our very high N T S and customer E scores for both quantum fiber and the upper end of our enterprise customer base, although not yet where we want to be our results with our mid market customers clearly show, we're making progress there as well.
As I say to our team all the time, we have much more to do and I'm incredibly proud of their accomplishments so far top line growth as our principal focus, but we cannot overstate the importance of these transformation efforts and delivering the experience our customers want and driving the efficiencies we need to grow the profitability.
<unk> of our business Chris.
Chris will discuss the details of the third quarter, but before he does that I wanted to spend some time offering my perspective on the two big announcements, we made today modifications to our capital allocation policies and today's announcements regarding our EMEA business.
Third time after Chris's remarks for your questions.
First the capital allocation discussion earlier today, we announced that we are eliminating our dividend and instituting an up to $1 $5 billion two year share buyback program I wanted to be clear that Kate the board and I are aligned on this action.
This is obviously a big decision that we are carefully considered but one we believe is the right long term decision for our business.
The benefits of reallocating capital from the dividend are significant for our growth plans, our balance sheet and our ability to use our free cash to unlock longer term value through share repurchases.
First and foremost our new policy should remove any questions. You may have about the capacity to invest in the growth of our business growth has always been and will continue to be our key imperative and this decision makes our ability to fund that growth clearer than ever.
You frequently asked questions about the dividend and we've generally said the same thing in response to your questions turning value to shareholders is a key priority for lumen and we believe the dividend is an appropriate value delivery mechanism, but we've also said that our board regularly reviews, whether that approach remains aligned to the current.
Stances.
When we announced the $7 5 billion dollar I like transaction last year, we specifically said that the board would assess our capital allocation policy in the wake of that transaction.
That transaction completed on October 3rd and today's announcement reflects the output of that assessment, we believe that the current market value of our shares dictates that the long term value creation is better realized through share repurchases rather than the payment of a dividend.
As I said, we have authorized an up to 1.5 billion dollar two year program and believe it is more attractive to retire shares at today's prices and to pay dividends at todays yields.
We have long supported the dividend is a good vehicle for value delivery that at today's stock price that is no longer the case, we expect to opportunistically repurchase shares over the life of the program.
Although our debt maturities over the next several years are very manageable the elimination of our dividend also provides the company greater flexibility in what promises to be an increasingly unpredictable credit market.
Over the last five years, we have significantly improved our balance sheet, eliminating more than $16 billion in debt and reducing annual cash interest expense by more than $1 billion.
And extended most maturities to 2026 and beyond that said, we do not favor using long term leverage as a principal source for growth capital.
Again this is a big decision on which we've spent a great deal of time and live in current circumstances, we believe shores up the foundations of our growth provides increased financial flexibility and is solidly in the best long term interest of our company and its shareholders.
Let me cover some of the details I mean me announcement, we announced today that we have entered into an exclusive arrangement for the proposed sale of our EMEA business to coat for $1 8 billion. This represents a very attractive multiple of approximately 11 times for Lumens EMEA business and would create additional value for our.
Shareholders included in the sale of substantially all of Lumens EMEA based network assets and associated commercial contracts.
Lumen and coal are also entering into a long term strategic partnership that will allow us to access each other's networks to serve enterprise customers requiring local connectivity in our respective markets.
As we did with Syrian and bright scheme, creating an exceptional partner is very important to us I'm excited about this transaction and believe coal will be the excellent partner, we need to serve our customers moving forward.
As was the case in the Latam in the ILEC transactions EMEA announcement allows women to receive attractive valuations for the assets and operations focus our investments in our key growth market and establish excellent partners and the areas, where we've divested these businesses.
We expect this proposed sale to close as early as late 2023 pending customary regulatory approvals.
A quick word on bright speed transaction, which closed earlier this quarter I would like to take a minute to acknowledge the tremendous work. Both teams did supporting the bright steam conversion it would be difficult to overstate the heavy lift our folks in the Brightcove team took on in transitioning these 20 states to bright speeds operating environment.
It's a great example of our ability to do difficult and complex things.
Want to wish bright speed the best as they begin their journey to deliver high speed fiber services in these markets, which will benefit greatly from their investment and strong management team.
Before I turn it over to Chris for some details on the quarter I wanted to take a minute to share my view of how luminous positioned as we transition to Kate's leadership.
Coming together of Centurylink and level three marked a seminal moment in our company's history, creating one of the world's largest most advanced and critical networks and lumen. We have built a platform that allows us to meet the networking communications needs of the most sophisticated enterprise customers, we have enhanced the power of our.
Core network service offerings with a range of cloud security and collaboration solutions and more recently have invested to upgrade and transform our central offices into many data centers further enabling what everyone now knows as the lumen edge cloud.
We have a powerful and robust fiber network complemented with an increasingly deep set of adjacent capabilities like orchestration interacting with our customers businesses via machine to machine applications, rather than phone calls or emails.
The divestiture of the Latam business, today's EMEA announcement, and the divestiture of our legacy Colo business, we've been consistently optimizing our assets to focus on the opportunities in which we have the ability to invest grow and be a market leader, we expect to continue to optimize focus.
And align our asset base with our growth opportunities.
These value accretive transactions together with the capital allocation changes, you're making today provides the company has significant flexibility to invest in new growth opportunities maintain a strong balance sheet and to execute on our share repurchase program.
We are at a turning point in human history with data and AI will transform society and business I believe lumen is well positioned for success in a world of such rapidly evolving technology.
Some of the world's strongest asset operation and human capital all delivered as a platform for the needs of the modern business and four how today's consumers live and work with connectivity.
I am proud of having led the illumina team during the integration and transformation of our company I'm, obviously, not but I feel like one of the founders of the company.
The team has approached the past five years, we've been building, a new company not merely making incremental improvements to be old.
I'm very excited to welcome Kate and believe she is the right person to take them into the next level and continue our path toward topline and Bottomline growth.
Now as a shareholder like all of you I look forward to <unk> continued success.
With that I'll turn the call over to Chris to discuss our third quarter results in more detail.
Yes.
Thank you, Jeff and good afternoon, everyone I want to start by recognizing Jeff for the significant contributions he has made to women and its predecessor companies.
As Jeff mentioned central level three merger in 2017, we've reduced debt by approximately $16 billion.
Sold our Latam business for about nine times EBITDA.
Of our ILEC business for approximately five five times EBITDA.
And announced today that we have entered into an exclusive arrangement for the proposed sale of our EMEA business to call the $1 8 billion.
This represents a very attractive multiple of approximately 11 times EBITDA and most importantly, Jeff has positioned our company well as we drive to profitable revenue growth.
Jeff I know I speak for the entire alumina family when I say thank you.
This year marks one of great progress in transforming our business.
During 2022, we completed both the Lat am and are much larger ILEC divestiture.
As our teams onto the foundation created an experience. He has learned over the years under Jeff's leadership, we're excited to have Kate join the team and just a few days.
She brings tremendous leadership skills and deep technology experiences to help drive lumen on the next step of our journey.
As you think about portfolio optimization. It is an ongoing process that the board evaluates regularly our goal is to maximize shareholder value highlighted by the EMEA announcement today, and we will continue to evaluate future portfolio related opportunities as you know Kate joined Us on Monday, and she will develop her thoughts related.
Any need within our portfolio of products and assets as well as any products or assets that she may deemed non strategic.
Moving onto reporting we're sharing a few new items this quarter, including a view of direct margin buyer, new business product reporting as well as pro forma historical financials, excluding the impacts from our divested Latam business and Caf II to help you align your models the size and scope.
The recently closed ILEC divestiture dictates that we will provide a more wholesome view of our pro forma financials. When we report our fourth quarter results.
Let me move on to discuss some macro thoughts as well as some 2020 to close the deal related model impacts.
We continue to face macro headwinds and we are actively working to address these challenges through cost reduction and other initiatives supply chains are strained with labor as the key headwind and we're all facing the impacts of inflation.
That said, we expect to end the year towards the low end of our adjusted EBITDA guidance range.
Recall that we slowed some of our transformation efforts as we stood up Syrian and bright speed, but with those transactions now closed we will reenergize our efforts in digital transformation.
We estimate that our full year 2022, EBITDA will be impacted by approximately $100 million.
Related to inflationary pressures.
Before discussing third quarter results I would like to provide a more calibrated jump off point as we near the close of 2022.
If you combine the divested Latam business, the ILEC 20 state business and the Caf II benefits, we received in 2022, which won't recur in 2023, the total EBITDA impact would be approximately $1 4 billion.
We will update you in future quarters. If there are any additional caf II related reserve releases and we will provide more detailed 2023 guidance when we report our fourth quarter results.
With that I will move to the financial summary of our third quarter. We are very pleased to have closed both the Latam divestiture in the third quarter and ILEC divestiture on October 3rd these.
These divestitures improve our revenue mix, our strategic focus and we received approximately $7 billion of net discretionary cash proceeds as you know we've been active in the market tendering for debt and expect a reduction in our overall debt as we close the year.
Also recall that we conveyed approximately $1 5 billion of debt to bright speed upon closing the ILEC transaction and that is in addition to the net cash proceeds I just mentioned.
Also be aware that these transactions caused a taxable event and we expect to pay approximately $900 million to $1 billion of tax during the first half of 2023 related to these transactions. This tax impact will be included in the overall cash tax guidance for 2023, which we expect.
To share with you when we report our fourth quarter results.
As we review our third quarter results I want to highlight that in our trending schedule as I mentioned, we have provided our pro forma results, excluding the financial impacts of the Latam divestiture as well as the historic benefits of Caf II support using that as a basis and in constant currency and adjusting for the sale of our correction.
The facilities business in the fourth quarter of 2021 overall business revenue declined approximately four 3% year over year and 2% sequentially.
Mass markets when adjusting for Caf II declined six 6% year over year, and one 9% sequentially.
We reported adjusted EBITDA of $1 $6 8 billion in the third quarter and generated a 38, 5% margin recall that year over year comparisons will continue to be impacted through first quarter of 2023 by the Caf II program that ended in 2021 and the subsequent 59.
Caf II reserve release in the first quarter of this year.
On a reported basis revenue was down 10, 2% year over year when adjusting for the items I mentioned earlier revenue declined 5%.
Our free cash flow was $620 million for the third quarter our.
Our dividend paid during the quarter totaled $255 million as Jeff discussed our board has decided to eliminate our dividend. So there will not be a dividend paid during the fourth quarter. Additionally.
Additionally, we have reduced pro forma net debt by approximately $11 billion year to date and gross debt by about $16 billion over the past five years, reducing our annual cash interest expense by approximately $1 billion.
Moving onto a more detailed look at revenue I will discuss our results on a pro forma basis, our third quarter total reported revenue declined five 5% on a year over year basis to 432 8 billion.
As I mentioned earlier in constant currency and adjusting for the sale of our correctional facilities business year over year revenue declined 5%.
Within our two key segments business revenue declined five 1% year over year to $3 155 billion.
On an adjusted basis business revenue declined four 3% year over year.
Mass markets revenue declined six 6% year over year to $1 173 billion.
Wholesale revenue grew 1% year over year. This is a channel that will likely decline over time and we manage for cash.
Within our enterprise channels, which is our business segment, excluding wholesale revenue declined seven 4% year over year.
On an adjusted basis enterprise channels revenue declined six 3% year over year.
Our exposure to legacy voice and other revenue continues to improve and we expect the closing of the 20 state ILEC divestiture last month to further improve our enterprise revenue mix going forward.
Hi, Gam revenue declined six 2% year over year.
<unk> was a $17 million headwind year over year and constant currency revenue was down four 2%.
<unk> revenue was negatively impacted year over year by one time revenue in the prior year related to a major broadcast event.
Large enterprise revenue declined 10, 4% year over year on an adjusted basis large enterprise declined nine 4%.
Remember that large enterprise includes our public sector business and results in this channel were impacted by a contract ending at the beginning of the third quarter.
Excluding public sector large enterprise revenue trends improved both year over year and sequentially and was the strongest performer within our enterprise channels with the year over year rate of decline improving 100 basis points since first quarter of 2022.
Within public sector, we've had significant wins over the last few quarters, including yesterday's announced contract with the U S Department of defense.
As a reminder, once these contracts are one the revenue is long lasting but ramped slowly as we convert existing services to the alumina network.
As you model, our fourth quarter for large enterprise be aware that it will be the final quarter impacted by year over year comparability related to our divested correctional facilities business and for reference the revenue benefit we received in the fourth quarter of 2021 was $3 million.
Mid market enterprise declined four 6% year over year, a significant 360 basis points improvement since first quarter of 2022 as we've discussed we believe our product set serves this segment well and we expect growth over the long term, we are seeing benefits in this channel, especially on customer retention and our recently.
Launched lumen marketplace provides an opportunity for further improvement.
As I move to our new business product lifecycle reporting I will reference percentage changes on a pro forma adjusted basis to normalize for the impact of Latam Foreign exchange and the sale of our correctional facilities business to provide a better view of our underlying performance.
Grow products revenue grew one 6% year over year in the third quarter, we saw strength in IP and cloud services.
<unk> now represents approximately 34% of our business segments and we carried in approximately 84% direct margin this quarter.
Nurture products revenue declined eight 4% year over year in the third quarter. The decline was driven by VPN and Ethernet.
<unk> now represents about 31% of our business segment and carried an approximate 70% direct margin this quarter.
Harvest products revenue declined six 4% year over year in the third quarter price increases had a positive impact on our decline rate. Our recently formed harvest team is working hard to manage to a lower rate of decline within this product set which is helping to not only extend the life of these products, but also to manage customers back.
Grow and nurture products Rick.
Call that harvest is an important part of our business and generates cash to fuel our growth initiatives harvests now represents approximately 29% of our business segment and carried an approximate 81% direct margin this quarter.
Other products revenue declined four 7% year over year in the third quarter, our other product revenue tends to experience fluctuations due to the nonrecurring nature of these products.
As you look at this product lifecycle reporting keep in mind that trends will fluctuate as we continue to manage products through their life cycles, and our harvest team digs in with opportunities to drive strong cash flow to invest in our growth products.
Moving on to mass markets as I mentioned earlier total mass markets revenue declined six 6% year over year, and one 9% sequentially.
Our mass markets fiber broadband revenue within our 16 state remain co footprint grew by approximately 18% year over year in the third quarter represented approximately 18% of mass market revenue.
So note with the close of our ILEC sale, our exposure to legacy voice and other services revenue has improved by nearly 400 basis points year over year.
During the quarter total enablement, we're approximately 210000 with approximately 195000 of those enabled locations and our 16 routine states, bringing the total enabled locations in the retained states to $3 million as of September 30.
Approximately 290000 total locations enabled in the <unk> footprint.
Enabling locations is hard work and the permitting process as well as third party labor supply has been a significant headwind for us. This year, while we are not satisfied with her enablement pacing year to date. It is important to note that we stood up a new factory internally as we pivoted from micro targeting to a market based approach. This includes an end.
And process from planning to engineering to construction and finally enablement, we have learned a lot through this process and those lessons will serve us well as we continue to work on to build.
During the quarter, we added 31000 quantum fibre customers on a reported basis an improvement from last quarter as we continue our pivot to a market based approach and adjust our go to market strategy there.
This brings our total quantum fiber subscribers to 889000 with 813000 of the subscribers within the 16 retained states.
Our <unk> and the retained states was approximately $60 and we see <unk> expansion opportunities with the adoption of in home Wi Fi solutions of speeding enterprise grade security solutions, and our recently launched multi gig offerings delivering up to eight gig symmetric services with the plant capable of further cost.
Effective speed enhancements going forward.
As of September 30, our penetration of legacy copper broadband subscribers in our retained 16 states was 12% highlighting the significant share taking opportunity as we accelerate the quantum fiber build.
Within the same footprint, our quantum fiber penetration stood at approximately 27%, but as we expand our footprint, we expect penetration to fall as we expand our addressable market at a higher rate than new customers are added.
This is just the math of an expanding business our quantum fiber 2020 vintage penetration was approximately 27% at the 18 month, Mark and we will provide an update next quarter with our 24 month penetration rate we.
We believe this penetration ramps strongly supports our expectations for longer term penetration gains.
Our quantum fiber NPS score within remain co was greater than positive 50, again this quarter, an indication of the quality value and superior service that quantum fiber delivers quanta.
Quantum fiber is an all digital multi gig capable prepaid product that features simple pricing with no contracts.
<unk> reduced call center volumes and supporting our very strong NPS scores, we continue to monitor how the economic environment is impacting our customers and we have not observed any discernible changes in customer payment patterns.
Turning to adjusted EBITDA for the third quarter of 2020 to pro forma adjusted EBITDA was $1 $65 9 billion.
Impaired to one $8 $72 billion in the year ago quarter as I mentioned earlier, we are seeing cost pressures from inflation. In addition to our opex investments to drive growth we.
We see more opportunity for transformation cost savings now that we've closed both the Latam and ILEC divestitures, and we return resources to our transformation initiatives.
Special items this quarter totaled a benefit of $527 million and were related primarily to a $593 million gain on the sale of our Latin America business.
On a pro forma basis, our third quarter 2022 margin of 38, 3% when compared to 49% in the year ago period.
Capital expenditures for the third quarter of 2022 were $845 million.
In the third quarter of 2022, the company generated free cash flow of $620 million.
Moving on to our 2022 financial outlook, we are updating our guidance for several metrics. We now expect capital expenditures in the range of 3 billion to $3 2 billion.
For the full year 2022.
As a result, we are raising our free cash flow outlook to $2 2 billion to $2 4 billion for the full year 2022.
We are also adjusting our expectation for stock based compensation expenses and now expect approximately $100 million for.
For the full year 2022.
As mentioned previously the board has decided to eliminate our dividend and is simultaneously authorized an up to $1 5 billion.
Two year share repurchase plan.
In closing our team is managing through macro headwinds well.
We will Miss Jeff's leadership, but look forward to Kate joining us on Monday as we continue our transformative journey. Our team remains focused on executing on our growth initiatives to drive long term profitable revenue growth with that we're ready for your questions.
Thank you if you would like to register for a question. Please press the one followed by the four on your telephone.
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And our first question will be from the line of Philip Cusick with Jpmorgan. Please go ahead.
Hi, guys. Thanks, very much and Jeff it's been a long time across a couple of companies I want to thank you for all your help extend them.
Right.
Yes, I thought.
Hi.
If we could.
Just talk a little bit about capex and the fiber build and whats holding this back a little bit.
And there's been other companies that are talking about building out of region and targeting new a little bit in Arizona, what's your potential to accelerate from here and do you feel any need to.
And then second just sort.
Sort of a follow up Chris does it makes sense to give.
Those of us who aren't very good at math.
A pretty specific range on what your EBITDA guidance implies for the fourth quarter just to make sure everybody's on the same page thanks very much.
Thanks, Phil I'll take the first one and then Chris can add this meeting takes a second question.
If you look at if you look at our hybrid enablement. So we're not doing as fast as we wanted to so let me lead with that we're not doing it as fast as we want to be declining new enablement. There are a lot of things that go into that.
Supply chain constraints.
Labor shortages inflationary pressures in those types of things.
And we will continue to work through those so I'm not I am not terribly worried about it but we'll work through as far as people coming in.
Some small part of the market in <unk> and.
Selecting just that market to go bill that's going to happen that's going to happen.
We've done it in other people's market ourselves and so.
We see that as just another competitor in those markets, where we need to do is make sure that we build a great product a great experience has the multi gig capabilities that we've talked about have the all digital interaction that we want and then we go at a pace.
The aggressive and appropriate for the market.
Yes, Phil.
And on the fourth quarter.
For the year, we've held our guidance on EBITDA.
We are near the lower end at this point just given some of the inflationary pressures.
Working through that.
That pretty much gives you the fourth quarter given the year to date results.
Thanks, guys. Thanks, guys. Thank you thanks for your comments.
Our next question is from Simon Flannery with Morgan Stanley . Please go ahead.
Hi, guys.
Filling in for Simon Thanks for taking the question.
First can you kind of talk about how youre, how youre thinking about the pacing.
On the buyback program and anything that would change that cadence.
And then on enterprise buying trends, we've heard some softening of demand people kind of rationalizing on things like AWS can you talk about what youre seeing on.
Customer buying trends on that enterprise front. Thank you.
Sure.
Let me, let me take the <unk>.
The buyback question first and then I'll come back to the to the other one.
Look.
We won't get into the specifics of timing, but we will be opportunistic and make sure that we take good advantage of it.
I'll tell you that the board is engaged in this process and we have a structured.
And thought through approach to how the how to go about it and we will follow that structured approach that but.
So it will be opportunistic and not get too specific about our timing on things.
And then with respect to buying patterns.
We said in the second quarter call that we were seeing slowing decision, making I don't think the environment has changed.
Very much since then we don't see an increase in our win loss ratio.
Or a decrease I should say in our win loss. So it's not that we're losing deals to somebody else. We just don't see people.
Making those decisions as quickly as possible and we don't see a particular increase in our cancels. So it's not like the deals are going away and so that's.
That's kind of the same environment that we saw in the second quarter, but it is a choppy environment for our enterprise customers and we do see them slowing the approval process. The SaaS go through to get new business to us.
Great. Thank you.
Sure.
Our next question is from backend Levy with UBS. Please go ahead.
Great. Thank you yeah. So look I wish you all the vast in your next chapter.
I do want to go back to the new capital allocation strategy I think there was a debate out there. If you were to completely eliminate the dividend or just low rates can you just go over the decision making process maybe.
So to provide.
Provide your view on the complete elimination is that a function of more challenging times ahead.
Or is it something different.
Maybe just a follow up on the fiber and Capex side can you just go over what your expectation would be on the remaining 22.
<unk> Mellon homes what percent could get.
Fiber overbuild.
Yes.
Yeah I'll take the first question and Chris can add to Chris you can take the second question about what percentage of our 22 million homes passed.
That's right.
And that will have a fiber overbuild.
Gotcha. Thank you first of all and yes.
Look we our board goes through a very thoughtful process I've told you before that we regularly review our capital allocation strategy in the context of the current environment in the context of current circumstances.
And and we obviously considered should we eliminate the dividend or or keeps.
Keeps some sort of small dividend in place and the answer was to eliminate it we believe right now if these trends at these stock prices, it's better to return value to shareholders through a share repurchase program and it is through some small token dividend.
So that was the process that we went through we also said and I mentioned this in the prepared remarks, but we also said when we announced the <unk>.
Apollo transaction for our 'twenty ILEC 'twenty stayed ILEC business than when we closed that business, we would reevaluate and look at our dividend policy and look at our capital allocation policy and make decisions based on the environment and the conditions at that time and so it's not a sign.
If there is any any greater weakness or inability to to fund. Our business is just we don't think thats the best way to return value to shareholders and as part of our assessment coming out of the Apollo transaction and we just believe that it's better to buy back shares.
But you're on your second question.
No I don't think this changes the goal. This is obviously a multiyear project we're doing everything we can as Jeff mentioned earlier too.
To go as fast as we can obviously, there's some near term headwinds, but at this point I don't think that changes our goal in terms of where we want to go or what we think we can do it's really about all.
All hands on deck right now to see what we can do given permitting.
And labor issues to get as many enablement in the ground as we can as fast as we can.
Got it thank you.
Our next question is from David Barden with Bank of America. Please go ahead.
Hey, guys. Thanks.
Appreciate it and.
And Jeff it's been a long time so.
For for being a partner in this whole process.
And I'm looking forward to.
Medicaid and for joining and I'm sure she's listening.
A couple of questions first would be on the.
One 8 billion Europe sale structure.
Construction has a put option a little strange.
Why that structure. It felt like maybe it was because we wanted to have all this stuff announced at the same time and we just needed to get something on paper.
And also could you share what the taxes on that transaction or you will look like.
And then second.
Just to follow up on that question regarding the stock buyback.
With the big tax Bill coming in the first part of next year.
Are we to imagine that.
There's going to be a constant conversation about well what does the debt market look like and where is our stock price and do we want to lever up while we're paying taxes to buy back stock like how is that going to look that conversation.
And.
I guess, we could my last one.
Is.
And I apologize for asking this question, but.
Yes.
The fiber revenues.
In mass market or three 7% of total revenue.
And yet there's this massive interest in spending.
Billions of dollars over many years and fighting the supply chain to get that whole thing rolled out.
Why.
Was that decision taken rather than.
Let's just run that business for cash, let's take that cash invested in the other 96% of our company.
Make that better.
And.
Recognize that maybe we.
We shouldnt be in the copper fiber upgrade business at the margin how did that conversation go alright. Thanks.
First of all let me take care.
The put options it seems strange when was it some sort of.
Just to get these things announced at the same time and Macy's, China seems strange for purchases in the U S.
Sales of businesses in the U S. It's not strange for sales of businesses in other countries and it's part of the week.
Have a process that we have to go through to get regulatory approval.
The option.
Structure is part of that makes it easier for for the company to.
Make sure that we're complying with the rules and regulations in the jurisdictions in which we operate so there's nothing strange about it for the details I would refer you to the 8-K.
This is if you look at other <unk>.
Mrs that have done similar transaction is a fairly common structure.
Certain markets in Europe .
Chris why don't you take the middle tier and then I'll come back to fiber, yes. So so the tax question.
<unk>.
Think I heard you correctly.
The combined tax impact we've said as.
Between 900 and all that.
Million in $1 billion that would be due next April .
And that includes the taxes for both of the divested businesses. So far as it relates to how we'll manage the buybacks versus leverage I mean look I really view those things as dynamic that we have to look at in relation to each other given the point in time right. So we have to look at what our cash performance looks like.
In any given quarter, you got to look at where the debt markets and our leverage or we've got to look at the buying opportunity in the equity markets. Obviously in the near term that buying opportunity I think it will be strong, but it's not a linear process that we stick to.
The dynamic process and.
We will manage it accordingly to make sure that we're doing the best job possible for our stakeholders. So that's that's really how we'll look at it going forward.
And I'll try and give a little bit of color David on your last question about fiber revenues and how we should be investing that money.
If you look at I don't remember the timing three or four years ago. We took a hard look at should we be in the consumer fiber business. So we began the consumer.
Copper business and.
Candidly coming out of that analysis, we decided the thing that we should do is just manage it for cash in the markets, where that makes sense and invest in fiber in the markets, where that makes sense and and we decided that the markets where it makes sense to invest in fiber our growth markets.
I don't want to leave anybody off the list, but look at Denver, and Minneapolis in Seattle, and all the communities that make up those markets. We've got we've got some great growth markets within the 16.
Remaining states that we operate in and so we've decided that those are good markets for us to invest in fiber and and then we decided that there is there are some that we should just sell it to somebody else can do better with those assets and we were doing that's where bright speak.
<unk> was created we think they'll do a great job they will invest in those markets that will be good for those markets that will be good for their investors and their and their owners and so.
There's a little bit of the answer is all of the above all of the suggestions that you attack and that's also to leave open the door.
No real change.
Our mind on how best to do these things going forward, we're always open to whatever structure makes most sense for our shareholder return and we look at these decisions not a static decisions made once and never revisited, but decisions that then we are very committed to that we are focused on executing against.
But open to other things if they make more sense for us.
Okay, gentlemen, thank you, Dave and it's been a long it has been a long time.
Curious.
Thanks, Dave.
Question. Please.
Our next question is from Frank Louthan with Raymond James. Please go ahead.
Great. Thank you and thanks for all the help over the years, Jeff So with what's left when.
When you sell all of this but where does this leave you with regard to top line growth.
And where do you when do you think you can deliver a sustained top line growth in the future. Thanks.
Hey, Frank its Chris.
That one I think when you look at our growth buckets. You mean my main focus obviously is doing what we can to get to grow bucket growing.
Faster sooner, we've obviously got a process around.
Harvest and nurture that I think certainly in the harvest bucket is starting to show results.
But realistically I still think we're two to three years away.
From from total growth just given the size of those buckets, but but the growth bucket is the focus and I think.
Starting with what we have.
But with what Jeff leaves us with and certainly case experience, that's where the focus will be as we go forward and I feel good about it.
And then just.
Go ahead no go ahead.
Just to add I feel.
<unk>.
Very excited to have Kate came in I think that the Illumina team has done a great job transitioning us from a telco to a technology company interfacing with our customers differently building. The platform that is tightly coupled to the infrastructure to the fiber that we have and building a platform for Kate and aluminum.
Team going forward too.
To sell and accelerate the growth in ancillary services and things around our edge cloud things around security collaboration orchestration all of those and so I.
I'm still very excited about our ability to tap.
To add growth to that platform.
That's great for the meeting are as well I guess, just a quick follow up.
The split between the grow nurture and harvest materially change with the sale of the EMEA business with any one of those buckets.
Will you have more or less exposure to.
The operations of our company doesn't change with the sale of EMEA I don't think either any of those buckets have any strong particular exposure do Chris No I don't think it's going to skew things dramatically one way or the other and it won't change the way we operate the best of the rest of the company either.
Okay, great. Thank you very much.
France, We've got just one more question.
Very good our next question is from Nick Dovetail with Moffett Nathanson. Please go ahead.
Alright, thanks for taking my questions.
Jeff I want to echo, everyone else's comments and congratulate John all your accomplishments and a well deserved retirement.
Thank you Nick and do you have the last question My last earnings.
Sure in my career, so so I'm looking forward to it.
Alright.
A lot of pressure to deliver on that.
I guess first on the on the cost cutting.
Or cost transformation.
As you noted over the past year, you've been a bit hamstrung.
Even the resources you have dedicated to getting the Apollo in Latam deals over the finish line you talked about getting that engine up and running.
What sort of cadence should we expect in terms of getting that back up to 100%.
And while the resources devoted to getting the EMEA deal.
Over the finish line weigh on your ability to do that.
Let me take the second one first and then Chris you can take the first one.
No the EMEA deal will not weigh on our ability. If you look at if you look at bright speed and if you look at Siri on those are much more stand up new business is being spun out and this.
This one is more of an an acquisition by an existing business of our business and so I don't.
And that's one of the key value drivers for us frankly, and I don't think there'll be as complicated I don't think it'll be as expensive on the alumina side of things, yes, I totally agree with that and as it relates to our ability.
To get back to some of the cost saving initiatives I think it'll take us a year or two to get back to full run rate, but we're we're starting with that now.
And as we go forward, we're going to be looking for ways to drive more automation and simplicity in our processes internally.
And that's where we're going to be focusing.
Yeah.
Okay. Okay.
Go ahead Nick.
Oh no.
Lastly, I want to ask about was sales compensation, which is something that <unk> been talking about a bit over the last several months.
Emphasizing growth categories deemphasizing, the harvest categories in terms of how people get compensated.
How do you how do you implement those changes and ensure that the base of harvest revenue doesn't fall added undue pace, while those changes you put into place.
Stated differently, what sort of incentives you put in place to ensure that people maintain that yeah, I won't I won't get into specifics, obviously, because again things are fully finalized yet, but I think the key point is that.
Our harvest bucket is really not product that gets sold very much at all anymore.
So when you look at.
You look at where the bulk of the sales exist today, it isn't a grow categories and the nurture categories. So it's really how you incent behavior within knows now separately, we do have a customer success organization that works very hard on things like re rates, making sure that we're moving customers up the stack from older tax.
<unk> and that's a separate compensation system. So that's how we we.
We manage the flow of products from old to new and we also just manage.
The overall decline of those of those assets. So there is a structured process around that in terms of how people are comp.
Okay. Okay, great. Thank you Chris.
Alright.
I'd like to say thank you all.
With all of you for a long time and I've appreciated the relationship and so I want to.
Close by saying.
How extremely proud I am of alumina team and what they've built.
When Mrs engaging with all of you on these quarterly calls and the various conferences that I attend I think I leave behind a company that has very strong foundation and is poised for a return to profitable growth. So I'm excited for that I am excited for lumen I'm excited for its employees and stakeholders as Kate leadership will.
Further strengthen what we've built over the past several years, so with that I'd like to say thank you for for the time that we've had together with me and in your.
Your interest in lumen.
Thank you for joining the call today.
Yeah.
Thank you we would like to thank everyone for your participation and for using Lumen Conference service today.
Does conclude the conference call. We ask that you. Please disconnect your lines have a great day everyone.
Yeah.
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