Q3 2023 Lumen Technologies Inc Earnings Call
Greetings and welcome to the lumen Technologies' third quarter 2023 earnings 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 telephone.
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 October 31st 2023.
I'd now like to turn the conference over to Mike Mccormack Senior Vice President Investor Relations. Please go ahead.
Thanks, Steve Good afternoon, everyone and thank you for joining Illumina technologies third quarter 2023 earnings call on the call today are Keith Johnson, President and Chief Executive Officer, Chris Stansbury, Executive Vice President and Chief Financial Officer, and Rahul Modi, our treasurer before we begin I need to call your attention to our safe Harbor statement on slide two of our third.
Quarter, 2023 presentation, which notes that this conference call May include forward looking statements subject to certain risks and uncertainties. All forward looking statements should be considered in conjunction with the cautionary statements on slide two and the risk factors in our SEC filings, we will be referring to certain non-GAAP financial measures are reconciled to the most comparable GAAP measures, which.
Can be found in our earnings press release. In addition, certain metrics discussed today exclude costs or special items as detailed in our earnings materials, which can be found on the investor Relations section of the lumen website with that I'll turn it over to Kate.
Thanks, Mike Good afternoon, everybody I'm excited to share a summary of the material progress we've made in our efforts to reposition alumina for growth I'll start with some major structural accomplishment.
First we've made significant progress in simplifying alumina with two divestitures.
But we expect to close the sale of our EMEA business to Cold Tomorrow November one.
Earlier than planned this transaction will generate approximately $1 $5 billion of net after tax proceeds, which we anticipate will be used for debt reduction.
Two weeks ago, we announced the sale of the majority of our CDN contracts a transaction that will enable us to continue to focus our resources on businesses, where we can differentiate ourselves from the market at scale.
Next the balance sheet.
We successfully reached a broad agreement with creditors that hold over 7 billion of the outstanding debt of the company and its subsidiaries.
The transaction will extend a large portion of our debt maturities and remove questions regarding the company's compliance with its debt covenants.
The creditor group will also provide $1 $2 billion of new financing.
The closing of the transaction is subject to the satisfaction of certain conditions, including completing work with our banks to extend our revolver and term loan a and getting approval from other creditors as needed.
In addition to restructuring the balance sheet, we've made the difficult decision to reshape and rightsize lumen for growth, we're taking immediate actions, which will result in about 4% fewer people inside the company.
This re org, along with additional optimization initiatives will generate annualized savings of approximately $300 million.
Now as you might expect this is a difficult but necessary decision given the revenue pressure, we felt from the noise in the market regarding our credit or discussions as well as global macroeconomic pressures.
These proactive steps to address our balance sheet and lower our cost base, we will reduce the noise.
It will improve our agility and efficiency and it will enable us to better compete in the markets we serve.
Now I'd like to talk about some of the operational improvements we're seeing in our business segment.
As we've shared we have a three pronged strategy to transform this business one secure debates to drive commercial excellence and three innovate for growth and we're making progress against all three.
Securing the base boils down to five things minimizing disconnects maximizing installations driving increased usage renewing customer contracts and migrating our customers to newer technologies. If we get these five things right we reduced churn.
Unknown Executive: Greetings and welcome to the Lumen Technologies Third Quarter 2023 earnings 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 telephone. 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, October 31st, 2023.
So let me share this quarter sequential performance for these five metrics in our North America large enterprise and mid market sales channels.
We saw a 4% reduction in disconnects.
9% increase in install a 5% increase in usage.
A 4% increase in VPN customer renewals and a 21% increase in voice migrations.
With heavy use of data and analytics to understand customer behavior and an agile approach, we created a wind formula to address churn and delivered improved business revenue performance. This quarter, obviously, a lot more work to do here, but we do see a path to success.
Michael McCormack: I would now like to turn the conference over to Mike McCormack, Senior Vice President, Investor Relations. Please go ahead. Thanks, Cersei.
Kate Johnson: Good afternoon, everyone, and thank you for joining Lumen Technologies Third Quarter 2023 earnings call.
Kate Johnson: On the call today, our Kate Johnson, President and Chief Executive Officer, Chris Stansbury, Executive Vice President and Chief Financial Officer, and Rahul Modi, our Treasurer.
Let's look at driving commercial excellence. This is about sales execution that ultimately yields growth simply put there's just two ways to grow you either sell to net new customers.
Kate Johnson: Before we begin, I need to call your attention to our safe harbor statement on slide two of our third quarter 2023 presentation, which knows that this conference call may include forward-looking statements subject to certain risks and uncertainties. All forward-looking statements should be considered in conjunction with the cautionary statements on slide two and the risk factors in our SEC filings. We will be referring to certain non-gab financial measures, the most comparable gap measures, which can be found in our earnings press release.
Or you sell more product and services to existing ones.
Progress against both of these growth vectors first we added more than 2500, new logo customers. So far this year across large enterprise mid market and public sector segments. Despite the headwinds I described earlier.
Year over year, we've seen 47% more grow products sold to existing customers or 16% normalized for a large deal that I'll talk about just a moment.
Kate Johnson: In addition, certain metrics discussed today include costs or special items as detailed in our earnings materials, which can be found on the Investor Relations section of the Lumen website. With that, I'll turn over to Kate. Thanks, Mike. Good afternoon, everybody. I'm excited to share a summary of the material progress we've made in our efforts to reposition Lumen for growth. I'll start with a major structural accomplishment. First, we've made significant progress in simplifying Lumen with two divestitures.
Finally, we achieved 14% higher seller productivity year over year, a very impressive metric given how many new sellers we have.
A big part of driving commercial excellence is going after net new markets for example.
See huge potential in the digital inclusion market, which presents an opportunity for aluminum help states bring reliable broadband connectivity to unserved and underserved markets.
Kate Johnson: We expect to close the sale of our Amia business to cult tomorrow, November 1st, earlier than planned. This transaction will generate approximately $1.5 billion in net aftertax proceeds, which we anticipate will be used for debt reduction. Second, two weeks ago, we announced the sale of the majority of our CDN contracts, a transaction that will enable us to continue to focus our resources on businesses where we can differentiate ourselves from the market at scale.
We won our first large multi year deal on the space representing over $400 million of revenue when the state of California chose alumina as a key strategic partner, we're now bringing the same commercial framework for public private partnerships to other states as they seek to bridge the digital divide.
Alright, the third proud of our business strategy innovating for growth.
This is all about bringing net new capabilities like network as a service or NAV to the market and gaining access to new profit pools.
Kate Johnson: Next, the balance sheet. We successfully reached a broad agreement with creditors that hold over $7 billion of the outstanding debt of the company and its subsidiaries. The transaction will extend a large portion of our debt maturities and remove questions regarding the company's compliance with its debt covenants. The creditor group will also provide $1.2 billion of new financing. The closing of the transaction is subject to the satisfaction of certain conditions, including completing work with our banks to extend our revolver in Termalone A and getting approval from other creditors as needed.
We've made great progress driving adoption of our first <unk> offering called lumen Internet on demand. This new digital capability is now generally available and has lighthouse customers and 13 industries, including healthcare technology insurance retail manufacturing and public sector to name a few.
In addition to selling NASDAQ directly to customers lumen is also leveraging our partner ecosystem to drive scale customers can buy alumina internet on demand through 136 enabled datacenters in 10 different markets across North America through our great partners digital Realty and Equinix.
Kate Johnson: In addition to restructuring the balance sheet, we've made the difficult decision to reshape and right size lumen for growth. We're taking immediate actions, which will result in about 4% fewer people inside the company. This reorg, along with additional optimization initiatives, will generate annualized savings of approximately $300 million. As you might expect, this is a difficult but necessary decision given the revenue pressure we felt from the noise in the market regarding our creditor discussions as well as global macroeconomic pressures. These proactive steps to address our balance sheet and lower our cost base will reduce the noise, it will improve our agility and efficiency, and it will enable us to better compete in the markets we serve.
Our MAF product roadmap is industry defining.
So we will be adding soon will be adding API capability to allow customers to activate <unk> in their own business applications.
Then we will layer in security with Ddos and then we'll offer dynamic bandwidth capability for ultimate usage flexibility.
That together with our edge fabric and exit switch Luminesce is setting the table for a new market category for the modern communications infrastructure platform.
One that optimizes application performance across hybrid architectures.
On Prem at the edge and multi cloud.
And one that makes room for rapidly changing network needs as Jen AI becomes mainstream.
Kate Johnson: Now I'd like to talk about some of the operational improvements we're seeing in our business segment. As we've shared, we have a three-pronged strategy to transform this business, one, secure the base, two, drop commercial excellence, and three, innovate for growth. And we're making progress against all three. Securing the base boils down to five things, minimizing disconnects, maximizing installations, driving increased usage, renewing customer contracts, and migrating our customers to newer technologies. If we get these five things right, we reduce churn.
We are classifying telecom, it's going to be disruptive to the industry and we are playing to win.
Alright, turning to mass market with a strong we had strong growth and quantify we're enabling us.
Where our construction factories operating well now that said our subscriber adds this quarter were below our expectations. During the quarter, we took significant steps to improve operations as we combined centurylink fiber with quantum fiber emerging all inventory and field tech systems into one and vastly.
Kate Johnson: So let me share this quarter's sequential performance for these five metrics in our North America, large enterprise and mid-market sales channels. We saw a 4% reduction in disconnect, a 9% increase in installs, a 5% increase in usage, a 4% increase in VPN customer renewals, and a 21% increase in voice migration. With heavy use of data and analytics to understand customer behavior and an agile approach, we created a wind formula to address churn and delivered improved business revenue performance this quarter. Obviously, a lot more work to do here, but we do see a path to success.
<unk> order to install commitments, while we believe these operational activities coupled with lower move activity Dampens. The subscriber adds this quarter, we do know that we need to do better selling and penetrating existing built.
Therefore, as we face a more constrained capital environment ahead, we'll prioritize sales and marketing investments over enablement growth.
While we will still build at a healthy pace.
Should see greater penetration rates and a higher return on capital spend and mass markets.
Alright to wrap up.
Often spoke spoken about rebuilding lumens, starting with our people.
Kate Johnson: Let's look at driving commercial excellence. This is about sales execution that ultimately yields growth. Simply put, there's just two ways to grow. You either sell to net new customers, or you sell more product and services to existing ones. We're making progress against both of these growth vectors. First, we added more than 2,500 new logo customers so far this year across large enterprise, mid-market and public sector segments, despite the headwinds I described earlier.
We've been hard at work doing that for the past 12 months.
And I am proud to share that during the third quarter lumen was recognized by U S News and World report as one of the 2020 for Best places to work in Telecom, It's our first time being named to the list and I think it demonstrates the power of creating a culture that enables change.
Transformation of messy business and despite extremely challenging headwinds, we've made big and important structural changes to the company and equally important.
Kate Johnson: Year of a year, we've seen 47% more grow products sold to existing customers, or 16% normalize for a large deal that I'll talk about in just a moment. Finally, we achieved 14% higher seller productivity year over year, a very impressive metric given how many new sellers we have.
We've made significant measurable operational improvements.
Lots more to do but we're confident in our strategy to pivot lumen towards stabilization and growth.
I'll turn the call over to Chris.
Thank you Kate and good afternoon, everyone.
I spoke about our progress in transforming and disrupting telecom and playing to win. She also spoke of our success in reaching an agreement with a group of creditors to extend our debt maturities.
Kate Johnson: A big part of driving commercial excellence is going after net new markets. For example, we see huge potential in the digital inclusion market, which presents an opportunity for Aluminum to help states bring reliable broadband connectivity to unserved and underserved markets. We won our first large multi-year deal in the space, representing over $400 million of revenue when the state of California chose Lumen as a key strategic partner. We're now bringing the same commercial framework for public-private partnerships to other states as they seek to bridge the digital divide.
On our Q2 earnings call. We said, we viewed the formation of the creditor group has an opportunity to both fund our future as well as address are challenging maturities profile.
Agreement, we announced today meets both of those objectives and will allow us to continue our transformation journey and the disruption of telecom.
Before covering our third quarter results I would like to take a few minutes to discuss several items, which will impact our financial trends going forward as Keith mentioned, we closed the CDN sale earlier this month and we expect to close the sale of our EMEA business Tomorrow November one.
Kate Johnson: All right, the third problem of our business strategy, innovating for growth. This is all about bringing net new capabilities, like network as a service or NAS, to the market and gaining access to new profit pools. We've made great progress driving adoption of our first NAS offering called Lumen Internet on demand. This new digital capability is now generally available and has lighthouse customers in 13 industries, including health care, technology, insurance, retail, manufacturing, and public sector to name a few.
The CDN sale will not have a material impact on our financials, we estimate that the CDN contracts contributed roughly $20 million in revenue and $10 million and adjusted EBITDA to our third quarter 2023 results keep in mind that the CDN contracts were part of our harvest portfolio and have received little capital investment.
In recent years, the valuation will not disclose reflects the declining nature of the revenue of these contracts we plan to wind down the remaining CDN contracts in 2024.
Kate Johnson: In addition to selling NAS directly to customers, Lumen is also leveraging our partner ecosystem to drive scale. Customers can buy Lumen Internet on demand through 136 enabled data centers in 10 different markets across North America through our great partners Digital Realty and Equinix. Our NAS product roadmap is industry-defining, so we'll be adding, soon we'll be adding API capability to allow customers to activate NAS in their own business applications. Then we'll layer in security with DDoS, and then we'll offer dynamic bandwidth capability for ultimate usage flexibility.
For the pending divestiture of our EMEA business, our 2023 outlook assumed a full fourth quarter contribution of approximately $140 million in revenue $50 million and adjusted EBITDA and $30 million in Capex.
Separately, we are expecting a tax refund of approximately $900 million.
Previously not included within the financial outlook.
Approximately $200 million of the refund will be applied to pay 2023 estimated taxes and we're expecting a cash refund of approximately $700 million in the first quarter of next year.
Kate Johnson: Now, together with our Edge fabric and exit switch, Lumen NAS is setting the table for a new market category for the modern communication infrastructure platform, one that optimizes application performance across hybrid architectures, Vaughan Prem at the Edge and multi-cloud, and one that makes room for rapidly changing network needs as GNAI becomes mainstream. We are cloudifying Telecom. It's going to be disruptive to the industry, and we are playing to win.
We expect to receive a near term cash benefit. This is in part due to an accelerated use of our Nols some of the benefits will reverse over the next few years.
There are counter balancing impacts related to the CDN contracts and the appending EMEA.
A transaction that make us comfortable keeping our full year 2023 free cash flow guidance of zero to $200 million.
As Keith mentioned, the macro environment and the overhang of our creditor discussions has resulted in revenue headwinds, which will pressure our results over the next few quarters with the creditor agreement reached today and continued execution against our plan, we expect to see sustained improvement in.
Kate Johnson: All right. Turning to mass markets, we have strong growth in quantum fiber enablements where our construction factory is operating well, and that said, our subscriber ads is quarter worth a lower expectation. During the quarter, we took significant steps to improve operations as we combined Century Link fiber with quantum fiber, merging all inventory and field tech systems into one, and vastly improved order-to-install commitment. While we believe these operational activities coupled with lower move activity, the ampens of subscriber ads is quarter, we do know that we need to do better selling and penetrating existing built.
Revenue trends in mid 2024 and.
In addition, we expect the cost actions that Keith mentioned earlier to help address near term pressures on adjusted EBITDA.
Additionally, we've been clear that in the wake of transactions over the last year and a half our organization needs to be more nimble and continue to work through transaction related dis synergies.
I will now discuss in more detail the financial summary of our third quarter as I've done throughout this year I'll reference our financial performance, primarily on a sequential basis for better comparability as the year ago period included the impacts of our divested Latam and ILEC 20 state businesses keep.
Kate Johnson: Therefore, as we face a more constrained capital environment ahead, we'll prioritize sales and marketing investments over enablement growth. While we will still build at a healthy pace, we should see greater penetration rates and a higher return on capital spent in mass markets.
Keep in mind, when the impacts of divestitures and commercial agreements are excluded from results our year over year growth rates are substantially better than the reported rates.
Our third quarter total revenue declined half a percent on a sequential basis to $3 641 billion.
Kate Johnson: All right. Starting with our people, we've been hard at work doing that for the past 12 months, and I'm proud to share that during the third quarter, Lumen was recognized by US News and World Report as one of the 2024 best places to work in telecom. It's our first time being named to the list, and I think it demonstrates the power of creating a culture that enables change. Transformation is messy business, and despite extremely challenging headwind, we've made big and important structural changes to the company, and equally important, we've made significant measurable operational improvements. There's lots more to do, but we're confident in our strategy to pivot Lumen toward stabilization and growth.
Adjusted EBITDA was 1.049 billion in the third quarter with a 28, 8% margin.
Free cash flow was $43 million in the third quarter.
Next I'll review detailed revenue results for the quarter.
On a year over year basis reported revenue was down 17, 1% with the impact of divestitures and commercial agreements representing approximately 73% of the reported decline.
Within our two key segments business revenue declined 1% sequentially to two $8 $94 billion and mass markets revenue declined two 2% sequentially to $747 million.
With our within our enterprise channels, which is our business segment, excluding wholesale revenue grew one 1% sequentially.
Christopher Stansbury: With that, I'll turn the call over to Chris. Thank you, Kate. Good afternoon, everyone. Kate spoke about our progress in transforming and disrupting telecom and playing to win. She also spoke of our success in reaching an agreement with a group of creditors to extend our debt maturities. On our Q2 earnings call, we said we viewed the formation of the creditors group as an opportunity to both fund our future as well as address our challenging maturities profile. The agreement we announced today meets both of those objectives, and will allow us to continue our transformation journey and the disruption of telecom.
Be aware that much of this strength is driven by growth in other products, which tend to fluctuate quarter to quarter.
However, excluding other products and the impact of divested businesses, our subtotal of grow nurture and harvest revenue declined at the slowest rate we've seen in years.
That said, we continue to expect near term variability in the revenue trends our exposure to declining harvest revenue is now less than 18% of enterprise channel revenue and was down approximately 70 basis points sequentially.
Christopher Stansbury: Before covering our third quarter results, I would like to take a few minutes to discuss several items which will impact our financial trends going forward. As Kate mentioned, we closed the CDN sale earlier this month and we expect close the sale of our Amia business tomorrow November 1st. The CDN sale will not have a material impact on our financials. We estimate that the CDN contracts contributed roughly 20 million in revenue and 10 million in adjusted EBITDA to our third quarter, 2023.
Large enterprise revenue grew 3% sequentially in the third quarter large enterprise revenue trends improved compared to the second quarter year over year, when excluding the impact of divested businesses driven primarily by continued strong trends in the <unk> products segment due to the demand for IP dark fiber and co location and modern.
Rating declines and nurture and harvest.
Now moving onto public sector revenue grew seven 2% sequentially.
Christopher Stansbury: Keep in mind that these CDN contracts were part of our harvest portfolio and have received little capital investment in recent years. The valuation, while not disclosed, reflects the declining nature of the revenue of these contracts. We plan to wind down the remaining CDN contracts in 2024. For the pending divestiture of our Amia business, our 2023 outlook assumed a full fourth quarter contribution of approximately $140 million in revenue, $50 million in adjusted EBITDA and $30 million in CapEx.
Excluding the impacts of our divested business.
<unk> public sector trends improved year over year, primarily due to higher other revenue, which includes nonrecurring equipment in it solutions improvement and grow revenue and moderating declines in nurture and harvest products during the third quarter.
Mid market revenue declined one 8% sequentially.
Excluding the impacts of our divested businesses third quarter revenue trends worsened year over year strength and grow products driven primarily by IP, you C&C and enterprise broadband, which is more than offset by lower VPN revenue within nurture.
Christopher Stansbury: Separately, we're expecting a tax refund of approximately $900 million previously not included within the financial outlook. Approximately $200 million of the refund will be applied to pay 2023 estimated taxes and we're expecting a cash refund of approximately $700 million in the first quarter of next year. While we expect to receive a near-term cash benefit, this is in part due to an accelerated use of our NOLs. Some of the benefits will reverse over the next few years.
Wholesale revenue declined three 4% sequentially, we expect our wholesale channel we will likely continue to decline over time as it is an area we manage for cash.
Now moving onto business product lifecycle reported.
Products revenue declined one 1% sequentially, excluding the impacts of our divested business as this quarter's results showed moderating year over year growth.
While results can vary in any given quarter, we expect sustained strength in this area as we execute on our turnaround.
Christopher Stansbury: There are counter-balancing impacts related to the CDN contracts and the pending Amia transaction that make us comfortable keeping our full year 2023 free cash flow guidance of $0 to $200 million. As Kate mentioned, the macro environment and the overhang of our credit or discussions has resulted in revenue headwinds which will pressure our results over the next few quarters. With the credit or agreement reached today and continued execution against our plan, we expect to see sustained improving revenue trends in mid-2024.
<unk> continues to represent approximately 39% of our business segment and carried an approximate 82% direct margin this quarter.
Within nurture and harvest, we expect we continue to expect headwinds in these categories, because we take proactive steps to migrate customers to newer technologies.
This improves our customers' experience and provides an uplift in the lifetime value of those customers for women.
As Kate mentioned, we continue to see positive leading indicators that our initiatives are working and it will take some time to be reflected in.
Christopher Stansbury: In addition, we expect to cost actions that Kate mentioned earlier to help address near-term pressures on adjusted EBITDA. Additionally, we've been clear that in the wake of transactions over the last year and a half, our organization needs to be more nimble and continue to work through transaction related to synergies.
In our results.
Nurture product revenue declined half a percent sequentially due to continued pressure in VPN and Ethernet services nurture represents about 30% of our business segments and carried an approximate 69% direct margin this quarter.
Harvest products revenue declined three 8% sequentially.
Christopher Stansbury: I'll now discuss in more detail the financial summary of our third quarter. As I've done throughout this year, I'll reference our financial performance primarily on a sequential basis for better comparability as the year-go period included the impacts of our divested LADAM and I-LECT-20 state businesses. Keep in mind, when the impacts of divestitures and commercial agreements are excluded from results, our year-over-year growth rates are substantially better than the reported rates. Our third quarter total revenue declined half a percent on a sequential basis to $3.641 billion.
Call that harvest is an important part of our business as it generates cash to fuel our growth initiatives harvests represents approximately 24% of our business segments and carried an approximate 80% direct margin this quarter.
Other products revenue grew 23, 7% sequentially or other product revenue tends to experience fluctuations due to the variable nature of these products.
Now moving on to mass markets revenue declined two 2% sequentially.
Our mass markets fiber broadband revenue grew three 2% sequentially and represented approximately 32% of mass markets broadband revenue.
Christopher Stansbury: Adjusted EBITDA was $1.049 billion in the third quarter with a 28.8% margin. Free cash flow was $43 million in the third quarter. Next, I'll review detailed revenue results for the quarter. On a year-over-year basis, reported revenue was down 17.1% with the impact of divestitures and commercial agreements representing approximately 73% of the reported decline. With our two key segments, business revenue declined 0.1% sequentially to $2.894 billion, and mass markets revenue declined 2.2% sequentially to $747 million.
Also note that our exposure to legacy voice and other.
Service revenue continues to improve with a nearly 20 basis point reduction sequentially.
During the quarter total fiber broadband enablement were 141000, bringing the total fiber enabled locations to approximately $3 5 million as of September 30.
During the third quarter, we added 19000 quantum fiber customers fiber <unk> was flat sequentially and increased on a year over year basis to approximately $61 in the third quarter.
At the end of the quarter, our penetration of legacy copper broadband drop below 11%.
Christopher Stansbury: With our enterprise channels, which is our business segment, excluding wholesale, revenue grew 1.1% sequentially. Be aware that much of this strength is driven by growth into other products which tend to fluctuate quarter to quarter. However, excluding other products and the impact of devastated businesses, our sub-total of grow, nurture, and harvest revenue declined at the slowest rate we've seen in years. That said, we continue to expect near-term variability in the revenue trends.
Quantum fiber penetration stood at approximately 25%.
The agreements with our creditor groups have given us runway to execute against our turnaround plan, but those agreements will result in interest expense increasing sooner than are forecasted anticipated.
This leads to a choice of higher enablement or higher returns for the mass market business and we are choosing higher returns. We will continue to build at a pace similar to what we're doing this year, but will increase our focus on driving penetration in <unk> and growth as I've said many times, our best use of incremental investment is in our business.
Christopher Stansbury: Our exposure to declining harvest revenues now less than 18% of enterprise channel revenue and was down approximately 70 basis points sequentially. Large enterprise revenue grew 0.3% sequentially in the third quarter. Large enterprise revenue trends improved compared to the second quarter year over year when excluding the impact of divested businesses, driven primarily by continued strong trends in the growth product segment due to demand for IP, dark fiber, and co-location, and moderating declines in nurture and harvest.
Where we see faster and better returns.
Turning to adjusted EBITDA for the third quarter of 2023, adjusted EBITDA was 1.0 49 billion compared.
Compared to $1 688 billion in the year ago quarter.
The third quarter of last year included $332 million related to the divested businesses in the third quarter of this year included a negative impact of $40 million from the divestiture related commercial agreements. These.
Christopher Stansbury: Moving on to public sector, revenue grew 7.2% sequentially, excluding the impact of our divested businesses, public sector trends improved year over year primarily due to higher other revenue which includes non-recuring equipment and IT solutions, improving grow revenue, and moderating declines in nurture and harvest products during the third quarter. Mid-market revenue declined 1.8% sequentially, excluding the impact of our divested businesses, third quarter revenue trends worsened year over year. Strengthened grow products were driven primarily by IP, UCNC, and enterprise broadband which is more than offset by lower VPN revenue within nurture. Whole-sale revenue declined 3.4% sequentially. We expect our whole-sale channel will likely continue to decline over time as is an area we manage for cash.
These items represent approximately 58% of the year over year decline.
Special items impacting adjusted EBITDA this quarter totaled $33 million.
Our third quarter 2023, adjusted EBITDA margin, excluding special items was 28, 8% as we lean into growth and optimization efforts.
Capital expenditures for the third quarter of 2023 were $843 million.
Yes.
In the third quarter of 2023, the company generated free cash flow of $43 million.
Now moving onto our outlook.
Our financial outlook for 2023.
Reiterating all guidance metrics, we will provide our outlook for 2024, when we report our fourth quarter results in early February.
Christopher Stansbury: Now moving on to business product life cycle reporting. Growth products revenue declined 1.1% sequentially, excluding the impact of our divested businesses this quarter's results showed moderating year over year growth. While results can vary in any given quarter, we expect sustained strength in this area as we execute on our turnaround. Growth continues to represent approximately 39% of our business segment and carried in approximate 82% direct margin this quarter. Within nurture and harvest, we expect or we continue to expect headwinds in these categories as we take proactive steps to migrate customers to newer technologies.
With that we're ready for your questions.
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And our first question comes from the line of Simon Flannery with Morgan Stanley.
Please proceed with your question.
Okay, great. Good evening, thanks, very much Chris I know the 8-K, just came out but it'd be great. If you could just give us a little bit more on the debt agreement, perhaps quantify the interest expense impact.
Christopher Stansbury: This improves our customers' experience and provides an uplift in the lifetime value of those customers for Lumen. As Kate mentioned, we continue to see positive leading indicators that our initiatives are working and it will take some time to be reflected in our results. Nurture product revenue declined 1.5% sequentially due to continued pressure in VPN and Ethernet services. Nurture represents about 30% of our business segment and carried in approximate 69% direct margin this quarter.
What happens to your maturity schedule as well.
So there's obviously a lot of work that needs to continue.
What I would say Simon is I'd highlight.
The agreement does address the maturities our need for investment.
Depending on participation rates it really does a clearer path.
Christopher Stansbury: Harvest products revenue declined 3.8% sequentially. We call that Harvest is an important part of our business as it generates cash to fuel our growth initiatives. Harvest represents approximately 24% of our business segment and carried in approximate 80% direct margin this quarter. Another products revenue grew 23.7 percent sequentially. Our other product revenue tends to experience fluctuations due to the variable nature of these products. Moving on to mass markets, revenue declined 2.2 percent sequentially.
Largely to 2029, which gives us more than ample time to execute the turnaround and we do see a pathway to.
Being able to execute against that agreement and we got the flexibility that we need.
As we move through that as it relates to interest expense again, it varies by year, obviously more impact near in less further out given the way we modeled.
Higher interest rates at the Investor day.
Christopher Stansbury: Our mass markets fiber broadband revenue grew 3.2 percent sequentially and represented approximately 32 percent of mass markets broadband revenue. Also note that our exposure to legacy voice and other service revenue continues to increase. We can improve with a nearly 20 basis point reduction sequentially. During the quarter, total fiber broadband enablements were 141,000, bringing the total fiber enabled locations to approximately 3.5 million as a September 30. During the third quarter, we added 19,000 quantum fiber customers.
And the way I look at it is.
We will be cutting back on capex, and the $2 million to $300 million range.
Over the next few years to.
To compensate for that.
Versus the analyst day projections.
Correct.
And how do you think about beat in the context of today's news is that something you've kind of de emphasize at this point.
And again I think our feelings on need are very similar to.
What we have said consistently which is if there is an opportunity we will participate.
Christopher Stansbury: Fiber R.Poo was flat sequentially and increased on a year-over-year basis to approximately $61 in the third quarter. At the end of the quarter, our penetration of legacy copper broadband grew up below 11 percent, and our quantum fiber penetration stood at approximately 25 percent. The agreements with our credit groups have given us runway to execute against our turnaround plan, but those agreements will result in interest expense increasing sooner than our forecasted anticipated.
But again, we're not.
<unk> a lot of hope on that those those programs tend to get.
Driven down in terms of the returns.
Very clear today, saying that our focus is return so it doesn't mean, we won't participate we're going to be selective.
Alright, Thanks, a lot.
Our next question comes from the line of Nick del Deo with Moffett Nathan Please.
Please proceed with your question.
Christopher Stansbury: This leads to a choice of higher enablements or higher returns for the mass market business, and we are choosing higher returns. We will continue to build a pace similar to what we're doing this year, but we'll increase our focus on driving penetration in R.Poo and growth. As I've said many times, our best use of incremental investment is in our business segment, where we see faster and better returns. Turning to adjusted EBITDA for the third quarter of 2023, adjusted EBITDA was $1.049 billion, compared to $1.688 billion in the year ago quarter.
Alright, thanks, taking my questions.
First Chris I was just scanning the 8-K.
So like Simon that time to go through everything in detail, but I think one of the bullets noted that you expect the cumulative cash flow that you had previously laid out at the analyst day to come in within within the range you had targeted to that but at the low end.
And if I'm reading it correctly it would seem to include a cumulative $600 million improvement in your cash taxes over that timeframe and presumably some of the lower capex. He is laid out so I'm just wondering if you could help us.
I understand the puts and takes there a.
A bit better I want to make sure I'm answering your question I mean.
Christopher Stansbury: The third quarter of last year included $332 million related to the divested businesses, and the third quarter of this year included a negative impact of $40 million from the best future related commercial agreements. These items represent approximately 58 percent of the year over year decline. Special items impacting adjusted EBITDA this quarter total $33 million. Our third quarter of 2023 adjusted EBITDA margins, excluding special items, was 28.8 percent as we lean into growth and optimization efforts. Capital expenditures for the third quarter of 2023 were $843 million. In the third quarter of 2023, the company generated free cashflow of $43 million.
The only thing that we've guided obviously as this year.
Still holding the guidance range.
As we said we expected a couple of hundred million dollars.
And to be used this year.
But when you look at just the other expenses and whatnot.
That we're incurring on some of the closed transactions and whatnot that kept us within the guidance range.
Going forward go.
Go ahead I'm.
Sorry, sorry go ahead.
No I would just say going forward.
We will have.
All other things being equal.
Free cash flow.
Shortfall that will be addressed by pulling back.
On Capex as I mentioned in my.
Christopher Stansbury: Moving on to our outlook. Our financial outlook for 2023, where we are reiterating all guidance metrics, will provide our outlook for 2024 when we report our fourth quarter results in early February.
My earlier response.
Okay, So just to be.
Clear I was referring to the first bullet in the cleansing information, where you talked about.
Your expectations versus what you had laid out at the analyst day, I see what Youre, saying, yes. So.
Unknown Executive: With that, we're ready for your questions. Thank you very much. If you'd like to register a question, please press the one followed by the four on your telephone. You'll hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the one followed by the three.
As we look at current performance, which is key reference was.
Impacted by the overhang from all the noise in the market around our debt structure and our ability to refinance it.
It unquestionably had a near term impact on sales that we expect will impact revenue. The way, we offset that is the cost reduction program announced today. So.
Simon Flannery: And our first question comes from the line of Simon Flannery with Morgan Stanley. Please receive with your question. Okay, great.
We have line of sight to that.
Being within that EBITDA guidance range that we talked about at Investor Day, We've got work to do obviously to reaffirm that for next year, but that's why we did what we did.
Christopher Stansbury: Good evening. Thanks very much. Chris, I know the AK just came out. Better be great if you could just give us a little bit more on the debt agreement, perhaps quantify the interest expense impact and what happens to your maturity schedule as well. Yeah, so there's obviously a lot of work that needs to continue. What I would say Simon is I'd highlight that the agreement does address the maturity is our need for investment.
There is great stuff going on inside the business in terms of improving revenue trends and we're excited about that but there is no question that.
These near term conditions.
Okay.
The revenue trend more near term.
Okay. Okay, and then just on the on the pace of fiber fiber enablement.
Christopher Stansbury: Depending on participation rate, it really does clear a path largely to 2029, which gives us a more than ample time to execute the turnaround. And we do see a pathway to being able to execute against that agreement. And we've got the flexibility that we need as we move through that as it relates to interest expense. Again, it varies by year, obviously, more impact near and less further out, given the way we modeled higher interest rates at the investor debt.
Whats the magnitude of the change Youre thinking and is the Capex reduction just a function of the lower enablement.
Yes, I think thats the way to think about it it will come in the form of lower enablement and Directionally I think it means that.
Next year and in coming years look relatively flattish to what we're doing this year in terms of enablement.
Okay. Okay. Thanks, Chris.
Our next question comes from the line of Michael Rollins with Citi.
Christopher Stansbury: And the way I look at it is we will be cutting back on TAPEX in the two to three hundred million dollar range over the next few years to compensate for that versus the analyst day projections. Correct. And how do you think about bead in the context of today's news? Is that something you kind of deemphasize at this point? Again, I think our feelings on bead are very similar to what we have said consistently, which is if there's an opportunity, we will participate.
Please proceed with your question.
Thanks, and good afternoon.
Two questions. If I could first just curious if you can unpack a bit more of the EBITDA pressure in the third quarter relative to revenue of course, excluding the divested assets and the transitory items that you highlighted.
In this slide.
And then just secondly, just in response to the last follow up on the last couple.
Question.
Is looming considering other ways.
To try to fund the business and try to get back some of the Capex.
Christopher Stansbury: But again, we're not resting a lot of hope on that. Those programs tend to get driven down in terms of the returns. And we were very clear today as saying that our focus is returned. So it doesn't mean we won't participate, but we're going to be selected. Right.
Some of the investment opportunities.
That you thought would be very productive when you laid out the original.
Unknown Executive: Thanks for all.
Business plan goals of the analyst day.
Yes sure.
Paul.
Address both of those so near term I think we've heard.
Our competition talking about a tough economic environment. There is no question that that that's impacting us although I would say on a relative basis. We are pleased with our performance.
Nick Dildale: Our next question comes from the line of Nick Dildale with Moffit Nathanson. Please proceed with your question. Hey, thanks for my questions. At first, Chris, I was just scanning the 8K, you know, but I think one of the bullets noted that you expect the cumulative cash flow that you would prove to laid out at the analyst day to come in within within the range you had targeted, but at the low end.
And then as I as I said in my previous response.
Nick Dildale: And if I'm reading it correctly, it would seem to include a cumulative six hundred million dollar improvement in your cash taxes over that time frame and presumably some of the lower KAPEX you just laid out. So I'm just wondering, you know, if you could help us understand the puts and takes there a bit better. Yeah, I want to make sure I'm answering your question. I mean, the only thing that we've guided, obviously, is this year we're still holding the guidance range.
Just the amount of noise in the marketplace over.
Whether our turnaround disruption was going to matter because we.
We had this huge 2007 tower that had an impact.
It is hard to measure that but it undoubtedly had an impact.
And that's why we're pleased with.
Where we ended up with the proposed transaction today, So I think that clears the way.
I think the third thing is again, great things happening inside the company, but as we've said consistently it's going to bounce around as we.
As we move through the transition.
Nick Dildale: As we said, we expected a couple hundred million dollars to be used this year, but when you look at just the other expenses and whatnot that that we're occurring on some of the closed transactions and whatnot, that kept us within the guidance range. Going forward. Go ahead. Oh, sorry. Sorry. Go ahead. No, I'll just say going forward, we will have all other things being equal, a free cash flow shortfall that will be addressed by pulling back on KAPEX as I mentioned in my in my earlier Fox.
Start to scale the things that are working.
In my prepared remarks, I did say that we.
We see line of sight to sustained improvement in revenue kind of starting mid year next year.
That remains so we feel good about that as it relates to other ways to fund capex, so more specifically.
The asset based securitization question, yes that remains an option and will continue to do.
Work around structures like that.
To see if theres an opportunity so those those remain but my comments today do.
Nick Dildale: Okay, so just to be clear, I was referring to the first bullet in the cleansing information where you talked about your expectations versus what you would laid out in the analyst day. Oh, I was just saying, yeah, so as we looked at current performance, which is as Kate reference was impacted by the overhead from all the noise in the market around our depth structure and our ability to be financed. It unquestionably had a near-term impact on sale that we expect will impact revenue.
We do not assume any additional.
Structure is helping us fund capex.
Thanks.
Okay.
The next question comes from the line of Berkshire Levy with UBS.
Please proceed with your question great.
Great. Thank you.
Hello up on the new deal how should we think about the net proceeds of the new financing that you are announcing.
<unk>.
How should we think about the split in terms of how much of it will be used in terms of driving new growth versus debt pay down.
Nick Dildale: The way we offset that is the cost reduction program that Kate announced today. So we have line of sight to the, you know, being within that even that guidance ring, we talked about it yesterday. We've got work to do, obviously, to reaffirm that for next year. But that's why we did what we did. There's great stuff going on inside the business in terms of improving revenue trends. And we're excited about that.
Through this transformation phase, where do you think your maximum leverage would be.
Yeah, So I think.
On that last piece I'd want to circle back with you because again that starts to get into what do we think guidance is for next year. So I don't think I want to go there today.
What I would say is that so first of all the.
Nick Dildale: But there's no question that these near-term conditions have, you know, heard the revenue trend more near-term. Okay, okay. And on the pace of fiber enablements, what's the magnitude of the change you're thinking? And is the CAPEX reduction just a function of lower enablements? Yeah, I think that's the way to think about it. It will come in the form of lower enablements. And directionally, I think it means that next year and coming years look relatively flatish to what we're doing this year in terms of enablements. Okay. Thanks, Chris.
The incremental raise I think was a really strong signal from our credit investors of their belief in our ability to turn the company around.
These are our smart shrewd investors, who represent the market and the fact that they.
Are willing to raise an additional $1 $2 billion I think it speaks to their confidence in this management team and our strategy and so I think thats huge we will use the funds. It's all really part of restructuring the debt it's not about.
Using it to necessarily funded specific piece of Capex, our capex as part of the thinking obviously, but this is about restructuring.
Michael Rollins: Our next question comes from the line of Michael Rollins with City. Please proceed with your question. Thanks. Good afternoon. Two questions I could first. Just curious if you can unpack a bit more of the EBITDA pressure in the third quarter relative to revenue. Of course, excluding the vested assets and the transitory items that you highlighted in the slide. And then just secondly, just in response to the last or following up on last couple of questions, is looming considering other ways to try to fund the business and try to get back some of the CAPEX and some of the investment opportunities that you thought would be very productive when you laid out the original business plan goals. Yeah, sure.
Really everything between now and in.
And through 2027.
I guess I will go so far as to say that.
On our leverage versus where we are today.
We would expect through.
Our our turnaround story that leverage will decline to probably stay relatively steady in the near term, but then we would expect that to the clients. So I'll go back to argue that much today.
Okay. Thank you.
The 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.
Christopher Stansbury: So I'll address both of those. So near term, I think we've heard our competition talking about a tough economic environment. There's no question that that's impacting us, although I would say on a relative basis, we're pleased with our performance. And then as I said in my previous response, I think just the amount of noise in the marketplace over whether our turn around disruption was going to matter because we had this huge 27 tower.
And.
Got it.
Chris, but you're only getting about sorry.
Okay. Thanks, guys, Yeah, so look.
I am reading this thing.
And.
So we had this cumulative cash flow expectation.
From the analyst day in June.
And now.
We've got this kind of mysterious.
Tax refund that's showing up.
Christopher Stansbury: That had an impact and it's hard to measure that, but it undoubtedly had an impact and that's why we're pleased with where we ended up with the proposed transactions today. So I think that clears the way. I think the third thing is, again, great things happening inside the company, but as we said, consistently, it's going to bounce around as we move through the transition and start to scale the things that are working.
And yes, there's can be some offsets and maybe it's a net 600 million positive.
And we're letting go some 4% of the corporation that can be a $300 million benefit we're going to cut capex and <unk>.
Even with all of that.
Still at the low end now of.
The Guy who did a few months ago.
And so what we haven't really heard is what is the actual cost.
Dollar number.
Christopher Stansbury: And in my prepared remarks, I did say that we see line of sight to sustained improvement in revenue, kind of starting mid-year next year, and that, you know, that remains. So we feel good about that. As it relates to other ways, to fund cat facts, I feel more specifically, the asset-based securitization question, yeah, that remains an option and we'll continue to do work around structures like that to see if there's an opportunity. So those remain, but my comments today do not assume any additional structures helping us on cat facts.
That's going to get whatever it is that you've done with the debt structure accomplished.
That's my first question.
And the second question is with respect to the third quarter, specifically as we try to like.
In the interim kind of model out what we're looking at.
What was kind of onetime in nature I know you called out something in the public sector that was.
In the revenue line it sounded like it was kind of the equipment type of deal you kind of call out all the one timers that affected the third quarter as we think about fourth quarter. I mean would you try to model out 2024. Thank you.
Yes so.
As it relates to the debt and again, because you're right. I mean this is a complex transaction.
Get into a lot of modeling on this call are not sort of a well.
Batya Levi: The next question comes from the line of Batya Levy with UBS. Please proceed with your question. Great, thank you. A follow-up on the new deal. How should we think about the net proceeds of the new financing that you're announcing? And what should we think about the split in terms of how much of it will be used in terms of driving new growth versus that paydown? And through this transformation phase, where do you think your maximum leverage would be?
What I would tell you is that is that when I said that we needed to.
Cut between two and $300 million of Capex.
<unk>.
That really foretells at higher costs associated with the transaction so think of it this way.
We have some near term revenue pressures improving as we get into mid year.
And next year.
Those revenue pressures are being offset by the cost reduction that we're taking.
Christopher Stansbury: Yeah, so I think on that last piece, I want to circle back with you because again, that starts to get into what we've been guiding for the next few years, so I don't think I want to say that the incremental raise, I think, was a really strong signal from our credit investors at their belief in our ability to turn the company around. These are smart, true investors who represent the market and the fact that they are willing to raise an additional $1.2 billion, I think, speak to their confidence in this management team and our strategy.
The tax.
Benefit, which really relates to a lot of hard work around how.
Can we.
Dresses, we pulled forward Nols so.
A bigger benefit nearer term less of a benefit longer term when you incorporate that into.
The model, which would include all the transaction costs associated with.
The debt restructuring.
And whatnot, that's what gets us to the map. It says we've got to put that two to 300 a year. So that's.
I think that answers your question not specifically by year, but that should give you the magnitude.
And as it relates to that.
Sure.
As it relates to public sector. It really was.
Christopher Stansbury: And so I think that's huge. We'll use the funds. It's all really part of restructuring the debt. It's not about, you know, using it to necessarily fund a specific piece of cat-backs. Our cat-backs is part of the thinking, obviously, but this is about restructuring really everything between now and through 2027. I guess I will go so far as to say that on our leverage versus where we are today, we would expect through our turnaround story that leverage will decline. I'll probably stay relatively steady, you know, in the near term, but then we would expect the decline. So I'll go with that far. I'll give you that much today.
It solutions and equipment this quarter and again it fluctuates around but we've given you all.
Unknown Executive: Okay, thank you.
A key one timers for the quarter and those things certainly other model as you know.
Got it alright, thanks, Chris.
Alright.
Our next question is from the line of Greg Williams with TD Cowen.
Please proceed with your question.
Great. Thanks for taking my question.
They're both focused on fiber to the home in the ILEC I guess are you focused on sales and marketing rather than the enablement.
For them for the next couple of years actually.
First question is are you are you worried about encroachment of third party overbill theres been coming into the space and your footprint, if you're not investing in it and second is if you're not investing heavily in it.
In the past you said you didn't expect to do any further large larger ILEC sale of their sales are.
David Barton: The next question comes from the line of David Barton with Bank of America. Please proceed with your question. Hey guys, thanks so much for taking the questions. And I've got a million questions. Chris, but I know. Thanks guys. Yeah, so look, so I'm reading this thing. And so we had this kind of cash flow application from the analyst Andrew. And now we've got this kind of mysterious tax refund that's showing up.
Logging on homes, but now that you're not investing into the degree that you said you would think they could sell a larger portion of it.
Yes, so first of all again I want to be really clear on this we're not walking away from.
From a consumer Bill, we're saying that we're going to stay relatively flat to where we are this year that is still a substantial investment in consumer and I think if you look across.
The space with rising cost of capital.
All of our competition has pulled back. So so this move is actually not out of step with what's going on in the broader marketplace.
David Barton: And yeah, there's going to be some offsets and maybe it's a net 600 million positive. And we're letting go some people 4% of the corporation that's going to be a 300 million dollar benefit. We're going to cut cat-backs. And even with all that, still at the low end now of the guided outlook from a few months ago.
I think theres, a real opportunity, though to improve returns and as Kate mentioned.
With an increased focus on subscription growth penetration.
We've talked a lot about the fact that until we got to scale on enablement and getting that enable fact enablement factory running smoothly. We should now is now we can scale market. So we haven't really started to ramp marketing until recently and Thats, a real opportunity for us and we're going to be very aggressive about that so I'm not worried about.
Christopher Stansbury: And so what we haven't really heard is, what is the actual cost? Last, the dollar number that's going to get whatever it is that you've done with the debt structure accomplished. That's my first question.
Encroachment.
I think the market is already spoken as to its willingness to invest at this point as it relates to how we think about the business long term I would say, we remain open to any and all ideas and again. The goal here is to build two great assets in enterprise business and our consumer business.
Christopher Stansbury: And the second question is, with respect to the third quarter specifically, as we try to, you know, in the interim kind of model out what we're looking at, what was kind of one time in nature, I know you call that something in the public sector that was in the revenue line, it sounded like it was kind of the equipment type of deal. You kind of call out all the one timers that affected the third quarter as we take about fourth quarter and we'll try to model out 2024.
And what happens with those businesses over time.
We're very open to considering what that looks like so.
We remain of the belief that consolidation will continue to take place in the consumer space and we would expect at the right point in time to participate.
Christopher Stansbury: Thank you. Yeah, so as it relates to the debt, and again, because you're right, I mean, this is a complex transaction, but take to get into a lot of modeling. I was called after I surveyed it. What I would tell you is that when I said that we needed to cut between 200 and 300 million of cat X, that really, I think four tells that a higher cost associated with the transaction.
Got it thank you.
Our next question is from the line of Frank Louthan with Raymond James.
Please proceed with your question.
Great. Thank you.
So a couple of sort of related questions back to lowering the fiber build.
Why would you choose that as far as a place to save for Capex, given kind of the relatively low risk and success rate of those businesses why not target other areas of spending.
Christopher Stansbury: So think of it this way. Yep, some near term revenue pressures, improving as we get into mid-year next year. Those revenue pressures are being offset by the cost reduction that we're taking. The tax benefit, which really relates to a lot of hard work around how can we aggressively pull forward in a well. So a bigger benefit near term, less of a benefit longer term. When you incorporate that into the model, which would include all the transaction costs associated with the debt restructuring and whatnot.
You sure Youre cutting the right part of the business because again too.
Your previous question, we'll invite some kind of competition and then my second question, assuming you're going to tell me that yes. It is the right part of the business what exactly is the opportunity and the other part of the business and why returns higher there and presumably coming in sooner than say the fiber build would be good.
Good question Brian.
<unk> talked quite a bit about how the returns profiles of these two businesses couldnt be more there.
Zimmer business as one.
Invest a lot in capital and then your payback period.
Christopher Stansbury: That's what gets us to the map that says we've got to cut that two to three hundred a year. So that's, I think that answers your question not specifically by year, but that that should give you the magnitude. And as it relates to the public sector, it really was, you know, IT solutions and equipment this quarter. And again, it fluctuates around. But yeah, we've given you all the key one timers for the quarter. And those things fit the other one.
Unknown Executive: All right. Thanks, Chris.
As measured in high single digit low double digit kind of territory very long time to return even with great performance now that asset, particularly given the quality of the fiber that we're putting in and the scalability of that is about as future proof again, so the beautiful thing about that business is a very long tail.
Of returns once you get to that payback.
The enterprise business is one of higher margins and faster returns where you're measuring.
Your payback window in low to mid single digit kind of years and when you look at the disruptive nature of the products and services, we're bringing to market around that is in excess switch and our security offerings.
Gregory Williams: Our next question is from the line of Greg Williams with TD Cowan. Please proceed with your question. Great. Thanks for taking my question.
Gregory Williams: They're both focused on fiber of the home and I like I guess you're focused on sales and marketing rather than the enablements for the next couple of years actually. First question is, are you worried about encroachment of third party overbuilders and coming into the space in your footprint, if you're not investing in it? And second is if you're not investing heavily in it. In the past, you said you didn't expect to do any further large larger I like sales or sales of large amount of homes, but now that you're not investing into the degree that you said you would. And they don't say could a sale of a larger portion of the I like to be on the table. Thanks.
That disruption.
Our ability to not just.
Keep and nurture existing customers, but expand our customer base has a much greater and faster returns. So that's really why we see.
Yes.
Enterprise it in the right place to spend it again.
I keep hearing about overbuild activity overbuild activity.
But we're simply not cede the higher cost of capital that everybody faces right now.
Is slowing down those bill so what we're doing by continuing to invest in that 500000 kind of enablement range every year.
Christopher Stansbury: Yeah. So first of all, again, I want to be really clear on this. We're not walking away from from the consumer bill. We're saying that we're going to stay relatively flat to where we are this year. That is still a substantial investment in consumer. And I think if you look across. The space with rising cost of capital, all of our competition has pulled back. So this move is actually not out of step with what's going on in the broader marketplace.
Still I would say quite robust compared to what we're seeing on the competitive front. So we.
We think overbuild activity has a much lower risk.
Given today's economic environment.
Alright, thank you.
So we have time for just one more question.
Okay. Thank you very much and our final question comes from the line of Jonathan Chaplin with New Street research.
Christopher Stansbury: I think there's a real opportunity, though, to improve returns, and as Kate mentioned, with an increased focus on subscription growth penetration. I mean, we've talked a lot about the fact that until we got to scale on enablements and getting that enable fact, and enable the factory running smoothly, which is now is, now we can scale market. So we haven't really started to ramp marketing until recently, and that's a real opportunity for us and we're going to be very aggressive about that. So I'm not worried about encroachment, because I think the market has already spoken as to its willingness to invest at this point.
Please proceed with your question.
Thanks, a lot since I'm last I'm going to steal too if I may.
I was fascinated by your comment that you would spend all the time talking to your creditors and the deal that they struck with you as a vote of confidence in.
<unk> turned around the turnaround strategy and just.
Wondering what you.
Shed with them in the context.
Negotiations.
That sort of incremental to what <unk> been able to share with the street.
Christopher Stansbury: As it relates to how we think about the business long-term, I would say we remain open to any and all ideas, and again, the goal here is to build two great assets, an enterprise business and a consumer business, and what happens with those businesses over time, we're very open to considering what that looks like. So we remain of the belief that consolidation will continue to take place in the consumer space, and we would expect at the right point in time to participate in it. Thank you.
I'd love to get some sort of if you could expand a little bit just on sort of yes.
Yes.
What we need to.
Yes.
Great.
Obviously, a very regulated space and I would say that.
What we shared with them.
That was different than Investor day was what was included in the blog materials to that so so you all have access to that.
We have full visibility for example around.
The.
The attacks.
Issue that we talked about earlier as.
As well as the fact that near term and we're seeing some.
Frank Louthan: Our next question is from the line of Frank Loutin with Raymond James. Great question. Great, thank you.
Some impacts from revenue.
When I say that they believe in our strategy, we believe in our ability to disrupt telecom. They believe in the innovation. They believe in what we're doing.
Frank Louthan: So a couple of sort of related questions. Back to lowering the fiber bill, you know, why would you choose that as far as a place to stay for CAPEX, given kind of the relatively low risk and success rate of those businesses? Why not target other areas of spending?
To migrate revenue from legacy services to noon.
And no one else is doing that no one else is investing in this space and it's a huge opportunity for us because of our focus so that's.
What we shared with them is what we shared with you, especially when you consider the broad information.
Christopher Stansbury: Are you sure you're cutting the right part of the business, because again, to, you know, your previous question will invite some kind of competition, and then my second question is, assuming you're going to tell me that, yes, it is the right part of the business, what exactly is the opportunity in the other part of the business, and why returns higher there and presumably coming in sooner than say the fiber bill would be? Yeah, I'm going to a good question, Frank.
Got it.
That helps and then my second question is I mean, it's really just a continuation of the question that Greg and.
The question that preceded that.
The question, which is it seems like you have got to the two very different opportunities and one in mass market. One in enterprise, they're on very different return profiles and in fact under the sort of the current circumstances.
Christopher Stansbury: I mean, we've talked quite a bit about how the returns profiles of these two businesses couldn't be more different, right? The consumer business is one of, invest a lot in capital. And then your payback period is measured in high single digit double digit kind of territory, so very long time to return even with great performance. Now, that asset, particularly given the quality and the fiber that we're putting in and the scalability of that, is about a future proof to get.
Don't have the resources to pursue both and so you're going after the returns in enterprise.
Given your circumstances that totally makes sense, but isn't the right.
So the right course of action.
Pulse constrained environment like urine to run a process to sell mass markets too.
Somebody that has the capital to put into it at the moment.
Take full advantage of the opportunity that book sort of organically with the markets that are there plus the big beat opportunity, that's coming and all the rest of it would not just be a lot more valuable in someone else's hands right now, but look I would say that that's a consideration when we look at regularly.
Christopher Stansbury: So the beautiful thing about that business is a very long tail of returns once you get to that payback. The enterprise business is one of higher margins and faster returns, where you're measuring your payback window in low to mid single digit kind of years. And when you look at the disruptive nature of the products and services we're bringing to market around that as an exit switch and our security offering. Williams. That disruption and our ability to not just keep and nurture existing customers but expand that customer base has a much greater and faster return.
Again, I want to be clear.
Were talking these last set of questions I'm going to challenge all of you kind of and you were thinking about it the questions would suggest that we're stopping our investment in consumer we're continuing to invest at the plane at the pace. We're investing at this year, we're going to continue to add.
In the range of half a million enablement, a year, two or three and a half million enablement that exist today, we're focusing on penetration and subscriber growth at <unk> and returns.
Christopher Stansbury: So that's really why we see enterprises in the right place to spend. And again, you know, I keep hearing about overbuild activity, overbuild activity, but we're simply not seeing the higher cost of capital that everybody faces right now. Is slowing down those bills. So what we're doing by continuing to invest in that 500,000 kind of enablement range every year is still, I would say, quite robust compared to what we're seeing on the competitive front. So we think overbuild activity is a much lower risk given today's economic environment. All right. Thank you.
At the same time, we're continuing to build those 500000 neighborhood, so very very clearly.
One everyone understand we're continuing to invest at a healthy pace in that business, particularly compared to what our competition is doing at this very moment, given the high cost of capital so.
That's an important point now the question you raised though is the right question and we have been very public in saying that the consumer space is one that is right at some point in time for consolidation.
When that happens we don't know our job is to improve the EBITDA and the return profile of the business that we have continued to invest in its future.
Unknown Executive: Sir, do we have time for just one more question? Okay. Thank you very much.
And if and when the right time comes then we'll consider those options but.
Jonathan Chaplin: And our final question comes from the line of Jonathan Chaplin with new street research. Please proceed with your question. Okay.
But our focus right now is on continuing the pace of builds that we're at today and driving improved returns.
Christopher Stansbury: Thanks a lot since I'm last I'm going to steal two if I may. So the I was fascinated because by a comment that you spend a lot of time talking to your creditors and the deal that they struck with you is a vote of confidence in the turnaround, the turnaround strategy. And I'm just wondering what you shared with them in the context of those negotiations that sort of incremental to what you've been able to share with the street.
Got it thanks, Chris I really appreciate it.
Thanks, Kevin searches Evelyn recall.
Thank you very much and we'd like to thank everyone for your participation and for using the lumen conferencing service today.
This does conclude the conference call and we ask that you. Please disconnect your lines have a great day everyone.
Yes.
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Christopher Stansbury: I'd love to get some sort of if you could expand a little bit just on sort of, yeah, the, what you need to. Yeah. That's obviously a very regulated space. And I would say that what we shared with them, that that was different than investor day. What was included in the blog materials to that. So you all have access to that. You know, we use full visibility, for example, around the tax issue we talked about earlier.
Yes.
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Christopher Stansbury: As well as the fact that near term and received some some impacts from revenue. I think when I say that they believe in the strategy, believe in our ability to disrupt telecom, they believe in the innovation, they believe in what we're doing to migrate revenue from legacy services to new. And no one else is doing that. No one else is investing in the space and it's a huge opportunity for us because of our focus. So that's I mean what we share with them is what we share with you. Especially when you consider the blog information on it that that helps.
Christopher Stansbury: And then my second question is, I mean, it's really just a continuation of the question that Greg and the question that preceded that Frank Frank question, which is it seems like you've got sort of two very different opportunities and one in mass markets, one in enterprise, they're on very different return profiles. And in fact, under the sort of the current circumstances, you don't have the resources to pursue both. And so you're going after the return to enterprise, giving your circumstances that totally makes sense.
Christopher Stansbury: But isn't the right the sort of right course of action in in a resource constrained environment like you're in to run a process to sell mass markets to somebody that has the capital to put into it at the moment. They get take full advantage of the opportunity there both sort of organically with the markets that are there plus the big beat opportunity that's coming and all of the rest of it would not just be a lot more valuable in someone else who stands right.
Christopher Stansbury: Well, look, I would say that that's a consideration we look at regularly, but again, I want to be clear, we're talking these last set of questions. I'm going to challenge all of you kind of and you're thinking about it. The questions would suggest that we're stopping our investment and consumer. We're continuing to invest at the place we're investing at this year. We're going to continue to add, you know, in the range of half a million enablements a year to our three and a half million enablements that exist.
Christopher Stansbury: Today, we're focusing on penetration and subscriber growth and our food and returns, you know, at the same time, we're continuing to build those 500,000 enablements. So very, very clearly, I want everyone to understand. We're continuing to invest at a helping pace in that business, particularly compared to what our competition is doing at this very moment given the high cost of capital. So that's an important point.
Christopher Stansbury: Now, the question you raise though is the right question and I would we have been very public in saying that the consumer space is one that is right at some point in time for consolidation. When that happens, we don't know. Our job is to, you know, improve the EBITDA on the return profile of the business that we have. Continue to invest in its future. And if and when the right time comes, then we'll consider those options. But but our focus right now is on continue. We're continuing the pace of build that we're out today and driving improve returns.
Unknown Executive: Got it. Thanks Chris. I really appreciate it. Thanks, Jonathan.
Unknown Executive: Seriously with that, we'll let them go. Thank you very much. And we'd like to thank everyone for your participation and for using the Lumen conferencing service today. This does conclude the conference call and we ask that you please disconnect your lines. Have a great day everyone. Thank you very much.