Q1 2023 Lumen Technologies Inc Earnings Call

Speaker 1: We see several positive indicators of progress on our path to growth.

Speaker 1: Let's start with Enterprise. You may recall that beginning in January of 2023, we changed our sales incentive plan to drive a laser focus on growth. In the first quarter, we outperformed our internal revenue target for growth products with strength in IP, Wavelength, SASE, managed security, and UCNC.

Speaker 1: It's clear, when we focus, we win.

Speaker 1: At the start of a new year, we established a dedicated mid-market sales team, augmenting both direct and indirect selling resources to drive new local acquisitions.

Speaker 1: And in Q1, new logo ads were up 5% sequentially, and importantly, these new customers have about 30% higher sales value than the new customer cohort added in the prior quarter.

Speaker 1: Now, to stem organic customer churn and revenue decline in legacy voice products, we established a dedicated outbound calling team to migrate customers to modern UCNC platforms paired with Lumen Network offerings, of course.

Speaker 1: Early results show that strategic migrations of these legacy customers increase the average spend by about 10%, reduces risk of churn, and gives Lumen a modern platform through which we can continue to upsell NextGen offerings.

Speaker 1: The powerful combination of customer obsession and focus-go-to-market execution is really starting to bear fruit. We have several recent wins with customers like Byline Bank, ProLiant Surgeons, and IHeart Media, all of whom trust Lumen with her mission critical applications as they seek to modernize their digital transformation. The powerful combination of customer obsession and focus-go-to-market execution is really starting to bear fruit.

Speaker 1: Now, we recognize that we have a lot of work to do on our enterprise sales execution. Over the next few quarters, you'll see us continue to galvanize our sales readiness programs, refuel our digital marketing campaigns, and refine our analytics-driven sales platform and upscale our talent across our field organizations.

Speaker 1: In the first quarter of 2023, we saw net enablement growth accelerate with March enablements eclipsing January enablements by more than double. This gives us confidence that we'll meet or exceed our 2023 enablement target of 500,000 locations. What's more, fiber installs have exceeded copper installs as quarter and that gap should widen accelerating fiber subscriber growth and revenue growth going forward.

Speaker 1: We're proud to share that our fiber customers, the majority of whom choose our one gig offering, are enjoying Quantam's world-class experience, driving a net promoter score of above positive 60.

Speaker 1: Look up, I hope these impressive execution results make it clear that the Quantum Fiber business is core to our strategy. You're going to see us continue to lean in hard as we ramp our build pace and increase our subscriber ads moving forward. We're going to continue to lean in hard as we ramp our build pace and increase our subscriber ads moving forward.

Speaker 1: Our priority to radically simplify Lumen, it comes in many forms from rationalizing IT applications to reducing skews in our product portfolio and so much more. We're making material progress on this key priority, which will not only help reduce cost

Speaker 1: But we'll also be the foundation for how we create quick, secure, and effortless digital experiences for our customers' partners and employees.

Speaker 1: I'll share a few quick examples for you now.

Speaker 1: 29,000 employees can share ideas for driving simplification by shutting down business practices that don't seem to add value or align to our strategy. So far, we've shut down 45 non-value added processes, saving the company about 120,000 people hours, and removing tens of millions of dollars of operating costs.

Speaker 1: Next, we have made great progress in dramatically simplifying our product portfolio. We started the year with more than 12,000 Enterprise SKUs and retired more than 60% of them so far just by eliminating legacy products. This simplification positions us well to reduce our Enterprise ordering systems from 10 systems down to 3, which will dramatically improve our billing accuracy, reduce customer care costs, and of course it's going to improve customer experience overall.

Speaker 1: There are just so many more examples of simplification at Lumen, such as unifying the company onto one communication platform down from five, or upgrading our ERP system to reduce our bespoke and complicated business processes.

Speaker 1: Our simplification agenda is aggressive and it's going to yield material results and I'll continue to share progress with you throughout the year.

Speaker 1: Okay, finally, I've been very, very public about our core priority to rebuild this company starting with our greatest asset, our people.

Speaker 1: Okay, finally, I've been very, very public about our core priority to rebuild this company starting with our greatest asset, our people. We're building a culture based on team trust and transparency.

Speaker 1: We have a lot of progress to share in this space. First, Lumen is being recognized by the industry for several reasons. In the past few months, we were named as one of America's most trustworthy companies. We were recognized for championing diversity. And we were celebrated for excellence in providing employees with remote work flexibility. Second, we are making bold investments that demonstrate our commitment to building a diverse and inclusive company. Over the past 90 days, we launched initiatives to revamp our performance management systems.

Speaker 1: You take the industry recognition and the people investments I just described, they seem to be paying off. We're seeing lower employee turnover, higher engagement within our workforce, and more outside interest in joining the Lumen team. In fact, we've had a greater than threefold increase in employment applications year over year. It's clear that we're building a company and a culture that people really want to be a part of. And I'm so proud of the team for making such material progress across all of our priorities in such a short period of time. Now with that, I'm going to turn the call over to Chris to discuss our first quarter results. Chris?

Speaker 2: Thanks, Kate, and good afternoon everyone. As Kate described, this is a year of rapid change in women. We're aggressively upgrading systems, processes, and our culture as we seek to modernize women to win in the marketplace and return to women to growth. Well, it's early on our journey, where please, with the improvements, we're starting to see.

Speaker 2: A specific callout is a significant improvement we're seeing in our mass markets execution, where our quantum reassessment period allowed us to adjust our plan and as we move forward is proving to have been an excellent decision. As Kate said, we're back and running fast.

Speaker 2: During Q1, we reduced our principal debt balance by $620 million, and Lumen's senior note holders that participated in the exchange received a higher coupon as well as secured debt in the level 3 silo. In the first quarter exchange transactions, we issued $915 million a level 3 secured bonds, and Lumen's annual interest expense remains relatively unchanged. This exchange, combined with the expected proceeds from the AMIA transaction, will allow us to focus on executing against our two-year turnaround plan, which we expect will return Lumen to growth.

Speaker 2: We will continue to pursue additional opportunities to enhance our capital structure to support our long-term plan, which we expect will provide strong returns for our stakeholders.

Speaker 2: This quarter we have expanded our reporting to include grow, nurture, harvest, and other by business channel. This structure includes a subtotal with grow, nurture, and harvest giving visibility to our primary focus within the business channel results excluding other. As a reminder, the other category revenue includes equipment and IT solutions which tend to experience fluctuations due to the variable nature of these products. Additionally, beginning this quarter and to better align with recent updates to the SEC's RegG compliance and disclosure interpretations, we will no longer report revenue adjusted EBITDA adjusted EBITDA margin.

Speaker 2: or CapEx on a modified basis, which excludes the impacts of our divested businesses as well as CAF II within historical periods.

Speaker 2: Accordingly, on this call, I will reference our financial performance primarily on a sequential basis for better comparability and to provide color on the impact that CAF2, the divestitures and commercial agreements had on select year-over-year results. It's important to note that excluding the impacts we have provided, our year-over-year growth rates are substantially better than the reported rates and are showing improvement in key areas. Our first quarter total revenue declined 1.6% on a sequential basis to $3.738 billion.

Speaker 2: adjusted EBITDA was $1.251 billion in the first quarter with a 33.5% margin.

Speaker 2: Free cash flow was negative $75 million in the first quarter, including $90 million of taxes paid related to our two divestitures in 2022. We now expect total transaction-related taxes of around $1 billion, with the majority of the balance being paid in the second quarter of this year from cash on hand. We reduced net debt by $582 million during the first quarter.

Speaker 2: to $2.956 billion. Mass markets revenue also declined 1.6% sequentially to $782 million.

Speaker 2: Business revenue declined 13.1% on a year-over-year basis with the impact of the divestitures and commercial agreements representing approximately three-quarters of the reported decline.

Speaker 2: Mass markets revenue declined 38.7% on a year-over-year basis with the impact of CAF2 and the devestiture impact representing approximately 86% of the reported decline. Within our enterprise channels, which is our business segment, excluding wholesale, revenue declined 1.4% sequentially.

Speaker 2: Our exposure to legacy voice revenue continues to improve and is now approximately 11% of enterprise channel revenue and is down approximately 50 basis points sequentially.

Speaker 2: Large enterprise revenue declined 1.9% sequentially in the first quarter. Large enterprise revenue trends improved year over year when excluding the impact of divested businesses driven primarily by IP and co-location.

Speaker 2: basis. As you know, we've had major wins in this channel over the last two years, and those wins are ramping up in revenue.

Speaker 2: You may have also seen our recent US Defense Information Systems $223 million contract win for providing modern hybrid cloud voice and conferencing services. Our partnership with the public sector is strong and we appreciate the confidence these entities have in Lumen and our significant capabilities.

Speaker 2: to deliver these mission critical solutions.

Speaker 2: Mid-market revenue declined 1.3 percent sequentially, excluding the impacts of our devastated businesses that was at similar level of year-over-year decline compared to last quarter. Strength and IP and UCNC was offset by declines in other product categories. wholesale revenue declined 2.2 percent sequentially. This is a channel that will continue to decline over time and one we manage for cash. Moving to our business product lifecycle reporting, grow products revenue grew 3.4 percent sequentially. Importantly, if we exclude the impacts of our devastated businesses, this quarter's results showed significant improvement in year-over-year growth at close to double the quarterly sequential growth rate.

Speaker 2: 1% sequentially driven by VPN and Ethernet.

Speaker 2: We will likely face headwinds within both the nurture and harvest product categories as we actively work to maintain customer relationships and maximize customer lifetime value by migrating customers to newer technology solutions.

Speaker 2: Nurture now represents about 31% of our business segment and carried in approximately 65% direct margin this quarter.

Speaker 2: Harvest products revenue decline 4.9% sequentially. As with NERCHAER, we will see headwinds in this category as we pivot customers to newer technologies with a significant focus on voice migration.

Speaker 2: Our Harvest team continues to manage these products both by extending the life of some products while also managing customers back to grow products. Recall that Harvest is an important part of our business and generates cash to fuel our growth initiatives.

Speaker 2: Harvest now represents approximately 25% of our business segment and carried in approximately 78% direct margin this quarter. Other products revenue declined 9.4% sequentially. As I mentioned earlier, our other product revenue tends to experience fluctuations due to the variable nature of these products.

Speaker 2: Moving on to mass markets, revenue declined 1.6% sequentially. Our mass markets fiber broadband revenue grew 2.7% sequentially and represented approximately 29% of mass markets broadband revenue.

Speaker 2: Also note that our exposure to legacy voice and other services revenue continues to improve with a nearly 60 basis point reduction sequentially.

Speaker 2: During the quarter, total fiber broadband enablements were approximately 120,000, bringing the total fiber enabled locations to approximately 3.3 million as of March 31st.

Speaker 2: We had a strong ramp in fiber enablements during the quarter and as Kate mentioned We are confident in our ability to meet or exceed our 500,000 new enabled locations target for 2023 We expect to continue ramping this build pace in 2024 and look forward to sharing a longer term view at our investor day on June 5th

Speaker 2: In the first quarter, we added 24,000 quantum fiber customers. This brings our total quantum fiber subscribers to 856,000.

Speaker 2: As Kate noted, we are ramping quickly with enable and subscriber momentum building. Our installs of Fiber broadband customers exceeded our copper installs, a trend that we expect to continue to widen going forward.

Speaker 2: Fiber ARPU was approximately $60 in the first quarter, and we see ARPU expansion opportunities with the adoption of in-home Wi-Fi solutions, up-tiering, enterprise-grade security solutions, and our recently launched multi-gig offerings delivering up to 8-gig symmetric services.

Speaker 2: The plant we are building is capable of further cost-effective multi-gig speed enhancements going forward.

Speaker 2: As of March 31st, our penetration of Legacy Copper broadband was less than 12%, highlighting the significant sharetaking opportunity as we accelerate the Quantum Fiber build. Our Quantum Fiber penetration stood at approximately 26% and as we expand our footprint, we expect penetration to fall as we increase our addressable market at a higher rate than 20% of the current

Speaker 2: the new customers are at it. Many investors have asked about competing fiber activity.

Speaker 2: What we are typically seeing is activity on the distant fringes of our curve growth markets. Our six core metros are hard markets to build out. Zoning and permitting hurdles, as well as the underground network infrastructure in these markets, which carries a higher build cost per location, may make other regions more appealing to competitors.

Speaker 2: While we took a small risk with our quantum reevaluation phase, we did not see any meaningful change in competitive activity during that short window. As our enablement and subscriber results this quarter demonstrate, we are now focused on accelerating our deployment of fiber enabled locations and adding subscribers.

Speaker 2: Our Quantum Fiber 2020 vintage frozen penetration is now above 30 percent, and we will provide an update next quarter with our 18-month penetration rate of the 2021 vintage.

Speaker 2: Our Quantum Fiber NPS score is now greater than positive 60, an indication of the quality, value, and superior service that Quantum Fiber delivers. Quantum Fiber is an all-digital, multi-gig capable, prepaid product that features simple pricing with no contracts, helping reduce call center volumes and supporting our very strong NPS scores.

Speaker 2: We continue to experience no discernible change in customer payment patterns. Turning to adjusted EBITDA for the first quarter of 2023, as just to EBITDA was $1.251 billion compared to $1.966 billion in the year ago quarter. The first quarter of last year included $415 million related to the divest of the...

Speaker 2: 2022 earnings call, EBITDA will be pressured from a year-over-year perspective based on higher inflationary impacts, the synergies from divested businesses, investments in growth and optimization initiatives, and the impact of customer migrations as we focus on improving our customer experience with newer technologies.

Speaker 2: and enhancing customer lifetime value. We incorporated these impacts into our annual guidance and are not changing those assumptions.

Speaker 2: Special items impacting adjusted EBITDA this quarter totaled $114 million. Our first quarter of 2023 adjusted EBITDA margin, excluding special items, was 33.5%. Capital expenditures for the first quarter of 2023 were $640 million. In the first quarter of 2023, our first quarter of 2020, our first quarter of 2020 was $6.8 million.

Speaker 2: 3. The company generated free cash flow of negative $75 million. As previously noted, this includes $90 million of taxes paid related to our two divestitures that closed last year.

Speaker 2: Moving on to our 2023 financial outlook, as a result of the debt exchange offer I discussed earlier, we now expect cash income taxes to be in the range of $300 to $400 million for the full year 2023. We anticipate offsetting this increase through our cost optimization efforts. In closing, our team remains focused on executing on our growth initiatives to drive long-term profitable revenue growth. We look forward to sharing more about our strategy and our path to growth with you at our investor day on June 5th. With that, we are ready for your questions.

Speaker 3: Thank you very much. If you'd like to register a question, please press the 1 followed by the 4 on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you'd like to withdraw your registration, please press the 1 followed by the 3.

Speaker 3: Again, to register for a question, please press 1-4.

Speaker 2: Please proceed with your question. Great. Thank you very much. Good evening. Kate, I wonder if you could talk a little bit about your conversations with the customers and how that's changed over the last few months since you've taken over and perhaps how they're thinking about optimizing their spend in light of the uncertain macro environment. It sounded like payment patterns on the consumer side were okay, but any color you could provide on what you're hearing from the CIOs. And then maybe, Chris, just an update on the EMEA deal, what's the latest timing? Is that still kind of right at the end of the year, at the start of next year? And any updates on any other potential transactions? Thanks.

Speaker 1: Hi Simon, thanks for the question. So we respect to what CIOs are saying. It is a complicated environment for sure, but that represents a huge opportunity particularly when you're sort of sitting down side by side with customers to innovate to solve their greatest business challenges. So they want us to help them deliver.

Speaker 1: cost-effective, reliable core operations. They want us to help them secure their data and applications. They want us to help them innovate. And the way to do that is to bring our capabilities in partnership with other great companies.

Speaker 1: to chase after, I think, where the real business opportunities are. Obviously, there's a big story forming in AI and machine learning. There's an enormous set of opportunities in the metaverse where people are sort of doing this 3D rendering and it consumes a huge amount of data and requires zero latency.

Speaker 1: All of the companies that we're talking with are thinking like that. And it's these ecosystem partnerships that combine our capabilities with the depth and breadth of other software companies that I think is really resonating. Most importantly, we're showing up.

Speaker 2: and we're asking them to co-create a partner and that's new and You know it's received with a giant smile ear to ear so Chris. Do you want to you want to dig in? Yeah, so on the EMEA transaction Simon everything's on schedule as anticipated no No speed bumps, and we still expect that to close late this year or early next year

Speaker 2: And just as a reminder, we'll use the proceeds from that transaction to reduce debt. And anything else that you're looking at, real estate sales or anything else that might be great on you? We continue to prune the portfolio. We're prudent.

Speaker 2: We've embraced the hybrid work environment and have announced that we're selling our room field campus. It's underutilized even if everybody showed up that was assigned to this facility. So like a lot of other companies, we're going to monetize that.

Speaker 2: There's other real estate that we'll be closing on later this year as well that has been in the work for a few years. As it relates to other business lines you know we continue to look at options as to whether we we harvest or we sell but don't expect big moves from from those kinds of things that's more of a grooming exercise.

Speaker 2: than any kind of a major restructuring of any time. Great, and just one follow-up on Kate on your comments. In the past, Managers talked about delayed decision making. Have you noted any changes in the kind of time it takes from customers to actually get a contract signed?

Speaker 1: There hasn't been a material change and I think what we're really thinking about is how do we show the value, how do we position our capabilities such that it cuts through any additional approval processes that the global macroeconomic environment might have been pushing on over the past 18 months to two years. Great, very helpful. Thank you.

Speaker 1: material change. I think what we're really thinking about is how do we show the value, how do we position our capabilities such that it cuts through any additional approval processes that the global macroeconomic environment might have been pushing on over the past 18 months to two years. Great. Thank you. Thanks, Simon. Cersei, next question, please.

Speaker 3: Our next question comes from the line of Michael Rollins with CIDI. You may proceed.

Speaker 4: Thanks and good afternoon. Two topics if I could. First, on the sales front, just curious with all the locations that you pass and that your fiber is near, is there a quantification of the low hanging fruit of customer opportunities in terms of...

Speaker 4: of size or revenue opportunity. And then secondly, as you look at the EBITDA performance for the quarter versus the year, can you frame the potential cost or the revenue dilution over the next few quarters that is a one or two quarters in particular that.

Speaker 1: Michael, I'll pick the first one on sales and I'll let Chris at the second one. From a sales productivity perspective, putting the right, you know, field force in the right locations is obviously incredibly important. What we're doing is over time we're sort of thinking through what business outcomes to customers want to chase.

Speaker 1: aligned to their particular industry or vertical. And that's really I think where the story is. It's like, okay, how can we fish together are you need capabilities across networking, edge cloud and security to show up in solutions that matter most to customers depending on?

Speaker 1: not just where they're located, but that obviously is deeply connected to our edge capabilities, but that covers 98% of businesses, so I think we've got, you know, ubiquity there. It's really about the outcomes aligned to their business models.

Speaker 1: obviously is deeply connected to our edge capabilities, but that covers 98% of businesses. So I think we've got you know ubiquity there. It's really about the outcomes aligned to their business models. Chris?

Speaker 2: Yeah, and on the just the OpEx trend through the year, I mean obviously as we entered the year and we gave the guidance and we talked about the investments that we were going to be making a position Lumen for success, we weren't at run rate when we came into the year so that will be building as we go through the year and that's why that spend level was a little lower in Q1.

Speaker 3: Thank you. Thanks, Mike. Is there a second question, please? Our next question comes from the line of Philip Cusick with JP Morgan. Please proceed with your question.

Speaker 5: Hi guys, thank you. A couple if I can. You know I appreciate the detail Chris on on the grow, nurture, harvest buckets in the commentary and on page 7 and I will go back and read it a few times so I understand it. In the meantime what can you add on recent trends in sales and funnel and things like that?

Speaker 5: And when do you expect we'll see these improvements to come through in the net revenue trends?

Speaker 5: And then second, if you could just talk about any further debt swaps from here or you're sort of done with that, that would be helpful. Thank you.

Speaker 2: Yeah, I mean as I mentioned in my prepared remarks, we're pleased with what we're seeing in the grow category. There's obviously a lot of work around how we migrate customers from legacy technologies to newer technologies. But I do think, Phil, that things will ebb and flow as it relates to...

Speaker 2: additional metrics behind it. You know, we're not prepared to really talk about that yet today, we will, at our investor day, talk about operational metrics that we can provide on an ongoing basis to give you guys better visibility to where we are on this journey. But again, so far so good. As it relates to the...

Speaker 2: the capital structure side of things there's a lot of options and we continue to evaluate those it obviously is a dynamic environment externally and so we're certainly not finished but you know there's nothing that's firm right now and obviously as we firm those things up we'll keep everybody approved

Speaker 5: I don't know if this is a seasonal impact. It's typical anyway. Thanks.

Speaker 1: ok So I'll take that one basically, as I said in my opening remarks, we have a ton of work to do to galvanize our enterprise selling machine. That's everything from sales running in this program, digital marketing campaigns, making sure that we're driving, analytics and sort of like what's the next best thing to do?

Speaker 1: You know, large enterprise, green shoots where we're seeing more funnel, we're seeing bigger deal sizes, etc. But we're not where we need to be. And if I anchored ourselves in the goal, it would be executing at or better than market in every one of the product categories.

Speaker 1: We're seeing more funnel, we're seeing bigger deal sizes, et cetera, but we're not where we need to be. And if I anchored ourselves in the goal, it would be at, you know, to be executing at or better than market in every one of the product categories. Thanks very much. Thank you.

Speaker 4: Thanks, Bill. Sir, see you next question, please. Our next question comes from the line of David Barden with Bank of America. Please proceed with your question. Hey, guys. Thanks so much for taking the questions. I guess first...

Speaker 6: Kate, as you kind of start tackling this, you know, opportunity to pursue solutions and be a partner for your customers, the, you know, the ways that you accomplish that, presuming that...

Speaker 6: there weren't just things on the shelf you weren't already selling. You've got to add, you know, arrows to the quiver. And one way is to develop applications internally. Another way is to buy companies with those capabilities or hire people those capabilities. Another way is to wholesale those opportunities.

Speaker 6: But all of those come with higher expense and complications and their own complexity. So I was wondering if you could elaborate a little bit about how you go from the company that this was a year ago, or even six months ago, to the company that you want it to be, and how does it look, and how does that incremental because, okay?

Speaker 7: admissions and

Speaker 6: that if what you're losing predominantly is the voice dollar, that seems like we'd be going away at 100% margin.

Speaker 6: But if you, I think you were saying 58% of the new sales are coming in the growth bucket. The growth bucket is to my, the question I'm asking Kate, you know, it's coming with a lot more baggage and stuff that goes along with it, which seems to be a lot lower margin at the increment. So for every one harvest dollar you lose.

Speaker 6: How many growth dollars do we need to kind of fill that EBITDA bucket? Thank you.

Speaker 1: Okay, let me start with your question. There was a lot to it, David, so I'd like to just sort of give you my simple answer, which is we have a three-prong strategy. Number one, we're going to stem organic decline. That's like VPN to SASE and voice migration efforts.

Speaker 1: and I can talk a little bit more about what that looks like under the hood in just a second. Number two, we're going to better execute against the core, and that's where we're going to hit or exceed market growth rates and things like IP ways on these Internet, etc. in the grow bucket. And then we're going to innovate for growth, and that's both commercializing the things that are on the truck today, which...

Speaker 1: We are under commercialized, period. We just don't, you know, flex our muscles in a way that we can and should. And you'll see us doing that more and more. We're also going to collaborate with partners and customers to create net new capabilities. Obviously leveraging our proprietary gifts and security in the edge and the network.

Speaker 1: And then there's the third thing that is basically the main lever for creating operating leverage, which is Network as a Service or NAS, which is where we digitize everything.

Speaker 1: Okay, so three lights with a stool, stem organic decline, better execute on the core and innovate for growth. When you talk about sitting with customers and reshaping the company to actually follow the dollars, which tend to stem out of complex business problems that our customers are trying to solve, they need the capabilities that we have.

Speaker 1: and their need to consume data is just going to increase. The more we can digitize our physical assets and bring those capabilities to bear in all of the existing and net new business problems, the more you'll see Lumium being recognized as not just customer obsessed, but a very...

Speaker 1: So let's talk about your question to Chris and then Chris I'll ask you to add comments.

Speaker 1: If we're cannibalizing ourselves, which I think is what you're asking about, in the harvest bucket we've got cash coming off of those products.

Speaker 1: You know, why would you actually go after those customers and and I come from tech right so I'm new to telecom So this is sort of mind-blowing for me to think about this notion of not touching anything

Speaker 1: because the whole idea of customer life cycle management is how you increase the value of a customer relationship over the lifetime of that customer. And so if we do nothing those customers will turn.

Speaker 1: So we go from 100 pennies to zero. We could go after them and do a one for one product swap and yeah some of the newer technologies might result in less margin, but thatís not how weíre thinking about it. We go after them to get them to net new technologies to modernize their businesses.

Speaker 1: And we think about it from the perspective of maintaining the customer relationship and maintaining the customer data, understanding how they behave and upselling them in our IP and third party IP. And net net, I think what we're finding and it's extremely early in this process, so we don't have all of the tricks yet.

Speaker 2: But what we're finding is that there's an opportunity up here to increase, you know, all of those revenue and EBITDA flows. Chris, do you have anything to add? No, I mean, I think Kate explained that as well as it could be explained, David. I think the key thing is and I…

Speaker 2: I've been asked this question a lot obviously at conferences. It's not an either or scenario. It's not this either or scenario of you either get to keep the legacy voice customer and milk it for as long as you can, and then the alternative is just a low margin replacement. It really is this bundle, and oh by the way, then there's a tomorrow with a customer, and a day after that, and a day after that.

Speaker 2: It's a very different way of thinking about this space than what I think people are Normally accustomed to out of telecom. So that's that's what we're trying to do here All right, great, thank you so much hate. Thanks Chris. Thanks David. Sir. See next question, please The next question comes from the line of Batya Levy with UBS

Speaker 8: Please, thank you. Please, proceed with your question. Thanks. Just to follow up on that point, actually, can you talk a little bit more about why the Quill Bucket direct margins are above harvest where you're running it for cash and what's driving that upside? And also, maybe a little bit more specific for the quarter, but...

Speaker 2: as you change approach in this category. Thank you. Yeah, I would say thanks, Patia. I would say that, I mean, let's start with something we talked about last quarter, which is we changed our incentive structure with the sales team.

Speaker 2: so that they are incentive to drive more growth product and become less dependent on legacy revenues that we know will turn as Kate just said. So that's something that's going to continue, I think, to put the focus where the focus needs to be. When you look at the margins, yeah, legacy voice obviously very high margin.

Speaker 2: and what not, and when you think about newer technologies like IP and Waves, once you've put the capital on the ground, those are extremely, extremely efficient to run. And then on top of that, obviously, as we sell security services, namely, as Kate mentioned in her prepared remarks,

Speaker 3: The next question comes from the line of Nick DelDao with Moffett-Nathanson. Please proceed with your question.

Speaker 4: Oh hi, thanks for taking my questions. Now Kate, you noted some really encouraging new logo and revenue per customer data in Q1 versus Q4. I assume you are looking at sequential trends to kind of strip out the noise from the divestitures. But I'd still be interested if you are able to frame those metrics in sort of a broader historical context, or even if you can't quantify it. Can you say if those sorts of changes in logos and revenues per customer are...

Speaker 1: kind of well outside of the bands of what was historically typical? I mean, I'm going to go back to our philosophy of customer lifetime value. And the choice between not chasing the customer and allowing for churn, versus moving to the modern platform where you can upsell them on.

Speaker 1: you know, your first party technology and security and the like, versus third party. I think going after the organic decline strategically is going to pay off in a material way. And it's so early right now, Nick, that it's really hard to characterize. And also

Speaker 1: I'm going to be very honest and tell you that the data that we have about our sales efforts and our customers, we've put all new analytics in place and we have transparency all the way down to the rep level that we never had before. So it's extremely hard for me to give you this sort of comparison that you're looking for. I think it's sort of a new set of efforts.

Speaker 4: and we are excited by the early results. Okay, okay, understandable. And I guess you are obviously doing a lot of prep work for some of the systems changes you've talked about. I guess any early developments or learnings there, whether encouraging or challenging that you think are worth calling out as we think about the work you have to undertake over the next couple of years.

Speaker 1: I think when you think about a telecom company that is a collection of companies, you need to assume that we have an antiquated IT backbone that's extremely complex and there's a lot of work to do in order to simplify it. So this is unfortunately not something that we can just snap our fingers and correct.

Speaker 1: quickly or easily or cheaply, it takes investment. But something that I think is new is our ability to fund our future. And funding our future includes making these systemic changes to enable better coverage of the market, better customer experience, a streamlined operation.

Speaker 1: you know, capability. And so, you know, lots more there on the story. I think we can share more on the 5th, on June 5th. But a huge amount of work to do and an enormous opportunity for this company. Okay, okay. You know, just one last one if I can. Chris, are you able to share the level of...

Speaker 2: So you'll see a little more spend later in the year than you did at the beginning of the year.

Speaker 4: Okay, got it. Well, thank you both. Thanks, Nick. Cersei, next question, please.

Speaker 3: Our next question comes from the line of Greg Williams with TD Cowen.

Speaker 1: Please proceed with your question. Great, thanks for taking my questions. A few questions on quantum fiber. You noted that the factory is back so to speak. So can you help us with the fiber subscriber build cadence from here? Typically the second quarter is a little weaker in broadband, but with this engine up and running could we expect sequential growth in fiber sub ads?

Speaker 4: The second is just on the increased cost of home pass. You guys ticked it up to $1200 of home pass. As I think about labor, it could be in short supply when you are trying to accelerate later this year in 2024 as bead money, chasing the same labor pool. I'm curious to hear your thoughts and expectations on comfort levels there. Thanks. I will hit the first one. I will give you the second one. If you think about the factory.

Speaker 1: you need in between those two outcomes, you need a marketing engine.

Speaker 1: So now that we've got the enablement, really, really high quality ones up and running, you're going to see us putting gas in the marketing campaigns, digital marketing campaigns to really, I think, turn the needle on subscriber growth.

Speaker 2: Yeah, and on the cost side, I mean the good news is that we feel good about the guidance that we gave at the beginning of the year. And we also, and I think this is more important, we talked about the fact that we feel that there's ARPU upside here and that's something that we'll be looking at going forward.

Speaker 2: That's the long way of saying that if we do experience movement in the cost, that's a far less impactful metric in terms of the long-term return than the ARPU. So we continue to watch it. We're not seeing any pressure there today. I want to be very clear about that. The team continues to look for efficiencies.

Speaker 2: In some cases, it has been able to find efficiency and do the build at a more cost effective rate than what was initially designed. So we'll continue to press that. But again, I'm less concerned about that number as it relates to the overall return. It really is about penetration in our poo and we feel good about both of those. Got it. Thank you.

Speaker 2: some cases has been able to find efficiency and do the build at a more cost-effective rate than what was initially designed. We'll continue to press that, but again, I'm less concerned about that number as it relates to the overall return. It really is about penetration in our poo, and we feel good about both of those. Dr.df Y

Speaker 6: Certainly. Our next question comes from the line of Frank Lausen with Raymond James. Please proceed with your question. Great, thank you. One of your peers is looking to pursue exiting some copper locations as they're sort of way under the Kohler obligations. Are there any opportunities there for you as you look forward? And then secondly, when you run fiber into an area, how long is it before you can retire the copper there and not have to support two networks? Thanks.

Speaker 2: Yeah, I'll take that Frank. So on kind of opportunities for additional copper consolidation, I'd say just simply that's not our focus, right? We've got to pivot to the new. It's where the future is for us and that's what we're 100% focused on.

Speaker 2: it relates to the copper I don't have an exact answer for you but what I can tell you is it in a way our job on that front is easy because we're starting from such a lousy place in terms of copper penetration right it's at 12% when we go into a market and we can really blast it with fiber

Speaker 2: there's really not any major issues in terms of turning copper down. So the team's all over that and they make those decisions on a market-to-market basis. All right, great. Thank you very much. Thanks, Frank. Does anyone have a question, please? Our next question is from the line of Eric Lupko with Wells Fargo.

Speaker 5: are migrating those customers up the stack. And then secondly, one for Chris, giving your desire to invest more in quantum fiber anyway to break down enterprise catbacks. And if we see any more market fiscal occasion, how much of that is success based catbacks that you could potentially adjust to help keep leverage in line.

Speaker 1: Yeah, regarding the portfolio simplification, the reduction of 60% of the SKUs was non-revenue impacting. What it did was basically clean up the database of product capabilities that we offer today and seek revenue on, which enables a simplification.

Speaker 1: you know, from ordering all the way down through billing. So it was the first step. Now we've got to take the next couple of steps, which is A, further simplification, and then B, you know, as we look to upgrade our ERP and do all the complicated work of reducing our application portfolio, we'll probably have...

Speaker 2: some harder decisions to make, but that's the next tranche of work. As it relates to the CapEx, again, there's a lot of math that we've shared on this, but I would say simply and directionally, high level we've said that of our roughly 3 billion in CapEx guidance for the year, we're going to be able to do that.

Speaker 2: It was split roughly two-thirds enterprise business, I should say, one-third mass markets, with about $250 million in each of those for maintenance.

Speaker 2: And so, Quantum had about 600 million, and then there's the CAPEX that goes into, you know, in-home enablements and turn-ups. So that's the million for consumer. On the enterprise side, after maintenance.

Speaker 2: you got a billion and three quarters left. And we've said that the enterprise business is really gonna be the beneficiary of a lot of the optimization investment we're doing on the CapEx side, which left about a billion and a quarter for success based.

Speaker 2: Entering the year on success-based, we probably have visibility to where about 30% of that's going because of contracts that were sold last year that will be turned up this year.

Speaker 2: The rest of it is based off of what we sell this year. So there's enormous flexibility as we go through the year if enterprise Goes through a period of significant softness will spend less. There's a natural governor and correlation between those two between those two numbers, but As we go through this year, we're confident that we can stay within our guidance

Speaker 2: given what the mass markets team is seeing and as we look to future years we'll talk more about that on June 5th.

Speaker 2: what the mass markets team is seeing and as we look to future years we'll talk more about that on June 5th.

Speaker 3: Thanks Eric. So we have time for just one last question. Certainly. Our last question comes from the line of Jonathan Chaplin with New Street Research. Please proceed with your question.

Speaker 9: Thanks. Two quick easy ones, if I may. First, I'm wondering if you have a sense of what the Bead opportunity is within your footprint. How many locations might be Bead eligible amongst the portion that you don't upgrade to fiber?

Speaker 9: And then a bit of a technical question for Chris on the proceeds from the EMEA transaction. I understand that those are going to put pay down debt. Can you tell us which silo specifically they go towards? Do the proceeds stay within?

Speaker 9: the level three silo paying down debt there or can they go anywhere across the capital structure?

Speaker 1: Sure, I'll take the first one. I'll let Chris do the second one. With respect to BEAD, so all of our numbers that we shared with you, the 8 to 10 million that we've talked about a couple different times, that's without BEAD funding at all. So anything from BEAD would be $5,000.

Speaker 1: you know, a net positive add to this story. And it's early days yet. We're not exactly sure how it's flowing down, so we can't give you that kind of transparency or precision yet. But we look at it as potential upside for sure.

Speaker 2: Yeah, and on the EMEA proceeds, you know, we'll get more specific about where those proceeds go as time goes on, but we do have a certain amount of flexibility. And the biggest thing is, is obviously we've got to be thoughtful about where we are on covenants.

Speaker 2: And that's part of what goes into our decision making on all that.

Speaker 1: Great. Thank you very much. Thanks, Jonathan. Thank you. So, thanks, everybody. That concludes our call today. I appreciate your time and look forward to seeing you or hearing from you on June 5th. Have a great day. We would like to thank everyone for your participation.

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