Q3 2024 Lumen Technologies Inc Earnings Call
Speaker Change: Greetings and welcome to Lumin Technologies 3rd Quarter 2021 for earnings call. After the speaker's remarks, there will be a question and answer session, and if you would like to ask a question, please press star 1 on your telephone keypad.
As a reminder, this conference is being recorded. I would now like to turn the conference over to Jim Green, Senior Vice President and Vester Relations. Jim, please go ahead.
Jim Green: Good afternoon everyone and thank you for joining the Lumin Technologies Third Quarter 2024 earnings call. On the call today are Kate Johnson, President and Chief Executive Officer, and Chris Dan'sbury Executive Vice President Chief Financial Officer.
Before we begin, I need to call your attention to our safe harbor statement that slide one of our third floor, 24-44 presentation, which notes that this comments call may include forward-looking statements, subjects, certain risk of uncertainties. All forward-looking statements should be considered in conjunction with the cautionary statements and the risk factors in our SEC filings.
will be referring to certain non-gap financial measures that reconcile to the most comparable gap measures which can be found on our earnings press release.
and Edition Certain metrics discussed today. We exclude costs for special items as detailed in our earnings materials. Which can be found on our best to relation section of our Wimmer website. With that, I'll turn the call over to Kate. Good afternoon, everyone and thanks for joining.
Kate: Lumin Third Quarter headline is this, the transformation is happening. We're making progress in our journey to turn Lumin into a digital network services company, with simple and modern product offering and for structure and operation.
Kate: We're pursuing two major growth factors, building the AI backbone and cloudifying telco, and have made material progress with each.
and that said, and as expected, our financial performance still reflects the secular headwinds on our legacy revenues. We're also investing heavily in transformation programs while running the core business.
Kate: which we have heavily on our EBITDA results. Now we have fully recognized we have a long way to go on this journey and we understand that our current financial results coupled with the fact that telcos in the industry are not talking about a turnaround, make it difficult to imagine long-term success for Lumin.
Kate: But our team sees a clear path to terms of company around. We have a plan to take cost out, deliver to our balance sheet and drive growth by using our assets and intellectual property to give enterprise customers new value in a multi-cloud hybrid architecture environment.
Kate: All of this will take time to execute and it will take time to show up in our financials.
Kate: But the path is real, and today I want to share more on the opportunity ahead and what we've accomplished so far. I'll be covering free topics.
Kate: One, One
Kate: How we are continuing to drive operational efficiency with sales grows on higher customer's sat in our core business to ensure we maximize cash generation, customer life time value, and cost out.
Kate: Number Two
Kate: How Will Women Is Building The Backbone For The AI Economy?
Kate: Adding more than $3 billion in incremental private connectivity fabric fails in partnership with the biggest names in the technology industry. And number three, how Ruin Digital has clouded finding the industry, driving Navid option to well over 400 customers and positioning the company for high-value digital revenue growth.
Kate: Let's start with our operational turnaround. We continue to see solid sales reformers in the third quarter with North American large enterprise and the market sales up nearly 14% year over year.
We saw notable strengths and IP sales of 18% here today and 104% gave way of sales of 50% here today through Subtember.
Kate: To compliments these sales results, once again we saw significant year-over-year improvement in customer-sat scores for every one of our enterprise customer-chales, as measured by transactional net promoter scores.
Kate: 17 points for our gender prize, up 11 points for wholesale 28 points for mid-market and a whopping 98 points for public sector.
Kate: We continue to improve our efforts to secure the base by focusing on five key levers of themselves, renewals, migrations, usage and disconnect.
Kate: Now while in salt were down slightly in the quarter, we did see a 14% sequential improvement in disconnects with hold-as-screen at their lowest level in over 5 quarters.
Kate: In last markets, the team continues to execute well and drive increased value for our consumer segment. And once again, had record quarters of fibers net ads.
Kate: Finally, last quarter we announced the billion dollar cost take up by the end of 2027 by unifying our network from four architectures to one, allowing dramatic simplification of our product portfolio and IT estate.
Kate: While this work is incredibly complicated, given our long history of mergers and accumulation of tech debt, we're on track of developing the planned executes. As we have said, these cost-out efforts will require upfront spending with a back-end loaded cost-takeout curve.
Kate: will provide further details on this important work as we progress. To summarize, we're pleased with how we're galvanizing women's core network services business.
Kate: Howard driving growth in quantum fiber and how we're simplifying and modernizing the company. But I want to be clear here. We are not here to find revenue growth in Legacy Telco.
Kate: All of our transformation work
Kate: is in service to customers who need and want to leverage technology like Gen AI to transform their business. And the legacy networks is yesterday just won't serve tomorrow's enterprise. They're not big enough, they're not fast enough, and they're not secure enough.
Kate: And of course, the customer experience in Legacy Telco is neither quick nor effortless, especially in complex, multi-cloud hybrid environments, which have become the norm for every business.
Kate: Loom in the fixing all of that by reinventing digital networking and that is what will fuel the company's long-term financial growth.
Kate: We see several growth factors in digital networking and I'm going to share two that we're going after right now.
Kate: The first is what's been receiving a lot of attention given the signs and the deals we're signing.
Kate: Loan is building the backbone for the AI economy. The market now recognizes that AI needs data, data needs data centers, and those data centers need to be connected. And several of the biggest means and technology, including Microsoft.
Kate: meta AWS and Google have chosen aluminum as their trusted network for AI.
Kate: We get asked all the time, what does the AI market mean for women? How many of these deals are out there? How long will this growth spread last?
Kate: Now as I've shared, we see a few days of playing out.
Kate: and Phase One, High-Scalar, Social Platforms and Cloud Companies are massively expanding their networks to support data-type build-ups with their AI model training.
Kate: As long as these companies keep building data centers, we will have the opportunity to connect them. These deals are deeply agreed to aluminum and well-timed for our transformation.
Kate: And we shared that we booked for the five building a PCF sales in last quarter's call, providing ample liquidity to close near-term funding glass gaps.
Kate: A since then, we have book more than 3 billion in additional PCF sales, giving us the opportunity to use the extra cash to do some the leveraging.
Kate: We remain in active discussions for more deals like this and we're going to update you on our progress when they materially affect guidance. Finally, we've established a dedicated operations scene to build these next N.A.I. networks and they've already broken ground on the succeeding work.
Kate: So if you're wondering why and how we're able to close more than $8 billion in PCF sales so quickly, I'll share this.
Kate: Big Tech
Kate: is choosing Lumen because our geographically diverse conduit-based intra- and inter-city fiber network was built for this moment.
Kate: and Lumen's Private Connectivity Fabric, just awarded the Competitive Strategy Leadership Award by Frost & Sullivan, is a best-in-class architecture that gives customers the control, capacity, performance, and security they need.
Kate: Now, we believe the second phase of AI evolution is starting to emerge as enterprises are beginning to use those AI models at scale, and they recognize the need for major network upgrades. And these enterprises are calling Lumen because they know we connect all three public clouds
Kate: and they also see that we are investing in the future networking needs unlike any other company in the networking marketplace.
Kate: We believe Lumen has become the thought leader in the space, and it's showing up in our business results. We're seeing an increased demand for higher-performance Lumen services, specifically for Waves and IP in our large enterprise and mid-market segments, with IP sales up 18% year-to-date and Waves sales up over 25% year-to-date through September for these customers.
Kate: And that's why we expanded our high speed IP service to include 400 gig ports in 14 different markets. We plan to expand to several more markets this year.
Kate: Additionally, we currently offer 400 gig waves in over 70 markets across nearly 80,000 route miles with plans to increase waves capex to further expand the footprint in 2025.
Kate: In the third phase of AI evolution, we see AI talking to AI, driving another potential parabolic increase in data workload volume. It's too early to share proof points for this phase, but given our network, our digital platform, and our portfolio of intellectual property,
Kate: We believe that Lumen is well positioned to handle the volume, pace, and complexity of enterprise networking needs, and we are playing to win.
Kate: Cloudifying telecom is going to disrupt the industry and provide Lumen with another major growth sector.
Kate: Expanding the internet and building out the required critical infrastructure is just step one.
Kate: But customers expect to be able to quickly, securely, and effortlessly use that infrastructure. And that's why Lumen is building a digital platform, natively integrating with our fiber network to enable enterprises to digitally design, price, order, and consume secure networking in a hybrid multi-cloud world.
Kate: To our knowledge, no other telco that owns a fiber network is doing this, and we see it as a material differentiator and revenue generation opportunity for Lumen in the future.
Kate: A year ago, we established the Lumen Digital team and launched our flagship network as-a-service, or NAS, offering.
Kate: As of today, over 400 customers have adopted Lumen NAS, a good start for sure. The NAS overlay lets our customers get the network pieces they want, when they want it, how they want it, in true consumption form.
Kate: Recent wins for our NAS product include Agilisys, the Blackstar Group, the PAC-12, and C3 Aero, among others, and MEF, formerly known as the Metro Ethernet Forum, just named Lumen the best NAS provider in North America.
Kate: Our progress in a short period of time isn't just exciting or encouraging.
Kate: It has fundamentally repositioned this company. NAS is just the beginning. With our world-class fiber network, our PCF architecture, Exus switch, and an ecosystem of big tech companies, all three clouds, committed to our network for the long haul.
Kate: We have all the pieces to redefine networking and drive massive value in a multi-cloud hybrid world, which is exactly what our customers want and need.
Kate: For the finish up, we have the cash, we have the assets and intellectual property, we have a world-class leadership team and culture, we have a great strategy, and we have a lot of momentum. Lumen's future is very bright. And with that, I'll turn the call over to Chris.
Chris: Thanks, Kate. Lumen continues to move forward along its path to transforming the business. And in the third quarter, we've taken additional steps towards achieving that goal.
Kate: We signed over three billion dollars in incremental PCF deals as we continue to be the partner of choice in building a trusted networks for AI.
Kate: And we also, given our confidence in the free cash flow generation, contributed $170 million to our pensions in the quarter, bringing us to nearly 90% funded.
Speaker Change: As Kate discussed, we are now at over $8 billion in new PCF sales since June. Our customers have validated Lumen's unique position to build the backbone of the AI economy. While we will not be reporting on specific PCF sales every quarter, we chose to highlight the over $3 billion today for three reasons.
Kate: First, we're incredibly proud of our team for how quickly they've been able to capture what we believe is a once-in-a-generation market opportunity.
Kate: We have the right assets and the right people to build the trusted networks for AI. Second, given the incremental size of this over $3 billion, it will positively impact our 2024 guidance for free cash flow, which I will update you on shortly.
Kate: And lastly, the PCF sales we're announcing today look similar in scope to the previous $5 billion largely sold on existing routes. Future PCF sales will also include new routes with a diverse set of enterprise customers.
Kate: Given the complexity of these bills, these discussions are ongoing and will take place over several quarters.
Kate: In the future we will provide updates to the extent PCF sales have a material impact on our financial guidance.
Kate: We introduced PCF sales last quarter and updated them this quarter because there was a need for investors to understand our strategy, the market opportunity, and the structure of these PCF deals.
Chris: We will continue to educate the market on those opportunities for Lumen and the AI economy while also focusing on the core metrics of sales growth, margin improvement, and free cash flow generation.
Chris: As we stated last quarter, we believe the progress we've made on driving PCF sales in 2024 is just the beginning of a large new tamp, which brings long term sticky revenue, offsetting higher turn legacy product to clients.
Chris: We're now in the planning stages of constructing these networks, securing the necessary equipment and labor, and we're confident in the cost and margin structure we've estimated for the AI network bills.
Chris: We estimate the cash received from the first $5 billion in PCF sales.
Kate: The incremental cash provided by the over $3 billion recently signed contracts provides increased flexibility to deliver our balance sheet and continue to address our capital structure in a meaningful way.
Kate: With respect to the balance sheet, another highlight of the quarter was our successful execution of a debt exchange, terming out over $800 million in 2026 through 2029 maturities to 2032.
Kate: We now have approximately $1.8 billion in maturities excluding leases due through 2028 down from approximately $2.6 billion at the end of the second quarter, and we're not done yet.
Kate: Now, transformations are messy, and particularly in industries where it has never happened before. So as we move through ours, we strive to bring you the transparency of both the good and the less good.
Kate: In Q1, we said demand for networking was heating up. In Q2, we delivered against that, substantially increased free cash flow guidance, and said there was an additional opportunity.
Kate: Importantly, in both Q2 and today, we're saying our legacy business is declining, consistent with industry trends, and needs investment to both build our digital future and unlock a billion dollars of cost efficiency.
Kate: The result of which will be lower 2025 EBITDA before improving in 2026. In short, we recognize credibility is critical, and we're taking great care in making sure our messaging is consistent with our delivery.
Kate: We believe the value creation path for Lumen is clear, through additional sales, balance sheet improvements, and cost structure optimization, all as we continue to execute on our core strategic goals of driving operational efficiency, building the backbone for AI, and cloudifying the industry.
Kate: We recognize we're in the early stages of a significant transformation of Lumen and remain laser focused on accomplishing the goals we set for ourselves.
Kate: Now, let's move on to the discussion of financial results for the third quarter. Our sales growth engines within our large and mid-market enterprise channels in our business segment, along with our mass market segment, showed solid performance this quarter, with large enterprise and mid-market sales up nearly 14% year over year, and quantum fiber broadband net additions once again setting an all-time record.
Kate: While Consolidated Revenue and Adjusted EBITDA still feel the impacts of legacy declines, we're encouraged by improvements we're making in the business, as disconnects improve both sequentially and year-over-year.
Kate: On a year-over-year basis, total reported revenue declined 11.5% to $3.221 billion.
Kate: 32% of the decline was due to the impact of divestitures, commercial agreements, and the sale of the CDN business.
Kate: Business segment revenue declined 12.7% to $2.536 billion, and approximately 37% of that decline was due to the impact of divestitures, commercial agreements, and the sale of the CDN business.
Kate: Next, I'll review our detailed revenue results for the quarter on a year-over-year basis.
Kate: Within our North America enterprise channels, which is our business segment, excluding wholesale, international, and other, revenue declined 6.9%. Overall, North America business declined 7.5%.
Kate: Large enterprise revenue declined 8.2% in the third quarter. Our growth revenue increased 1.6% year-over-year, with continued pressure in nurture and harvest product revenue.
Kate: We expect continued variability in trends as we drive towards overall stabilization. Mid-market revenue declined approximately 6.9% year-over-year, with an improvement in grow revenue to 5% year-over-year, offset by nurture and harvest.
Kate: Public sector revenue declined 4% year over year. Public sector revenue can be lumpy quarter to quarter. However, we continue to see traction with large bookings in this space, which takes time to ramp to revenue. And these wins give us continued confidence that public sector will grow year over year in 2024.
Kate: Wholesale revenue declined approximately 9% year-over-year. The harvest portion of the wholesale portfolio
Kate: So our revenue can track by 16.3% year-over-year in the third quarter.
Kate: This is primarily driven by telco partners that are selling legacy services.
Kate: Our harvest product revenue will likely continue to decline over time and is an area that we will manage for cash.
Kate: International and other revenue declined 64.8% driven primarily by the divestiture of our EMEA business and the sale of select CDN contracts in the fourth quarter of last year.
Kate: Moving to our business product lifecycle reporting, I'll reference the results based on our North America enterprise champs.
Kate: Higher sales in our growth product portfolio were led by enterprise broadband, dark fiber, and IP. These sales were offset by declines in nurture and harvest, resulting in an overall decline of 6.9% year-over-year.
Kate: While results can vary in any quarter, we expect sustained growth in the growth product revenue as we execute on our core turnaround.
Kate: Within North America Enterprise Channels, growth products revenue increased 4% year over year, up from 1.5% year over year last quarter.
Kate: Represents approximately 45% of our North America enterprise revenue and for our total business segment carried an approximate 80% direct margin this quarter
Kate: Harvest products revenue decreased 14.1% year-over-year and continues to be negatively impacted by declines in TDM based voice.
Kate: Harvest represented approximately 16% of our North America enterprise revenue in the second quarter.
Kate: For our total business segment, it carried an approximate 73% direct margin this quarter.
Kate: Other product revenue declined 11.1% year-over-year. And as a reminder, other product revenue tends to experience fluctuations due to the variable nature of these products.
Kate: During the quarter, fiber broadband enabled location ads were 131,000, bringing our total to over 4 million as of September 30th, and pacing towards our targeted annual 500,000 bill target this year.
Kate: We also added 43,000 Quantum Fibre customers, which is our best Fibre Net Ad quarter reported to date, and this brings our total to over $1 million. Fibre ARPU was $62, flat sequentially and up slightly year over year. This is just outstanding work by that team.
Kate: At the end of the third quarter, our penetration of legacy copper broadband was approximately 9%, and our quantum fiber penetration stood at approximately 26%.
Kate: Now turning to adjusted EBITDA. For the third quarter of 2024 adjusted EBITDA was $899 million compared to $1.049 billion in the year ago.
Kate: Third quarter EBITDA was negatively impacted by legacy revenue declines, seasonally high operating expense, as well as some startup costs associated with our Custom Networks Group.
Kate: For the third quarter of 2024, our adjusted EBITDA margin was 27.9%. EBITDA margins declined 90 basis points year-over-year, compared to a 270 basis point year-over-year decline in the second quarter.
Kate: Special items impacting adjusted EBITDA totaled 56 million dollars. The majority of special items this quarter were related to transaction separation costs.
Kate: Capital expenditures were $850 million, and free cash flow, excluding special items, was positive $1.2 billion.
Kate: As we previously stated, we're leaning into our network investments to support the rapid growth and demand our customers are facing while improving our overall cost structure.
Kate: Now moving on to our financial outlook. We continue to estimate FY 24 EBITDA to be in the range of 3.9 to 4 billion dollars.
Kate: However, given the overall trend in the business and initial cost impacts from the incremental PCF sales, we see FY24 EBITDA at the low end of that range.
Kate: As we said previously, we expect EBITDA to decline year-over-year in 2025 as a result of continued legacy declines, startup costs for PCF contracts, and incremental transformation costs with a longer-term goal of improving the broader cost structure.
Kate: 2024 CapEx is expected to be in the range of $3.1 to $3.3 billion, and cash interest in the range of $1.15 to $1.25 billion.
Kate: Lastly, we're raising our 2024 free cash flow guidance from $1 to $1.2 billion to $1.2 to $1.4 billion.
Kate: This guidance includes some incremental OPEX, CAPEX, and cash flows associated with our PCF sales growth, as well as incremental spending to ultimately improve our cost structure and margins.
Speaker Change: And with that, I'll turn it back to Kate for closing remarks. Thanks, Chris.
Kate Johnson: I know what we're saying is different than what everyone else in the industry is saying.
Kate Johnson: It's going to take some time for the growth vectors I talked about to overcome the secular headwinds and show up in our financials.
Kate: So we're confident that our plans will achieve exactly that, and we appreciate you taking the time to understand our story. With that, operator, we're ready for questions.
Speaker Change: Thank you. As a reminder to ask a question please press star 1 on your telephone keypad. If you would like to withdraw your question simply press star 1 again. Please ensure that your phone is not on mute when called upon. Thank you.
Speaker Change: Your first question comes from the line of Michael Rollins with Citi. Your line is open.
Speaker Change: Go to Beadaholique.com for all of your beading supplies needs!
Michael Rollins: Thanks and good afternoon. I wanted to just ask on some of the
Michael Rollins: PCS disclosures. There were three new customer announcements over the last few weeks. Did those specifically relate to these
Speaker Change: New sales in this quarter or did that relate to the prior initial five billion dollars and then
Speaker Change: Kate, you mentioned at the beginning of the call some details where you're seeing improvements in the business sales. And just curious
Speaker Change: where that's coming from, can you give us maybe an update on the marketing and distribution, and are these PCS sales also providing you with a magnet to get additional wins from these hyperscale customers?
Speaker Change: Thanks.
Speaker Change: Yeah, for sure.
Kate Johnson: So, thanks Mike. Basically.
Kate Johnson: The four customer stories that we told come from the $8.5 billion in total, and we're not going to differentiate between buckets, but they are a magnet, very much so. You know, when you get all three clouds...
Kate Johnson: In the bag, you've got yourself an ecosystem. You couple that with, you know, a digital platform to make it easy to consume the services that you're running on that infrastructure.
Speaker Change: and you've got something, you know, pretty special. It's different than what everybody else is doing. We've got the cash to do it, so we're super excited about that. Regarding the uptick in IP and waves, particularly at the higher capacity levels,
Speaker Change: It's purely an indication that our customers are recognizing a need for expanded networks.
Speaker Change: because of the workloads we're running. We don't have specific data to say it's all AI. That is a conversation and the signals we're getting from the conversations that we're having with our customers. And so we think it fits perfectly in line with that trajectory we talked about. First,
Speaker Change: You know, the big tech builds the networks and the AI models, you know, and trains them. The second step is these customers are saying, I'm using these models to transform my business and I'm having a massive uptick in my own.
Speaker Change: You know, networking needs. I think we've realized that every AI strategy needs a network strategy and customers are coming to Lumen because we've become a thought leader.
Speaker Change: Next question, please.
Speaker Change: Your next question comes from the line of Sebastiano Petty with J.P. Morgan. Your line is open.
Sebastiano Petty: I think a quick housekeeping on the incremental.
Sebastiano Petty: PCF announcements.
Sebastiano Petty: Should we think about that broadly as having a similar timeline to what was discussed last quarter as we're thinking about, you know, contribution and the IRU constructs that you kind of laid out last time? I know you kind of said they're similar to the last deals, but just try to think about timing as they kind of come on. Because it does seem as though, you know, part of that cash was probably reflected in the free cash flow upgrade. Just want to just housekeeping there. Yeah, Sebastian. Yeah. I'm sorry. Go ahead.
Speaker Change: Oh, no, go ahead, Chris, and then I can follow up.
Chris Dan'sbury: Yeah, you're exactly right. If you just look at the shape of those deals, the incremental deals that were signed this quarter, in terms of the margins, the cash flows, how all that will work, the timing, it looks very similar to what we did on the five billion. So I think that's a good way to model it. Unknown Speaker
Speaker Change: Okay, that's helpful. And then thinking about
Speaker Change: Him just
Speaker Change: You did guide to the lower end of the 2024, you know, your guidance range does imply a pretty decent acceleration sequentially, even to kind of get to that point. Anything specifically that we should be thinking about there as it pertains to just maybe cost coming, cost cuts kind of coming online or anything that we should be thinking about from a timing perspective? Thank you.
Speaker Change: Yeah, it's really more, I would say, the seasonality, like that we see.
Speaker Change: In the summer months, we obviously have more construction.
Speaker Change: maintenance, higher energy costs, and that abates somewhat in the fourth quarter. We also, you know, made some intentional investments in the quarter to help accelerate the work that we need to do to go capture the billion dollars.
Speaker Change: And so when you look at the timing of those things, that's what gives us confidence in delivering on the lower end of the guidance for the year.
Speaker Change: Thank you. Thank you.
Speaker Change: The next question comes from Batia Levy with UBS. Your line is open.
Batia Levy: Great, thank you. In terms of the incremental TCF sales that you've signed,
Batia Levy: Should we assume that they're mostly big tech or are you starting to see a little bit of enterprise demand as well?
Speaker Change: And just to confirm, I think you mentioned that this new mix will be on the existing constructs that you're building for the original PCS deal. Does that mean the CAPEX requirements would be pretty much included in the original deal? And how should we think about the prepaid revenue mix of the incremental sales?
Speaker Change: Thank you.
Speaker Change: I'll cover the first part, you cover the second part, Chris. So the customer mix, we shared last quarter that it's more than 15 customers were in, you know, these tranches. We had some repeat business, we had some new business.
Speaker Change: So it's a mix.
Speaker Change: Predominantly those customers are building AI models and if you look at some of the logos that we shared that are standing side-by-side with us going long on our strategy, you know, it's all three clouds and a large social platform.
Speaker Change: and what those companies are reporting are massive infrastructure investments.
Speaker Change: to build out the infrastructure for AI. And they're coming to Lumen, that's the story. The second piece of the next wave.
Speaker Change: is really enterprises, and they're not.
Speaker Change: Unknown Speaker You know, buying at the same size because they're not planning on commercializing their AI models. For the most part, they're using to transform their own business, and maybe some of their own products.
Speaker Change: you know, and services that they offer their customers. So it's not the same size and build out as the hyperscalers and the social platforms.
Speaker Change: Yeah, and on the second piece of the question, Batya, I would say so of the total kind of $12 billion opportunity set, the eight and a half that we've we've talked about today that we've secured to date, really does look the same. So I would say that the same ratio of capex
Speaker Change: to sales value.
Speaker Change: The, you know, the amount that's recurring versus the amount that's up front. I would use those same parameters.
Speaker Change: that we shared last quarter. What you see in terms of the impact for this year is just timing of cash flows where given the time of year those were signed, we do have some inflows coming this year, but we'll incorporate a lot of that capex.
Speaker Change: Obviously in the next year's guidance when we give 2025 guidance.
Speaker Change: I think the important thing is that as we move forward from here, as we said at a number of investor conferences, the second half of that $7 billion opportunity
Speaker Change: Our new networks, just like we built, the difference is they're on new routes rather than existing routes. Those economics will look different. We're in the middle of...
Speaker Change: multiple conversations with customers around that. And as we get better cost estimation around that, we'll update guidance and give you guys more clarity. But that that'll probably be something that takes a few quarters until we have that lockdown.
Speaker Change: Next question, please.
Speaker Change: The next question is from Jim Schneider with Goldman Sachs. Your line is open.
Speaker Change: Unknown Speaker
Jim Schneider: Good afternoon. Thanks for taking my question. I was wondering if you could maybe just clarify on the
Jim Schneider: The incremental three billion of the seven you talked about, does that mean that there's four billion of pipeline left to go, as you mentioned, or is there an incremental pipeline above and beyond?
Speaker Change: The first seven you would you had seen before the sort of extend that the lot beyond the $12 billion total pipeline. And then maybe as a second question.
Speaker Change: Can you maybe just kind of comment on your mass market business and given the amount of deal activity there, maybe clarify whether you're seeing any kind of firm indications of interest and potential interest in acquiring that asset. Thank you.
Speaker Change: Sure, Jim. So, so really,
Speaker Change: Just so we're all on the same page.
Speaker Change: In the $7 billion of opportunity, we said today that we had secured over $3 billion of that. So let's just call that roughly half.
Speaker Change: Of the remainder, that's really new routes, as I just mentioned in my previous answer, that's going to take multiple quarters now.
Speaker Change: There continues to be customer interest.
Speaker Change: in not just new routes, but existing routes.
Speaker Change: We're not going to continue to update pipeline, because it really is now normal course of business, and we want to be in that motion. The entire point of talking about the $5 billion and the $7 billion was to alert the market.
Speaker Change: with points of validation that what we've been saying earlier this year was in fact true. This is a significant opportunity, it remains a significant opportunity, and we'll report against it. So you're going to see us get into a cadence.
Speaker Change: of communicating updates really as it impacts guidance because of where we are in the process. Now on the consumer side, I guess just a few thoughts. First, I wanna emphasize the great work by the team and we're not the only ones that noticed that.
Speaker Change: The rest of the world is starting to notice what this team is doing on execution as it relates to enablements and penetration, and we couldn't be happier with the work they're doing.
Speaker Change: Now, we've also said a couple of things, right? We have said for years now that this was a space that should and would eventually consolidate, and I think we're starting to see that happen today.
Speaker Change: And we've also said that we've got two great businesses in our enterprise business and our consumer business, that we have a responsibility to invest in both.
Speaker Change: But that ultimately, they don't strategically belong together, they've got two different return profiles, and at the right time, we would make the decision to separate them. Now we don't have
Speaker Change: Any news to report today?
Speaker Change: What I will say is, you know, at your conference and other conferences, we've been pretty clear about what the economics of the consumer business are when you look at it between copper and fiber. So I would leave it up to all of you.
Speaker Change: to do the modeling and determine how significant an impact you think that would be on our ability to deliver the company and focus as an enterprise company.
Speaker Change: Thank you.
Speaker Change: The next question comes from, thank you, from Jonathan Chaplin with New Street. Your line is open.
Jonathan Chaplin: Thanks, guys. Quick follow up on that, Chris. And then I've got just a network question as well. So on the on the
Jonathan Chaplin: the sort of thought process around the sale of mass markets. One thing I think you had been considering was separating out the fiber business from
Speaker Change: and the rest of mass markets.
Speaker Change: and how that would work.
Speaker Change: And then maybe a little bit more of a difficult question, but it would be great to get some context for
Speaker Change: The network overall and how much of it has been consumed by these PCF contracts. So from memory, I think Level 3 initially had 12 conduits.
Speaker Change: put fiber into. And we've heard that some of the conduits have been sold or have been sort of given the rights to them have been given away in these new PCF contracts.
Speaker Change: I'm wondering how many have gone, how many you've got left, that would be, yeah, thank you.
Speaker Change: Yeah, so I'll take the second question first. So.
Speaker Change: As we were
Speaker Change: So clear.
Speaker Change: On the last earnings call. We have not sold any of these assets. These are long term leases.
Speaker Change: of conduit, sometimes just fibers, sometimes both. It's new networks on existing routes.
Speaker Change: It's building net new routes, putting new conduit in the ground, et cetera. And we strategically plan with our customers and with our own business modeling when we should in fact put more conduit in the ground or less conduit in the ground. And I want to call your attention to a very, very strategic partnership that we did with Corning.
Speaker Change: to utilize their new fiber solutions, which as much as quadruples the capacity of our existing network.
Speaker Change: We have all the right network in all the right places and we've got access to the best fiber in the world to continue to grow with and for our customers. Additionally, any of these long-term leases on those routes
Speaker Change: These customers of ours, these are deep partnerships, they do not, by contract, have the right to compete with us in those spaces. So just to demystify, because I saw a few reports that had it very, very wrong.
Speaker Change: Okay, so these are great deals, huge cash infusion. We're super excited. They're giving us the jet fuel for this rocket. Now, Chris, you want to talk about consumer? Yeah, and on consumer, look, I don't want to get into...
Chris Dan'sbury: A lot of details here because we don't know what we don't know and we'll obviously tell you what we can when we can, but I will reiterate what we have said publicly and you need to think about the consumer business as two businesses.
Chris Dan'sbury: You have a copper business that generates most of the EBITDA, and you have a fiber business that consumes most of the CAPEX.
Speaker Change: So therein, you know, you can do can do the modeling. The reality is, it's definitely possible to separate. You know, nothing is easy, obviously, but I would say we've done harder things.
Speaker Change: And, and I think we've proven to the market that we're not afraid of doing hard things. So we'll see where that takes us. But that's all I can really comment on at this point.
Speaker Change: Chris, does the Ziply transaction change what you think that asset is worth?
Speaker Change: I think the transactions that are taking place in the market more broadly are validation of our thesis that consolidation needs to happen and there's tremendous value in these assets.
Speaker Change: And we, you know, we have an asset that is sizable in this consolidation play. And so I'll let you do the math on that.
Speaker Change: Great. Thanks, guys.
Speaker Change: The next question, thank you, comes from David Barden with Bank of America. Your line is open.
David Barden: Hey guys, thank you so much for taking my questions, I appreciate it.
David Barden: So, two, if I could, the first is on the three billion, Chris, you kind of a
David Barden: elaborated that this is going to look a lot like the $5 billion.
David Barden: deal that you did before. You gave us a lot of math that we could do around that.
Speaker Change: $5 billion, and the net of it was that about 15% of that, or $800 million of the $5 billion came in over a three to four year construction period, and then another 5% came in over a further 20 years in terms of IOU maintenance and stuff.
Speaker Change: So this $3 billion, just like that, you know, would be about a $500 million cash contribution over the build period, which would be 20678 or so. And then another, you know, amount that would come out over the next 20 years. And you suggested that there's a lot of...
Speaker Change: Unknown Executive, Michael McCormack
Speaker Change: Before you have to spend it from partners. I'm wondering if that's what you're talking about. Are you using some of this upfront payment money?
Speaker Change: to do things with the balance sheet before you then come back and spend it to go do the build-out projects. That would be my first question, if I could.
Speaker Change: that is off base from what we can deliver.
Speaker Change: And so the way I would characterize it, rather than getting into specific pieces of math, number one, no, we are not spending other people's money to de-lever the balance sheet and then come back and have to re-raise debt to go build these networks. We're not doing that. I want to be exceedingly clear.
Speaker Change: But the five billion dollars, when we model out
Speaker Change: Transformation Objectives and the Investments Required, which includes
Speaker Change: The investments to turn around the business and invest in our future, investments in things like pension, and the payment of debt as it matures, the $5 billion closed that funding gap, as we said. The $3 billion, with that box checked,
Speaker Change: The deals that constitute the three billion dollars give us now more flexibility to go
Speaker Change: and reduced debt. And remember, we started all of this with cash on the balance sheet. So you have to take you have to take all three pieces, cash on the balance sheet before the 5 billion, the 5 billion, the 3 billion. And when you look at all of those sources, we have ample cash,
Speaker Change: to start to de-lever the company. And you'll hear more from us on that when we can tell you, but you will see us start to de-lever the company from these deals.
Speaker Change: Anastazia Goshko, Christopher Stansbury, Unknown Executive, Michael McCormack
Anastazia Goshko: Got it. Thank you.
Speaker Change: And then I guess my second question is maybe a little bit of a housekeeping question.
Anastazia Goshko: As we think about your comments about the obvious need to step up the EBITDA in the fourth quarter, at a minimum it's got to be about a billion dollars as a jumping off point for 2025. You've talked to us about how 2025 is going to be down. I guess I'm trying to figure out how far it's down. And I'm looking at the 4Q2023 EBITDA and I know that there's a lot that was in there that was
Speaker Change: What that might look like and would that be an appropriate kind of trajectory to think about how the 2025 down year plays out. Thank you.
Speaker Change: Yeah, so I don't want to get too much into into 25 guidance right now for obvious reasons because we are still
Speaker Change: quantifying what we what we see as the need to invest.
Speaker Change: in both the deals and, you know, cause by the way, we haven't said this yet, so I'll say it here. The customers that have signed these contracts, particularly in that first set, are calling us and asking us if we can go faster.
Speaker Change: And so there's discussions around that. So we're trying to finalize that, trying to finalize the investments required.
Speaker Change: on the billion dollar takeout and what we need to do there.
Speaker Change: I would say that at this point, you know, if I look at kind of street averages, probably a little high, you know, versus versus expectations for next year. But at the same time, as I've said, we want to give you 26.
Speaker Change: when we give you 25 because I think 26 will be a fairly significant inflection point given our ability to take cost out.
Speaker Change: So, you know, those are the those are the things we said, and I think until we get a little further along, I don't want to, you know, I don't want to go further than that, because we've got work to do.
Speaker Change: Yeah, I understand. I appreciate it. Thank you guys.
Speaker Change: Your next question.
Speaker Change: comes from Nick Del Dio with Moffett Nathanson. Your line is open.
Speaker Change: Hi, thanks for taking my questions. First, you shared metrics that suggest much better sales in North American Enterprise over the last several quarters. When should we start to see that flow through into the P&L in a more noticeable way?
Speaker Change: And then, Kate, you'd also mentioned.
Speaker Change: that you had over 400 NAS customers signed up, which was good to hear. I mean, obviously it's early, but I guess to what degree is NAS contributing incremental revenue? You know, either because those are new customers that came to you because of NAS or they're existing customers that are spending more because of the product. Thank you.
Speaker Change: Yeah, I'll take the second one, Chris. I'll pass the first one to you. So starting with the NASC customer. So we're building a new digital platform and the focus is about driving adoption.
Speaker Change: That's about customer obsession. It's about what capabilities do they need?
Speaker Change: We're super lucky to have the network that we do because everything we build on that digital platform is integrated.
Speaker Change: into it natively. And so we can, you know, achieve.
Speaker Change: The Right Economics and, you know, massive...
Speaker Change: Unknown Speaker
Speaker Change: Delta of capabilities compared to other offerings in the marketplace from those companies that simply don't have a network and they frankly come to us to fill the circuits underneath their portal.
Speaker Change: And so, it's very exciting, but we're going to stay focused on getting as many customers on there as possible. I think what we're seeing is customers testing it, I'll try one port, I'll try two ports, they have a good experience.
Speaker Change: they start to add ports. And that's where we start to innovate and drive additional
Speaker Change: Service Innovation, like Luma Defender, for example, is an opportunity for us on the horizon, you know, to sell into every NAS customer, etc.
Speaker Change: That's the storyboard. How it impacts revenue, we're not going to give transparency to that for a while. We're simply not ready to. You know, we have models that suggest that this is going to be very accretive over time, but it'll take time to get to scale. That's true for every cloud business.
Speaker Change: Right, and we're using the cloud methodology to, you know, to figure this thing out and plan it. So, Chris, do you want to talk about this question? Yeah. And so, typically, Nick, we would expect to see sales convert.
Chris Dan'sbury: to revenue in about a three month time window. Now, obviously, as we go forward and we're selling more digital services, that narrows, which is one of the benefits.
Chris Dan'sbury: are ways from that. I would say this, you know, in the in the growth bucket, as we said last quarter, we only grew one and a half percent year over year. This, this quarter, it's four.
Speaker Change: So I think that's encouraging. We have to watch that closely. So, you know, we don't we don't there's not enough a trend line there yet, but that's what we're watching. But I also want to be really realistic here.
Speaker Change: and it's a good problem to have. We have a legacy business that's enormous.
Speaker Change: it generates an enormous amount of cash, which is part of how we're able to invest in our future.
Speaker Change: That legacy business.
Speaker Change: given its size, will continue to offset
Speaker Change: the growth that we see in those grow buckets. So I don't, I don't expect in the near term, given what's going on in the industry, you know, I've commented on what I think is some, some bad re-rate behavior in some cases that's driving customer disconnects. I think those things will continue. And that'll continue to weigh on total revenue. But I think if we look at things like the TNPS scores, the sales,
Speaker Change: The fact that disconnects, at least in the near term, appear to be stabilizing. You know, I hope that that starts to show a slight improvement in the rate of decline as we move forward over the coming quarters.
Speaker Change: Unknown Speaker. Thank you.
Speaker Change: Thank you. Thank you. Thank you.
Speaker Change: Next question, please.
Speaker Change: The next question is from Greg Williams with TD Kellan. Your line is open.
Greg Williams: Great. Thanks for taking my questions. Just back on the potential mass market sale, we're splitting the fiber off from the copper. Just wondering if you can provide an update on potential dis-energies. I remember when you guys sold off the assets to Brightspeed.
Speaker Change: you mentioned that there were some dis-energies there. But there wasn't a lot of enterprise overlap. In this situation, you'll have six or seven markets where you're heavily overlapped with enterprise and just wondering if there's gonna be a greater level of dis-energies as a result. Second question's on, just, yeah, go ahead, I'll have a follow up.
Speaker Change: No, no, go ahead. Go ahead. Sorry. So the second question is actually separate. It's on the North American enterprise. I noticed that the nurture bucket was actually declining faster than the harvest bucket. You mentioned that VPN and Ethernet had some impact, but I found that kind of interesting and just wondering if you can help us understand that dynamic.
Speaker Change: Yeah, so a few things. So on the on the first one.
Speaker Change: You know, one of the benefits of CenturyLink and Level 3 being put together is there are routes that, you know, came from CenturyLink.
Speaker Change: Frankly, Blumen would never sell. They're going to be critical for our enterprise delivery going forward. So I think there's...
Speaker Change: Without getting too specific, I think there's ways for us to make sure that we continue the synergies that existed before.
Speaker Change: The other thing is, is look, just like on the enterprise business, where we talk about the simplification and better customer experience we can bring by unifying four networks, there's work we can do on legacy copper.
Speaker Change: and the consumers on the consumer side as well. So I would say that's less of a concern at this point, but again, more to follow as we have more to share.
Speaker Change: As it relates to what happened in Q3,
Speaker Change: The reality is, is that that nurture bucket really is VPN and Ethernet. Nothing specific really to point to.
Speaker Change: We do have migration plays in place, new migration plays, to help
Speaker Change: move many of those VPN and Ethernet customers to newer services, that has not yet hit.
Speaker Change: So that's an area of focus we have as well. But I would say there was nothing significant that you could point to that moved the needle. I would say it's just more of a quarterly blip.
Speaker Change: Got it. Thank you.
Speaker Change: Thanks. Next question, please.
Speaker Change: The next question comes from Frank Luthan with Raymond James. Your line is open.
Speaker Change: Go to Beadaholique.com for all of your beading supplies needs!
Frank Luthan: Great, thank you. Can you give us a idea of the annual revenue on wavelengths and what the margins are on those relative to your other products? And then, you know, contracts of this nature tend to see some expansion over time, they're already telling you to go faster. You know, what do you think is the potential for some upside to this $8 billion? And over what time frame do you think you'll start to see some of that creep? Thanks.
Speaker Change: Yeah, so on the $8 billion, nothing really to share at this point because we're still in those conversations about how much faster we can go and what that means for us. I would simply say
Speaker Change: that
Speaker Change: Again, the reasons why customers are here is because of their confidence in our ability to build these networks for them.
Speaker Change: and they are calling us because they know of our capabilities and they know it's possible that we could go faster. So that's something that they're willing to participate in with us and as we know more, we'll share it. And I'm sorry, what was the first question again? It's been a long day, Frank.
Speaker Change: We're not at the point yet where we're disclosing individual product details.
Speaker Change: You know, as we go forward, it's something we're looking at. I think it's a little bit early.
Speaker Change: But in time, you know, I think we'll probably come to a different way of looking at it that we'll ultimately share with you guys, but it's too early yet. And we don't, you know, we don't go below grow, nurture, harvest at this point. And that's what we're going to stick with for now.
Speaker Change: All right, so on the back of the building.
Speaker Change: Thanks.
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Speaker Change: Operator, we have time for one more question.
Speaker Change: Thank you. Your final question will come from Eric Lubitschow with Wells Fargo. Your line is open.
Eric Lubitschow: Great, I appreciate you squeezing me in. So just to follow up on the mass markets business, you know, as this
Speaker Change: We've alluded to on the call a lot of recent announcements and deal activity from
Speaker Change: a lot of private overbuilders. So as you look at
Speaker Change: Your footprint today.
Speaker Change: roughly 18 million homes, copper homes, you know, how does
Speaker Change: Some of this recent competitive activity or announcements play into how
Speaker Change: Attractive, you think that future growth opportunity is either by you
Speaker Change: or a partner and how you think about, you know, what could be built out with Fibre at Attractive.
Speaker Change: Economics.
Speaker Change: Yeah, we've so what we've said publicly that of those 18 million again, there's a there's a fairly sizable piece that's rural. But there is, you know, 8 million, you know, home potential, I think is reasonable. Maybe it's a little more, maybe it's a little less, we're at four right now. So the reality is that the markets where fiber is being built are really attractive markets.
Speaker Change: And if you look at the size of our fiber footprint today, and you look at the potential fiber footprint
Speaker Change: We are the largest asset out there that has yet to be consolidated. So, you know, those are the facts. And, you know, we'll see where we go from here.
Speaker Change: Appreciate that. And just just to follow up, you touched on, you know, the funding gap is closed and now you have more flexibility. Is that?
Speaker Change: Then another way of saying you think Lumina will be kind of consistently.
Speaker Change: Free cash flow positive from here. I'm just trying to think about obviously a lot of puts and takes
Speaker Change: In the next year, you talked about Eva Dallow or, you know, presumably CapEx a bit higher from some of these PCF sales ramping and then obviously kind of a wild card on PCF contributions next year, but just any kind of directional help you can provide on what FreeCASMO could look like.
Speaker Change: We will be generating positive free cash flow. Now, I want to be really clear on one thing.
Speaker Change: That's cumulative because of the impact of tax payments and the timing of TAPx.
Speaker Change: There could be, and I just don't have enough information yet to be able to share it, there could be a year where maybe we're free cash flow negative, but we will have received the cash in advance of that and we'll plan accordingly.
Speaker Change: It's just that the size of the tax payments and the quantum of the capex that'll get spent. It's going to be really lumpy, and it's going to be lumpy quarter to quarter. It's going to be lumpy year to year, but cumulatively, yes.
Speaker Change: Pre-cash flow positive and especially with the billion dollar cost takeout Even with the pressures on revenue, we're confident in making that statement
Speaker Change: Thank you. Thanks, Eric.
Speaker Change: This concludes the question and answer session. I'll turn the call to Kate for closing remarks.
Kate Johnson: Thanks, everybody, for digging in and taking the time to understand our unique story. I look forward to meeting you at the upcoming conferences and updating you on the significant progress we're making. See you soon.
Speaker Change: This concludes today's conference call. We thank you for joining. You may now disconnect.