Q4 2022 Lumen Technologies Inc Earnings Call
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Greetings and welcome to the Lumen technologies fourth 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 have a question. Please press the one followed by the four on your account.
With that I'd.
If at any time during the conference you need to reach an operator, Please press star zero.
As a reminder, this conference is being recorded Tuesday February 7th 2023.
I would now like to turn the conference over to Mike Mccormack Senior Vice President Investor Relations. Please go ahead.
Thank you and good afternoon, everyone and thank you for joining us with Illumina technologies fourth quarter 2022 earnings call. Joining me on the call today are Keith Johnson, President and Chief Executive Officer, and 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 fourth quarter 2022.
A presentation, which notes that this conference call May include forward looking statements are subject to certain risks and uncertainties.
All forward looking statements should be considered in conjunction with the cautionary statements on slide two and the risk factors in <unk> SEC filings, we will be referring to certain non-GAAP financial measures are reconciled to the most comparable GAAP measures can be found on our earnings press release. In addition, certain metrics discussed today exclude costs special items as detailed in our earnings materials all of it.
It can be found on the Investor Relations section of the linear website with that I'll turn the call over to Kate.
Thanks, Mike Good afternoon, everyone and thanks for joining us today in a few minutes, Chris will cover our fourth quarter results and discuss 2023 outlook measures.
Let me begin by saying how excited I am to be here at lumen during such a pivotal time in our company's history.
I have a passion for leading businesses through the challenging world digital transformation, it's what I've been doing for a few decades, and it's where I feel most comfortable.
While it's only been three months since I joined lumen I already feel at home.
I've had the opportunity to get to know many of our employees customers and partners and I spend time understanding our business processes, our proprietary gifts and our go to market capabilities. I can tell you that I see a very significant opportunity for lumen and its stakeholders that said, there's hard work ahead for our team as.
We made significant changes to how we serve our customers and how we execute for better financial results.
2023 will be a year of rapid change for lumen as we execute on our plans and pivot towards growth.
As with any successful transformation, it's essential to get the right talent and I am delighted to report. The addition of three seasoned technology executives to the Illumina team.
Sean Showtime has been appointed executive Vice President of product and technology running our newly integrated product development and it organizations.
Ashley Haynes gas bar has been appointed Lumens executive Vice President and customer experience officer, running our marketing functions as well as customer success.
And Jay barrels has been appointed executive Vice President of enterprise and public sector sales.
With the addition of these three executives to the team we infused deep digital transformation leadership product development and innovation muscle marketing and customer lifecycle thought leadership.
And enterprise selling expertise all essential components of our transformation now with the team in place we're ready to execute our plan.
Clarity is an existential priority for any company seeking to transform.
As such over the past three months, we've spent considerable time with employees customers and partners drafting and rolling out a crystal clear strategic plan, what we're calling inside the company the lumen Northstar.
In short our Northstar defines who we are who we serve our proprietary gifts that yield a competitive advantage are targeted to success metrics and of course, our aspirational culture.
This important plan provides clarity to the illumina team and our stakeholders on our path to growth.
It starts with our mission to digitally connect people data and applications quickly securely and effortlessly.
The first part connecting people data and apps, that's our core DNA and positions our world class network as the Crown jewel of our portfolio.
The three words at the end of that mission statement quickly securely and effortlessly.
That's really what our customers are demanding as we solve their core problems such as delivering cost effective operations.
Curing their data and apps.
Eating for their customers and helping their employees thrive.
It's where we have the most amount of work to do and as the underpinning of our investment and operating plans.
A big part of our North Star plan is a detailed economic model that provide some sensitivity analysis around our grow nurture and harvest revenue categories.
This work has informed our plans to disrupt negative growth trends in our legacy businesses and bolstered our intention to innovate for growth.
As a result of this work we've established five core priorities for lumen.
Our first priority is to develop company wide customer obsession.
Moving is the product of many mergers and as such we've been forced to drive operational efficiency to ensure we achieve the synergies and the value intended from combining these entities.
No material mindset shift.
As with any mindset shift this will take time and practice.
It will require deep skills building.
A significant part of our culture development priority, which I'll talk about shortly.
But more than just the mindset shift.
Delivering on our desire to become a customer customer obsess company.
Requires innovating and investing for growth or second core priority.
As such we are reshaping our organizational structure by combining our product development teams with our I T teams for greater speed and agility.
We're centralizing marketing for tighter alignment to the customer lifecycle, and we're installing what we call a growth operating system to build the muscle inside of lumen that enables us to innovate new products that delight customers and drive shareholder returns.
Our innovation focus will be to create an monetize capabilities that enhanced the value and commercial potential of our work.
No I think it's worth spending a minute on this concept of growth operating system.
Lumens been focus on driving operational efficiency as I said in our scaled businesses.
But to grow we used to become great and innovating in establishing new to big businesses.
We want our teams to act like entrepreneurs collaborating with our customers and aluminum teams to solve problems that our customers experience.
And at the same time.
Much like in the V C World.
We will foster this innovation in an environment with important guardrails, including a growth board executive sponsorship and cofounder teams to ensure we're pursuing and maximizing the value of high potential projects. This means performing extensive testing with our customer base.
Mailing fast on many concepts.
Recognizing the high potential of others and quickly allocating capital accordingly to maximize growth.
This is a critical motion as we pivot to an outside in mindset.
And while I just shared our intention to to develop net new capabilities that enhance the value of our network Hell.
I also want to emphasize that we will continue to invest in our world class network.
We just won't stop innovating here and we will continue to invest in our fiber infrastructure to meet the demands of our sophisticated customer base, who are dealing with complex business problems, coupled with a workforce that now the man's remote work flexibility in the post pandemic world.
We recently announced our major network expansion plan to drive 6 million additional intercity fiber miles two are already expensive network by 2026.
As we execute and pivot towards growth or third corps priority will be to ensure we have the complete go to market capability in place to enable us to compete in today's technology market.
We believe aluminum will benefit significantly from incremental investment in our marketing and feel facing teams to properly cover the market and capitalise on near term opportunities in growing spaces like security and edge cloud.
We will therefore, inject opex and capex to ensure that luman conserve two distinct groups requiring unique approaches the.
The first group includes large customers in the public sector large enterprise and upper mid market channels.
These organizations offer require extensive inter kit and customized solutions and the service group <unk>.
We aim to offer scalable solutions with a higher level of personal engagement and a robust set of managed service offerings.
A second group includes customers and the consumer S M B and lower mid market channels.
This group tends to prefer a less hands on approach and often utilizes self service options to service group will offer a simplified product selection with a user friendly digital platform for easy ordering and seamless interactions.
Our goal is to remove any obstacles for them by offering straightforward solutions that can easily be accessed and manage securely in digitally.
To support our first three priorities are developing customer obsession innovating in investing for growth and building a reliable execution engine.
We're gonna lean heavily into the fourth to radically simplify our company.
Simplification will come in two major forms first we'll focus on doing fewer things better that means shutting down subscale are non accretive businesses, which includes no longer selling products or services that don't directly enhance our valued customers or benefit luman and its shareholders.
We will ensure all resources are aligned to promote the programs and projects of support our mission to digitally connect people data announce quickly securely and effortlessly.
The second form of simplification will come as we build the digital enterprise consolidating systems and modernizing our I T infrastructure to support effortless employee and customer digital experiences.
These two forms of simplification will help us optimized for cost and growth simultaneously.
Our fifth and extremely important core priority at luman will be to further develop our culture, we know that the cultural common denominators of companies that successfully transforming the digital era include clarity customer.
Customer obsession courage and a growth mindset.
At Lumens straight from the tap, we're committing to clarity and everything we do and I Hope my comments today have reflected that commitment.
The remaining common denominators won't come in the form of an edict or a mandate.
We will invest in and train our employees to develop the skills required to change.
That wraps up the high level summary of how we plan to transform lumen to pivot to growth we.
We need to do a lot of things some basic and some quite complex to position ourselves to take advantage of the opportunity that lies before us we will continue to move with great speed, but also very thoughtfully and collaboratively leveraging our customer and partner relationships to guide us.
The team is coming together with formidable energy and I'm really looking forward to sharing more of our story with you as the year progresses.
Before we move onto our discussion of results in the twenties twenty-three outlook. It's important that I talk about a couple of items as we enter 20 twenty-three.
First an EBITDA in Capex, we're leaning into our growth and optimization priorities and Chris will provide financial details of these initiatives shortly.
We believe these investments are critical to position luman for strong execution and scalable sustainable growth and.
And we expect revenue and EBITDA stability in less than two years.
Second, let's talk about our quantum pacing.
As we've said previously we hit the pause button during the fourth quarter now to be Frank It was more of a stop button, then a pause button, which impacted our quantum metrics for the quarter.
That said.
The evaluation, we undertook was absolutely critical to position quantum for long term success.
By focusing on all metrics and not just the location enablement goal, we've established a higher IRR more predictable longterm outcome for this exciting project.
A natural outcome of our assessment of quantum is a more focused build target.
We're we're able to achieve proper returns for shareholders.
We believe the overall quantum enablement opportunity is eight to 10 million locations.
The engine is rubbing back up and we're aggressively working to ramp or build activities in 2023.
And to that end, we made an important change during the fourth quarter to separate our operational activities like planning engineering, and all field operations between mass markets and business.
Maxine Moreau, our president of mass markets now has top to bottom operational and P&L responsibilities.
This was a significant change internally that I expect will improve our quantum deployment pacing.
But it will take time to read scale.
My expectation is that later this year, you'll see significant improvement in our execution on enablement.
And with that I will turn the call over to Chris to discuss our fourth quarter results Chris.
Thank you Kate and good afternoon, everyone to start I Hope you had a chance to review the AK referrals on January 27th which provides modified financial information back to first quarter of 21, removing the impact of the ILEC in ladder and businesses as well as the impact of the calf to program.
The AK also outlined a new business sales channel reporting structure for 2020th we reported which collapsed argument a large enterprise and pulled public sector out of large enterprise.
This provides better alignment with how we manage these channels internally and should provide for more clarity when modeling or a company.
Let me move on to discuss some macro thoughts later in my remarks, I will address our outlook for full year 2000, twenty-three, but near term we continue to face macro headwinds supply change remains strain with labor is vickie headwind and we are all facing the impacts of inflation. In addition, we are actively working to offset the synergies <unk>.
Resulting from the divestiture of our 20th state I like business as well as our light am business, but those headwinds are likely to persist through this year.
Despite these near term pressures. This is an exciting time for luman and our team Kate.
Kate has energized our company and we are positioning luman to win this will require internal systems and process investments to solidify our platform pivot to a position of playing offense and enable us to grow I will discuss the impact of these investments later in my remarks.
With that I will move to the financial summary of our fourth quarter results.
There will be referencing results on a modified basis, which aligns with the 8-K disclosures mentioned earlier and removes the impact of the divested businesses that closed during twenty-twenty too as well as the impact of the calf to program.
Overall business revenue declined approximately 4.2% year over year, and 0.3% sequentially on a constant currency basis and after adjusting for the sale of our correctional facilities business in the prior year period.
Mass markets revenue declined 7.6% year over year and 2.8% sequentially.
We reported adjusted EBITDA of 1.3 million $3 billion in the fourth quarter and generated a 36.7% margin.
Our free cash flow was $126 million in the fourth quarter.
After paying all taxes owed on the 20 twenty-two business divestitures, we reduced estimated net debt by approximately $10 billion during 2022 and during the quarter, we repurchased 33 million shares of common stock for $200 million.
Moving to a more detailed look at revenue or will be referencing all revenue growth metrics on a modified adjusted basis, where applicable to remove the impacts of foreign exchange and the correctional facilities business sale in the fourth quarter of 2021.
On that basis, our fourth quarter total revenue declined 5% year over year to $3.8 billion. This is the last quarter for which year over year comparisons are impacted by the sale of the correctional facilities business.
That benefit related to the Correctional facilities business was about $3 million in the fourth quarter of 21.
While the impact of effects year over year was a headwind of approximately $20 million.
Within our two key segments business revenue declined 4.2% year over year to $3.005 billion in mass markets revenue declined 7.6% year over year to $795 million.
Within our enterprise channels, which is our business segment, excluding wholesale revenue declined 5.9% year over year, our exposure to legacy voice revenue continues to improve within the enterprise channels, dropping 141 basis points a year over year and now represents less than 12% of enterprise channel revenue.
Large enterprise revenue decline, 2.5% year over year as I previously noted in the new reporting we will be providing starting this quarter. We've collapsed IGN in large enterprise into the large enterprise channel and have moved public sector to its own channel now representing our largest enterprise channel large enterprise.
Had improved revenue trends, both year over year and sequentially and was our strongest performing enterprise channel.
Public sector revenue declined 13.8% we've.
We've had significant wins in this channel and we expect to see improving trends as the year progresses. We also had a contract in this channel expire last quarter, which is impacting the year over year comparisons by 176 basis points.
On a sequential basis public sector revenue decline, 0.9% <unk>.
Mid market revenue declined 6.6% year over year with V. P N and voice the most significant headwinds wholesale revenue grew 0.5% year over year. This is a channel that will likely decline over time and one we manage for cash.
As I moved to our business product lifecycle reporting I will be referencing percentage changes on the same modified adjusted basis I referenced earlier as Kate mentioned are Northstar plan incorporates a detailed economic model with plans to disrupt legacy declines and help us innovate for growth.
Grow products revenue grew 2.5% year over year in the fourth quarter, we saw strengthen waves security services and unified communications.
Grano represents over 36% of our business segment up from 34% in the prior year period and carried an approximate 84% direct margin this quarter.
For added color grow products represented the majority of our enterprise sales in the fourth quarter, which will continue to improve our mix of revenue going forward.
I would note the grow revenue was negatively impacted by approximately 100 basis points related to a public sector contracts that expired.
This will continue to impact our grow comparisons through the first half of twenty-three.
A key focus going forward will be to accelerate the growth of the grow portfolio. This will take some time, but we believe we have real opportunity here with our outside and focused vacate mentioned earlier.
Nurture products revenue declines, 7.5% year over year in the fourth quarter. The decline was driven by VPN, an Ethernet and nurture now represents about 31% of our business segment and carried an approximate 68% direct margin this quarter we.
We are making good progress under nurture strategy in our efforts to migrate this revenue back into grow products.
Harvest products revenue declined 8.3% year over year in the fourth quarter or harvest team continues to work hard to manage to a lower rate of decline within this product said, which is helping to extend the life of these products. In addition, as with our nurture products, we are managing customers back to grow and nurture products harvest now represents approximately.
26% of our business segment and carried an approximate 76% direct margin this quarter.
Other products revenue declined 6.4% year over year in the fourth quarter or other product revenue tends to experience fluctuations due to the largely non-recurring nature of these products.
Moving on to mass markets as I mentioned earlier total mass markets revenue declined 7.6% year over year, and 2.8% sequentially or mass markets fiber broadband revenue grew by over 18% year over year and in the fourth quarter represented approximately 19% of mass markets revenue Arts.
Suppose you to legacy voice and other services revenue is improved by 320 basis points year over year.
His Cape discussed we've made significant changes in how we are approaching the quantum fiber opportunity.
This was a thoughtful evaluation that will result in a significant improvement in long term shareholder value.
That said our location and subscriber results were impacted by the pause we had in place through our evaluation.
This change in strategy will continue to impact quantum metrics until we get to scale with our new plan, which we expect to occur late this year.
During the quarter total enablement, where approximately 97000, bringing the total enabled locations to over $3.1 million as of December 31st.
During the quarter, we added 19000 quantum fiber customers and this brings our quantum fiber subscribers to 832000.
Fiber or poo with stable sequentially at approximately $60, but we've seen accelerating year over year growth each quarter during 2022.
As of December 31st or penetration of legacy copper broadband footprint was less than 12%.
Quantum fibre penetration stood at approximately 26%.
Quantum fiber 2020 vintage penetration was approximately 29% at the 24 month, Mark and is now over 30%.
Or 2021 vintage was at approximately 17% at the 12 month Mark.
Or quantum fiber M. P. S score was greater than positive 50, again this quarter, an indication of the quality value and superior service the quantum fiber delivers as.
His Cape mentioned, we have recalibrated are addressable footprint to ensure we are generating healthy returns for our shareholders.
Based on that Recalibration, we are targeting eight to 10 million locations for the overall build a roughly five to 7 million incremental locations over the next few years, 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 fourth quarter of 20 twenty-two adjusted EBITDA was $1.393 billion compared to $1.496 billion in the year ago quarter. As I mentioned earlier, we are seen cost pressures from inflation. In addition to our opex investments to drive growth.
Special items this quarter totaled $583 million related primarily to a non-cash loss reported upon the designation of army of business is held for sale and transaction and separation costs, partially offset by a gain on the sale of our I like 20 state business, our fourth quarter 2022.
<unk> margin was 36.7% down slightly from 37.2% in the year ago period.
Capital expenditures for the fourth quarter of 2022 were $833 million. Additionally.
Additionally, in the fourth quarter of 2022, the company generated free cash flow of $126 million or.
Ah reported net debt was $19.5 billion as of December 31st 2022.
And are expected estimated net debt stands at $20.4 billion.
Are expected estimated net that reflects our utilizing cash on hand to settle the tax obligations related to the divestitures, we closed in 2022, which totals $900 million to $1 billion.
We anticipate paying these taxes during the first half of 2000 twenty-three given.
Given the investments that Kate identified we anticipate leverage to rise to between four to 4.3 times in the near term, we expect leveraged to peak as we approach year end 20, twenty-three and decline thereafter for the full year 20, twenty-three, we expect adjusted EBITDA to be in the range of $4.6 billion to $4.8 billion when.
Bridging to our full year adjusted EBITDA guidance. In addition to the calf to completion and divested business EBITDA. There are a few other drivers to keep in mind.
We estimate that our full year EBITDA will be impacted by approximately $100 million related to incremental inflationary pressures combined with Dissynergies. We expect a headwind are between $200 million to $250 million. This year, we're actively working to mitigate the impact of these dissynergies.
As Kate discussed over the next couple of years, we will be aggressively investing both opex and capex to position ourselves for long term sustained success.
The focus of these investments will be to enable growth improve customer experience and simplify how we operate these.
These investments will include a number of items such as Digitization ERP network is a service and I teach simplification. These.
These growth and optimization investments outlined in our EBITDA guidance waterfall chart are expected to total $150 million to $200 million importantly, we expect our revenue and EBITDA to stabilize as we exit 2024 with growth thereafter.
Moving to capital spending for the full year 2000, twenty-three, we expect total capital expenditures in the range of 2.9 billion to $3.1 billion.
Growth and optimization investments totaling $250 million to $350 million are included in this guidance.
Additionally, we expect to enable an incremental 500000 quantum locations in 20 twenty-three as we emerge from our project reevaluation, we anticipate a cost per enablement of $1200 and 20 twenty-three.
Lastly are capital expenditure guidance includes $35 million to $65 million related to rebuilding efforts in the wake of Hurricane Ian last fall.
Moving on to free cash flow, we expect to generate free cash flow in the range of zero to $200 million for the full year 2000 twenty-three.
In total or twenty-two twenty-three free cash flow will be impacted by $435 million to $615 million related to our growth and optimization investments as well as the impact of hurricane in recovery efforts.
We do not have any required or plan discretionary pension fund contributions in 2000 twenty-three. Additionally.
Additionally, the cash taxes due on the 2022 sale of the ILEC and Latam businesses are being paid out of the cash proceeds from those deals and are excluded from our free cash flow guidance.
As a reminder, our first quarter typically has seasonally higher expenses related to timing of bonus payments and other prepaid expenses.
We expect net cash interest expense in the range of $1.1 billion to $1.2 billion for 20 twenty-three.
In terms of special items for 20, twenty-three, we expect a significant ramp up and costs compared to prior years, primarily driven by dedicated third party costs to support transition services for the divestitures. The reimbursement for these services will be in other income with no material net impact to our cash flows.
In closing we are positioning luman for growth, we're making tangible progress internally and we're investing in ourselves over the next two years to deliver on our longer term goals. We look forward to sharing our progress with you as we execute on airplanes and will provide more detail around those plans and expected financial performance at our Investor day.
New York City on the afternoon of Monday June 5th So please save that date more details will follow in the coming months with that we are ready for your questions.
Thank you if.
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And our first question is from the line of Simon Flannery with Morgan Stanley . Please go ahead.
Great. Thank you very much thanks for all of the the the positioning.
Positioning of the company and the opportunities.
Help us understand the path to revenue and EBITDA stability I know, we've got the analysts say coming up but what sort of milestone strict we'd be looking for during 2023. Two suggests that things are improving it do you think there'll be an inflection and the rate of revenue decline.
Dr. Klein, how how do we get comfortable that you are on this path to turn this around within a couple of years.
And then on the fiber side of things could you just talk a little bit about had the bead program fits into your expectations, giving your kind of some sort or less aggressive posture towards quantum as being something that's interest you at this moment. Thanks.
Thanks, Simon So first and foremost 2023 is the reset year. So we talked about a new leadership, we talked about a new mission, we're talking about new priorities and it's gonna take us some time to get Rolling I think we bring a couple of things to the story that we haven't done before the first is.
Injecting energy into the growth engine in the form of marketing in the form of discipline sales approach.
At the at the high end of the market really an execution focus and mindset with some of the new leaders that I'm, bringing in some excited about that and I. Thank God that we'll get some early traction in the form of things like funnel on pipeline.
I think that this the story of two year stabilization is really you know as we go into 24, we're gonna have started the green shoots to show you more explicitly.
With respect to your question about bead.
Our projection this year is our our protection for about eight to 12 million enablement. In total doesn't include any beat funding and beat is super early the funds hasn't started flying yet. So we really don't know how that story is going to pan out, but it does represent a potential upside to our story.
Great. Thanks, a lot.
And our next question is from the line of Phillip <unk> from J P. Morgan. Please go ahead.
Hi, Thank you following up first on the enterprise space. The 150 to 200 million in an investment can just dig more into that and and how much of that is sort of one time in terms of New York P investment versus ongoing cost and.
How should we think about the potential.
For revenue and EBITDA growth in in business over a long period of time, you know if if we go back to to the underlying market is this a growing market or is it a shrinking market that you need to take Sharon. Thanks, very much so great question.
Or pivot is about moving from place of playing defense to offense.
I talked about changing mindset to really obsess about customers, that's about finding new problems and addressing them with both our existing capabilities as well as building a capability to address those.
Those problems with net new capabilities, either billed by our partnering and Ah you know if.
If you think about it customers are dealing with these giant problems if the usual stuff cost effective core operations, how do I get my employees to thrive how do I took care of my data and applications. You know how do I drive business process improvement, how do I innovate for my customers, but they're doing all of that in the hybrid world.
Basically you know hybrid meaning working from home or working from the locations had been in place for years.
As all of that changes the complexity of their networking solution needs are changing as well and that represents a huge opportunity for us, but I think we all know that we really need to sort of glide up the stack of it and really lean into both security and edge in order to drive net new growth on top of that coordinate.
[noise] working solution set that we have Chris do you want to add anything to that yeah. So he felt the in terms of what the spending is focused on we talked about it a bit but we've got to digitize more of what we do and and so that that customer experience is more seamless and and self serve wherever possible. We've got to continue to simplify.
And and really stopped doing some things automate some things, which will allow us to get it to dissynergies, but makes us easier to do business with in the ERP is one piece of that.
And then beyond that we've obviously got to invest in things that are going to drive growth things that would allow us to enable network is a service for example, so really understanding where the network is so that customers can quickly access it.
And deploy from there so that's what's in there, but none of those things will be complete this year.
Referenced in my comments that this is probably a two year journey in terms of spend as it relates to why we think we can get to revenue and EBITDA stabilization by the end of next year I wanted to be really clear that's based off of the things. We have today, so when Kate talked about growth O S. That's X.
That's kind of Supercharging the growth down the road.
But with what we have today I think we can very accurately say that from a from a product and sales standpoint, we were not executing as cleanly as we could have and there's renewed focus there's there's a lot more rigor behind the connectivity.
Between product and are selling efforts.
And frankly, there's some low hanging fruit that we can go after so I'm not gonna sit here and tell you that it's fixed by second half of this year. That's why we said by the end of next year.
But I can tell you that the reason, we said that as we got line of sight, given what we have in house today.
If I can follow up.
And forgive me. This this I don't mean to sound disrespectful at all but we we've heard from luman and the predecessor companies for <unk>.
12 years about the new changes in plans and thanks for going to turn around and.
And I know you have an analyst coming up in June and you've only really at a team been together for a little while [laughter] is there anything that's that's sort of dramatically changing under the hood that can start to give us some faith that this business is really turning.
As opposed to what.
It feels like a another iteration of things that we heard before.
Yeah, So I'm here now.
I'm excited to be here not cause there's a huge opportunity and one of the things that I'm, bringing to the table as this maniacal focus on execution.
And I think that that's a really important shift I think when you think about the pivot to growth need to think about lumen as a collection of companies that was trying to drive synergy from a bunch of murderers and was inwardly focused on driving operational efficiency every dollar of revenue look good.
Because as a potential contributor to EBITDA and every dollar cost takeout look good but there was no anchoring norstar. There was no customer obsession there was no really focusing on how do we innovate for growth and we hadn't.
Been in a position to invest in our go to market engine everything from marketing sales and sales support and customer success and now we are right. The capital allocation priorities that we set for the company now enable all of that and the leaders that I'm, bringing in from technology combined with the leaders that are already here at luman that real.
No. This business that combination is going to be incredibly powerful it's a really exciting time.
That's helpful. Thank you.
Thanks, Bill next question please.
And our next question is from the line of David Barton with Bank of America. Please go ahead.
[noise] Hey, guys. Thank you so much for taking my questions and Kate Uhm, Congrats on the new job and welcome to the Mosh pit. So I guess I got a few if I could.
I guess, Chris [noise], you've been talking about disrupting legacy declines if you could be more specific about what that really means.
And then and then Kate you talked about a priority being radically simplifying does that mean that there's.
More strategic stuff to come in terms of.
The the asset base that we're looking at inside.
Luma today and I, if I could ask a third of it I apologize.
With respect to the stock buyback of $200 million in the fourth quarter.
Could you walk us through.
Kind of whose idea that wasn't and how you landed on that being the right choice.
Twist for allocating capital. Thank you.
Yeah sure. So the first question really on kind of how we can disrupt.
The growth trajectory of legacy products look that the historical motion I think broadly in telecom is sell things until they die.
And hopefully that new thing you.
You can sell more of that.
What what is absent from that as a customer lifetime value mindset and there's this fear of cannibalization and I wanted me really loud and saying cannibalization is good because if you can keep that customer for longer than you can manage that migration, you're going to be much better off so.
What we're talking about is aggressively managing end of life products moving customers up the stack. So think about legacy voice right think about things like custom.
Customers, who are nearing the end of a VPN contract, who don't want to renew but there's there's IP in waves out there and we can wrap security around it so more proactively addressing those.
Those migrations and that's something that.
It hasn't been a key focus and I think that's some of the low hanging fruit I talked about.
As it relates to the buyback look there was a big change and.
I've had conversations about it we've had conversations with your peers about it and other investors. It was a tough decision, but it was guided by the fact that.
The way, we solidify lumens performance for all of our stakeholders going forward is by getting back to growth.
And so cutting the dividend did that.
In the near term, we knew that there were index funds and other investors who relied on that dividend to have an ownership position.
In lumen and so we bought back stock around the times of those index funds were rebalancing.
To support the stock through those big shifts.
And so that was the thinking in terms of how we manage that in the fourth quarter now and David did.
You ask a question about simplification could you repeat it I didn't hear something.
Yeah.
The question was you know the the within the confines of the I think the fourth priority like radical simplification of the business I I think the streamlining of of processes and and that sort of thing I think it's kind of one side of the interpretation of what that might look like another side might be.
You know further acid divestitures, you know other kinds of strategic types of things instills that have not been turned over to date.
Yeah, I mean, the the two sort of pieces of it as I discussed so it's gonna be understanding how we could do fewer things better I think is what I said and and with.
This mindset around simplification of our product portfolio, we've had a proliferation of skews.
And when you think about the proliferation of Icke systems through all the murders to support those skills both sides of the equation simplification of what we sell as well as how we sell it that's the winning formula. So that those were that was the intention of our remarks regarding the overall strategy I think if you keep coming back to.
Mission statement to digitally connect people data and applications quickly securely and effortlessly anything that we do will strategically map directly to that statement.
Great I understand thank you so much.
Thanks, David next question please.
Our next question is from the line of Greg Williams with Cohen income. Please go ahead.
Great. Thanks for taking my questions and echoing the congrats Kate My first question is just on what are the larger puts and takes on the range of 200 million dollar arrangement guidance that determines the low end in the high end and then second question is just on the reduction of your quantum driver for Cats, I believe I heard a stand up 500000 enablement, what's your <unk>.
[noise] level on the fears of third party over builders coming in as you're not building is that sort of contemplated in the fact that you know reduce your overall.
Build from 12 million $8 million to $10 million in those third party over the other just just coming up with a built in that territory. Thanks.
Hey, Greg it's Chris.
In terms of the guidance range I.
I would say that the pieces that I spend.
Spend more time being concerned about the things frankly that are beyond our control.
Things like the inflationary environment and just the broader macro so I'd say, that's that's probably the biggest piece of the variability.
I can tell you that that the guidance is mapped directly back to things like sales quotas and the way we.
People for performance has changed as well so all of that is designed.
To drive us to where that guidance is but it's really around the the things beyond our control that that move us to between the high and the low.
As it relates to the quantum piece I mean, I think your points are valid one and that's obviously I think a risk but.
And frankly, I think you can even see it in some of the penetration numbers from 2021.
I was very concerned about putting fiber in the ground for the sake of putting fiber in the ground right we need to make sure that we remain focused on those large metros that we've talked about.
And that we.
Stop being so focused on a cost per enablement and on.
A number of enablement and more around making sure that in those markets that were serving that customers are going to want our product.
And so I think even though this is a little bit painful in the near term, we're seeing really good performance on.
Are planning yield, meaning when we plan a market and it goes to engineering and then it comes out of engineering that we've been able to accurately estimate the cost. So that we can proceed to construction rather than having to go back to planning all over again, so we're seeing some really good activities internally, but I would much rather have this car.
Inverse station today than one five years from now where we hit a thousand dollars and we hit the the 10 million enablement and then you guys are asking me where the annuity stream is on all that fiber in my own opinion. Our opinion is that I think you're gonna see that from some of the over builders in markets that are that are building for this.
Take a building rather than really having a returns mindset around it.
Got it. Thank you. Thanks, Greg next question please.
And our next question is from the line, but yeah Levi from UBS. Please go ahead.
Thank you it looks like you're expecting another 10 per cent decline in organic EBITDA. This year aside from the impact from the synergies and inflation and higher investment for growth can you can you provide a little bit more color on the drivers for that organic decline does that assume maybe worsening top line trends as we go through the <unk>.
Transition or is it more of a make shift where growth is coming from lower might've services. Thank you.
Yeah, but yeah, it's it's crispy.
The key thing is we do have that grow bucket, which is now the largest bucket, it's not growing enough, okay, and that's really where the focus is so the reason you see in total organic declines is that we have harvest and nurture buckets that are declining at high single digit rates.
Margin is really not a concern as we move into the Grove bucket, we've disclosed that in the presentation, but when you look at our direct margins, it's actually beneficial to us when we move into the grow products. So it's really about.
Managing that migration, because we still have roughly two thirds of the business that is declining at very high rates and how do we supercharge the growth bucket. So the starting the performance itself isn't where we want it to be with the starting point is actually pretty strong we've got a a good base. There. So I'd say that's one thing. The second thing is obviously, we're in a tough macro environment.
Where everybody's being.
Being very thoughtful about the money they spent so.
If you think about us doing a reset we're doing it in a tough environment. So I think both those things combined are really what's driving that.
Maybe just a quick follow up how should we think about the pacing of that EBITDA declined sure. The here is his first have the chaff because you have the dissynergies or is that going to be all set as your ramp up investment polka out.
Look I don't Wanna get too scientific around that because we obviously have a lot of variability for example, and our opex quarter to quarter.
Higher opex in the summer when it's hotter than we're doing more construction. So there's a lot of moving pieces in there I would say the most important thing is that revenue number.
And I think over time, we would we would like to be able to show you guys that the decline rate is slowing and I think that's gonna be the first leading indicator that were on our way to growth and so I don't want to predict when in the year you start to see that again, it's a two year journey until we get the stabilization.
But I've watched that over time and I think that's the best way to measure our success.
Okay. Thank you thanks to our next question place.
Our next question is from the line of Michael Rawlins with City. Please go ahead.
Thanks, Good afternoon.
Curious if you could share a little bit more detail in terms of what's happening currently in the.
Sales cycle in the pipeline and are you entering 2023 with a better backlog just given some of the announcements that you've had over the past number of months you know, particularly in the public sector.
And then just one other question on the bridge regarding Dissynergies.
Are you always dissynergies isolated divestitures or do those dissynergies encapsulate the decision to separate the operations of mass markets from the business segment. Thanks.
Hey, Mike This is Kate.
So two addressed your question about what's happening in the enterprise business. The first thing is from public sector perspective, you're absolutely right. We have a healthy backlog of we're excited about seeing a lot of that convert this year.
Our pipeline continues to be steady and strong and regarding enterprise decision, making I think with the macroeconomic environment. We all see sort of more approvals required for purchases of technology I think that plays right into the pivot that we're making where we need to be great at pitching or value story and.
How we can help customers address their most like the central problems and and help them get through those buying cycles, Chris Yeah and that the Dissynergies are really around the divestitures that has nothing to do with with ops. So.
Obviously, there's there's corporate overhead that doesn't go away when you sell off big chunks of EBITDA, but there's other efficiencies we can get to internally. If we can automate some more things going forward and that's really where the focus is there on the Dissynergies now I will say that that as we were talking about this in.
<unk> <unk>.
Last year, we actually thought they'd be a little bit higher than than where we're calling it for this year and that's because we've got some some other cost savings initiatives going on internally that we think and can start to eat away at that so that's good.
And one other follow up on the net.
Leverage you mentioned it could be four to 4.3 is that the peak through this whole cycle of getting back towards your goal of EBITDA growth or is there the potential for leverage to go even higher before it goes slower.
Yeah that is our estimated peak and quite frankly that excludes any assumption on the EMEA deal closing because right now we're assuming that doesn't happen until early next year. So when that closes obviously those you know give them more leverage is we said that we would from a capital allocation standpoint focus on growth.
And then manage.
Leverage and buybacks dynamically, obviously with a with an exit a leverage ratio that high those proceeds to be focused on debt reduction and that would bring us back down but operationally, yes, we would expect that that leverage is peak.
As we exit this year, because we're doing obviously the spending that doesn't give us.
All the benefits from that spending until we go forward and then then some continued spending next year, but I would not expect it would go above that.
Thanks.
Like a tourist place.
And our next question is from the line of Frank Louthan with Raymond James. Please go ahead with your question.
Great. Thank you how long do you think it'll take to integrate the I T systems from the past mergers and will you be integrating you're changing any billing system. My first question. The second question.
When you talk about getting rid of some of the businesses that you mentioned you don't really support the growth how many of the how long will that take given that some of these may still have longer term contractual obligations of regulatory obligations.
That may be harder to just eliminate if you can give us some color on that that'd be great.
Neither one of these things are overnight stories on with respect to simplifying the I T.
Infrastructure, it's complex, we have a lens towards customer satisfaction customer experience and that's driving our prioritization and how we actually do the planning as well as you know what what's the level of difficulty and and how much well how much can we do that will impact things in the short medium and long term. So we're right at the planning stage.
A building the framework to be able to give you more clarity.
The second piece of that was what was the question of around the products.
And sale of product Oh.
The simple fact doing less and and doing it better is the focus obviously when we talk about businesses that don't accrete to the Northstar whenever.
Whenever we have customers whenever we have revenue whenever there's EBITDA literally very thoughtful and use of a product lifecycle framework to evaluate how to move these customers to modern technologies and and how to create a great customer experience in doing so where they can get the benefit of more of our capabilities and.
Maybe some of our partners as well and that framework is something that is is new to you know our our teams in terms of.
Taking a disciplined approach to simplifying a narrowing what we do every day. So we're right in the early throes of doing that we're not going to be turning anything on or off overnight without careful consideration.
And Frank I would only just add one quick thing there because I know you've been at this game a lot longer than theater I have.
And that there's been a lot of disaster scenarios with billing system. So I want to address that head on.
Part of what we're doing is really determining where we want the end point to be because quite frankly, they're in some cases, there's gonna be no business case for integrating all billing systems. If the products that are supported by those billing systems are maturing out from a product lifecycle standpoint, so in the near term, it's really about simplifying what the customer <unk>.
<unk>, which may not deal with the front end and then where we can deal with the front end.
In a in a seamless way, we will or will just migrate to the new thing as we build going forward. So it's complicated as you well know, but we're not blindly running into a billing replacement program.
Okay, great. Thank you very much thanks breakfast.
And our next question is from the line of neck Dugdale with SBB Moffett Nathan. Please go ahead with your question.
Alright, Thanks for taking my questions I have one for Caitlin for Chris <unk> Your predecessor, Jeff used to emphasize profitable growth and we casually per share is kind of the financial measures. He was most focused on I saw the profitable growth Gotta mentioned in the deck what other financial metrics are you going to be most focused on and.
Is there anything you need to do to get the organization of lying around them.
And then for Crit, Oh, sorry go ahead.
No no if I had please ask yeah.
Yeah, I was gonna say, it and then for Chris.
With respect to the growth and optimization spending I think he said, it's a two year journey in terms of spend.
<unk> I don't want to ask for 2024 guidance, but if we think about that two year journey.
Should we expect heavier spending upfront with sort of a tape ran over time or should we think of that as being relatively even over the course of two years.
I'll I'll jump in first with respect to measurements for success look there. There are two key measurements for success that we're holding ourselves accountable to you in the North Star plan. The first is the ease of doing business for both employees and customers and by the way there's a one to one correlation between a gray.
Customer experience and a great employee experience.
Making it easier for both is is is a win win it also materially influenced our our design criteria around bringing product and technology together, because the customer experience becomes the product that we're selling the.
The second mean measurement, which I have discussed Israeli profitable revenue growth now that said that at the highest level. We've we've spent considerable time.
Mapping they K P I as in the measurements, both financial and operational to our our mission statement to digitally connect people data and applications quickly securely effortlessly those those descriptive quickly securely effortlessly. There are literally hundreds of metrics that we're gonna be thinking about as we transform operations as we intensified go to mark.
<unk> you know as we as we build all of the engines to execute for this company.
A reliable way and we've done so for for our business segment for a mass market segment and for corporate as well. So it's a complex that we can we can shine a little bit more light on that an investor day, but we're not short on Kpis for sure.
Yeah, and as it relates to the spend profile over the next couple of years I would assume it's it's relatively flat from year to year and really the the key thinking behind that Nick is there's only so much we can do it once and I think we're going as fast and as hard as we can if we could do more now I would.
So that we get to the finish line faster but.
From an organizational capacity standpoint, particularly given the fact that we're still providing service agreements to the two divestitures last year, we're working on another big one this year, we've just gotta be careful so I would assume that next year.
From a from a capex standpoint on those growth initiatives and simplification if it just looks a lot the same as this year.
Okay. Thank you.
Next question please.
And our next question is from the line of Eric Luka with Wells Fargo. Please go ahead.
Thanks for taking the question and welcome Kate between.
<unk> a question on the the nurture bucket, we've seen that declining around seven or eight per cent. The last couple of quarters and maybe you could help us understand.
Much of that is due to maybe substitution or cannibalization into other buckets like grow.
How much of that you think is.
Maybe more legacy of nature that essentially could turn off and whether there's an opportunity there maybe turn that trajectory into a better direction. If you can price more aggressively like you've done in some of the harvest buckets. Thank you.
Yeah, I'll I'll take that so that.
The the harvest bucket declines have been aided in part by rewrite activity. So part of what we're doing there is looking at what can we do on cost what can we do on managing rewrites that the benefits of of kind of shifting more into growth I would say really haven't started yet that's.
Got a lot more life in it as we've gotten into 2023, so I would say that that's yet to come.
As it relates to nurture.
There's really not been much in the way of reread activity. There I think that's something we can do and nurtures, probably the harder of the too because if you think about something like VPN. We have a lot of customers that like the VPN may have or they have recently signed VPN contracts because it meets their need today.
It's really the the VPN customers that are Mora at an end of contract and and don't want to continue with that where we have the opportunity. So we've got to get a little more clarity around what we think those longer term growth rates can look like we have an opinion on that I think it's a little early to share that but that's something we would certainly provide some more color on it the <unk>.
Yesterday.
Okay. Thanks for it.
Thanks, Sir John We've got time for just one more question.
Our final question is from the line of breath Feldman from Goldman Sachs. Please go ahead.
Thanks for squeezing me in and welcome Kate If I go back to the deck and you talk about through the updated fiber address ability opportunity to 810 million locations. When that's complete that would still represent a link a little less than half of the locations that are in your a landline footprint at this point in time, how are you thinking about managing.
A portion of that footprint, that's not on the upgrade path is there a meaningful amount of revenue and EBITDA coming out of those markets right now and there's obviously a lot of legacy fixed costs embedded in that area is that something you can start taking out now or is it can be a little further down the road when you get those savings. Thank you.
Yeah, I'll take that breath the.
When you look at our existing footprint, we've obviously still got a lot of areas that are rural and as we said our plans for quantum are dense urban areas in major metros in that that remains we're not we're not going to be.
I'll be looking to run fibre to lower density areas because the numbers just don't make sense.
As it relates to those areas, though they they're overall.
Performance has been more stable than the 20 states that we've sold.
So the performance there has been good we will manage that.
Very closely for things like racing cost as time goes on.
But at this point those are assets.
That are attractive to us and and we will continue to manage them closely.
Thank you.
Thanks Prep.
Turn it over to K for closing comments.
So I just wanted to say thank you for the warm welcome for everybody. Thanks for the great questions and thanks for joining today I Hope you come away with the same level of excitement that I have for this great business.
The investments were gonna make over the next couple of years are the right ones to position us for our very very bright future and I look forward to sharing more about the journey with you and all of our goals for the next few years only hosts are Investor day in June and with that will end the call.
Thank you Kate we would like to thank everyone for your participation and using luminal conferencing service today.
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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