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spk01: Please continue to hold. You are currently holding for the Lumen Technologies fourth quarter 2021 earnings call. Please remain on the line. The conference will begin in approximately four to five minutes. We thank you all for your patience. Thank you. Thank you.
spk06: Thank you. Thank you. Thank you. Thank you.
spk01: Greetings and welcome to Lumen Technologies' fourth quarter 2021 earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question and answer session. 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 today, Wednesday, February 9th, 2022. It is now my pleasure to turn the conference over to Mike McCormack, Senior Vice President, Investor Relations. Please go ahead.
spk04: Thank you, France. Good afternoon, everyone, and thank you for joining us for the Lumen Technologies fourth quarter 2021 earnings call. Joining me on the call today are Jeff Story, President and Chief Executive Officer, and Neil Dev, Executive Vice President and Chief Financial Officer. Before we begin, I'd need to call your attention to our safe harbor statement on slide two of our fourth quarter 2021 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 reconciled to the most comparable GAAP measures that can be found in our earnings press release. Certain metrics discussed today exclude costs for special items as detailed in our earnings materials, all of which can be found on the investor relations section of the Lumen website. With that, I'll turn the call over to Jeff.
spk09: Good afternoon, everyone, and thank you for joining us. 2022 brings new beginnings for Lumen. The team is energized for rapid change as we streamline our assets and aggressively invest to drive growth. I want to be clear, our focus is on turning our top line positive with profitable revenue. Every employee in our organization, our sales team, field techs, customer care, support functions, is focused on this objective. On today's call, I'll provide a few thoughts on our fourth quarter results, an update on our announced transactions, a review of our key capital allocation priorities, and a review of our investment plans, which we believe will position the company for long-term sustainable revenue growth. Neil will discuss the fourth quarter in more detail, provide our outlook for 2022, and update expectations for the timing and financial impact of our two announced transactions. We'll reserve time after Neil's remarks for your questions. Our fourth quarter revenue trend was stable compared to the third quarter, and on an organic basis, our business revenue was unchanged from the third quarter. We said previously, we do not expect a straight line to revenue growth, but our forward indicators provide us confidence that we can achieve our stated long term goals. Quarterly sales were once again strong, and the funnel remains above pre pandemic levels. The Lumen platform is transforming the way businesses approach their technology needs, bringing best-in-class solutions to enable fourth industrial revolution use cases and enabling the digital transformation for enterprises. Enterprises are adjusting to new hybrid workloads, and Lumen, as well as our world-class partners, are delivering the expertise necessary for our customers to succeed. As you can imagine, the excitement within Lumen is high as we position our quantum fiber platform for a major acceleration. Our robust, symmetric, all-digital experience is resonating with customers. Quantum will help drive revenue growth and lower the operating costs for our mass market segments, improving the profitability and durability of the business. At the same time, incumbency provides us a meaningful cost advantage as we build and launch new quantum markets and drive penetration gains. Our expectation for long-term penetration is fully supported by the strength of the product as well as the performance in our existing quantum markets. Even in our nascent quantum footprint, we have achieved 29% penetration with limited marketing activities, more than doubling the penetration we have in our legacy copper areas. As we pivot from micro-targeting to a market-based approach, we expect to be able to attract and retain new and existing customers to our superior product capabilities much more aggressively. The opportunity for quantum is significant. I hope you can feel our excitement for the future of Lumen as we invest to drive enterprise and quantum fiber growth. Let's shift to a few quick thoughts about our previously announced transactions. These transactions allow us to focus on the areas of our business that we believe are best poised for growth. As you think about the pro forma revenue mix, over one-third of our mass market exposure to legacy voice and other revenue will be divested. Not only does our revenue mix improve, but these transactions also delivered strong valuations, supporting the view that our overall asset portfolio remains deeply discounted by the market. While we disagree with our current valuation, there's only one way to realize our true market value, execution. We get it, and we're focused on delivering. We're making good progress toward closing both deals, and Neil will provide an update on our expected timing and financial impacts. We're working to be a strong partner to both Stonepeak and Apollo as they onboard our employees and customers and as we help position them for success. Last quarter, we provided you our top five capital allocation priorities as we deploy our significant free cash flow and utilize the proceeds from these valuable transactions. I hope I've been clear that investing in growth is always our highest priority, and we will invest in both CapEx and OpEx to lay the foundation to achieve our goals. I feel we are in a great position entering 2022. Let me start with quantum fiber. There is a tremendous amount of activity here at Lumen as we rev up the quantum engine. We are readying the platform to deliver on our plans and remain very confident in our opportunity to deliver the terrific experience provided by quantum to more than 12 million locations over the coming years. Quantum fiber revenue grew 22% year over year, and we look forward to the growth that will come from our much more aggressive quantum stance. we see a long-term significant and sustainable revenue growth opportunity for our mass markets business resulting from our quantum fiber investments. As of the end of the fourth quarter, we had approximately 2.6 million enabled locations within the retained 16 states, in line with our expectation outlined last quarter. Our excitement builds as we enter 2022 with our plan to accelerate aggressively and ramp that enablement pace to over 1 million new locations, with a goal of hitting the run rate of 1.5 to 2 million enablements per year as we exit 2022. Our fully funded 2022 Quantum Fiber Plan will enable millions of customer locations to experience our best-in-breed quantum experience and product capability that we believe will drive higher ARPU, lower churn, and significant customer lifetime value. We'll invest heavily to bring the quantum experience to our customers, especially in the areas of product development, marketing, brand, and go-to-market sales initiatives. Both enterprise and mass market supply chains are stressed, and we continue working very closely with our diverse and valued suppliers to mitigate risk as we execute on our growth objectives. In addition, we're managing through this inflationary environment, and with some exceptions, do not expect pricing pressures to impede our goals. Our excitement for Quantum Fiber is easy to understand, but we are equally excited about our enterprise business as we continue to invest aggressively in our edge compute and storage platforms, our managed service offerings, SASE, and our security products. Our customers' digital experience across our core networking services is unique and drives success with a customer-first posture. Along those lines, we have successfully launched our fully digital self-service edge compute ordering system, which allows existing and new customers to self-provision services, including bare metal and storage solutions, in minutes without the need for human interaction. We believe our extensive long-haul and dense metro infrastructure and our ultra-low latency, ultra-high capacity network provide cost advantages over many of our competitors and deliver a powerful customer experience. We're seeing early signs that our customers understand that value proposition, and our recently announced $1.2 billion network services contract win for the U.S. Department of Agriculture is a great example. As part of this solution, we're delivering secure remote access, managed data, contact center, and cloud connectivity solutions to more than 10,000 USDA locations across the country and abroad. Awarded under the $50 billion Enterprise Infrastructure Solutions, or EIS, program, the 11-year task order is illustrative of the broad range of products and services offered on the Lumen platform. This is a long list, but our services to the USDA include SD-WAN, MTIPS, Zero Trust Networking, Edge Computing, VPN, Managed Security, UCaaS, Voice over IP, Ethernet, and Wavelengths, and related equipment and engineering services. I mentioned earlier that we had another strong sales quarter in 4Q. While the USDA deal highlights our expertise in the public sector, our other sales within North America Enterprise, which do not include public sector, were up both sequentially and year-over-year. In fact, December was the highest sales month we've seen in several years for this area. Beyond driving growth, we believe returning cash to shareholders is a very important part of the Lumen strategy and that the $1 per share level is attractive and sustainable long-term. As we've said, our payout ratio will likely rise in the near term during the accelerated quantum build phase, which we think should be viewed as a discrete project. The completion of the multi-year build phase coupled with our expectation for top-line growth should return us to more normalized payout ratios over time. We will continue to manage our balance sheet to remain relatively leverage neutral through our quantum fiber deployment plan, but we do expect the timeline to reach our target net leverage ratio of 2.75 to 3.25 times adjusted EBITDA will be extended. To be clear, relatively leverage neutral is inclusive of the impact of not only the transactions, but also the CAF2 to RDOF transition. We will also continue to evaluate our asset portfolio, and I hope our opportunistic but open approach to asset optimization is fully appreciated. It offers both a compelling valuation and a clear strategic benefit. Lastly, I want to emphasize that we continue and do not reflect the tremendous opportunity. Our board remains prepared to authorize further buybacks on short notice if we believe a buyback provides the best. With that, I'll turn the call over to Neil to discuss our fourth quarter results. Neil.
spk10: Thank you, Jeff, and good afternoon, everyone. We entered 2022 with a clear focus on closing two significant transactions and executing on our plans to drive future growth. I will begin with our financial summary for 2021. We generated adjusted EBITDA of $8.440 billion in 2021 and on a full-year basis expanded margins by over 100 basis points year-over-year. We continue to make progress on our objective of improving revenue trajectory with fourth quarter down 0.8% sequentially. When adjusted for foreign currency and the sale of our business during the quarter, our sequential revenue declined 0.5% in the fourth quarter. We again delivered solid free cash flow of $3.742 billion. We returned $2.1 billion to our shareholders during the year through quarterly dividend payments and our stock repurchase programs.
spk12: Additionally, we reduced net debt by $1.5 billion during 2021 and exited the year with leverage at 3.6 times.
spk10: We also announced two significant transactions at very attractive multiples with an aggregate value of over $10 billion. Turning to revenue in the fourth quarter, total revenue declined 5.4% on a year-over-year basis to $4.847 billion. Year-over-year metrics continued to be impacted by COVID-related demand in 2020. On a sequential basis, total revenue declined 0.4%. On a year-over-year basis, revenue declined 4.7% to $3.494 billion. Normalizing for foreign currency headwinds and the sale of our correctional facilities business, sequential revenue was flat and declined 4.3% on a year-over-year basis. Within business, iGAM revenue declined 0.2% on a year-over-year basis.
spk12: On a constant currency basis, iGAM... ...in decline 1% year-over-year. The year-over-year decline was due primarily... ...which I have referenced on previous calls. We saw sequential benefits from compute and application services...
spk10: which was driven by managed security and cloud services.
spk12: Within large enterprise, in the fourth quarter, we sold the remainder of our correctional facilities communication services business.
spk10: The sale of this business at the end of October impacted revenue by about $7 million in the fourth quarter, and the impact on a full quarter basis would have been about $1 million.
spk12: We had strength sequentially in computing.
spk10: by our IT solutions and cloud services. Year-over-year trends were impacted by the surge in COVID and the timing of non-recurring revenues in our public sector channel. Mid-market enterprise declined 0.2% sequentially and 7.1% on a year-over-year showing improvement compared to the third quarter. Wholesale revenue was essentially flat on a sequential basis, and year-over-year declined 4.3% versus the 7% decline in the third quarter. Wholesale benefited from demand for fiber infrastructure and a few one-time items. We continue to manage this business for cash. Computer and application services for enterprise channels grew 3.9% sequentially, showing growth across all channels but declined 2.2% year-over-year. The year-over-year decline is primarily driven by the previously mentioned large IGAM customer disconnect. IP and data services for enterprise channels declined both sequentially and year-over-year due to fewer new VPN network deployments. We saw continued increased demand for IP in the fourth quarter as customers transitioned to SD-WAN and hybrid work environments. Fiber infrastructure services sequentially and 2.4% year-over-year.
spk12: These products have significant professional services and equipment. Year-over-year revenue variability is driven primarily by these non-recurring services. The voice and other services, which include our legacy services, declined both sequentially and on a year-over-year basis as we managed these areas for cash.
spk10: Voice comparisons continued to be impacted by higher COVID-related usage in the year-ago quarter. Turning to mass markets, fourth quarter 2021 revenue declined 1.9% sequentially. our mass markets fiber broadband revenue grew 22% year over year this quarter. During the quarter, we added 29,000 quantum fiber customers up from 25,000 ads in the prior year fourth quarter. Turning to adjusted EBITDA, for the fourth quarter of 2021, adjusted EBITDA, excluding special items, was $2.088 billion, compared to $2.188 billion in the year-ago quotation activities.
spk12: We continue to drive healthy EBITDA margins during the quarter, growing by about 40 basis points year-over-year to 43.1%.
spk10: Capital expenditures for the fourth quarter of 2021 were $848 million. While we continue to focus on capital efficiencies, capital spending was up both sequentially and in the quantum fiber build plan. We expect capital expenditures to increase going forward as our quantum fiber build ramps. In the fourth quarter of 2021, the company generated free cash flow of $776 million. At the beginning of each year, we evaluate our external reporting and make adjustments to better align our financial reporting with management focus and drivers of our business. In 2022, we are adjusting our mass markets product revenue reporting categories to fiber broadband, other broadband, and voice another. The two key reasons for these changes are the increasing importance of our quantum fiber platform and the completion of the CAF2 program. Given its relatively small impact, the RDOF subsidy revenue will be included in the voice and other category in our new reporting. Contemplate making any additional changes to our reporting at this time.
spk12: Moving on to the business outlook for 2022.
spk10: As we focus on portfolio rationalization in transforming the business, we will have several moving pieces that will complicate year-over-year comparability. Before I get into financial guidance, I will touch on some of those factors. First of all, as a reminder, the CAF II subsidy ended in 2020 EBITDA by about $500 million. When combined, The two divested assets are expected EBITDA with capital spending of about $450 million in 2022. We now expect the transactions to close in early third quarter of this year. For simplicity of guidance, we have assumed first half results are included in our consolidated results. At this point, we don't expect deal close related timing variance to be material. For the full year 2022, we expect adjusted EBITDA to be in the range of 6.5 billion to 6.7 billion. When bridging to our 2022 full year adjusted EBITDA guidance, In addition to the obvious CAF2 completion and divested business EBITDA, there are a few other drivers to keep in mind. As Jeff mentioned, we have significantly stepped up our investments in growth initiatives for enterprise and scaling our quantum fiber business. As for the divestitures, we will have separation costs and dis-synergies, which will impact near-term results. As we prioritize growth initiatives and supporting our divestitures in 2022, we expect our transformation savings to be lower than prior years. For the full year 2022, we expect total capital expenditures in the range of 3.2 billion to 3.4 billion. Within that, we expect to spend about a billion dollars of capital on quantum during 2022. We expect to generate free cash flow in the range of 1.6 billion to 1.8 billion for the full year 2022. For 2022, we do not have any required contributions to the pension.
spk12: As a reminder, typically has higher working capital use driven by timing of bonus paid expenses.
spk10: We expect net cash interest expense in the range of 1.3 billion to 1.4 billion to expect to stay leverage neutral as we close the transactions and scale our quantum fiber business. In terms of special items for 2022, we expect a significant ramp up in costs compared to prior years, primarily driven by dedicated third party costs to support transition services for the divestitures. The reimbursement for these services will be in other income net impact to our cash flows. In closing, 2022 is all about executing on our growth initiatives for the enterprise Lumen platform and scaling our quantum fiber business that fuel our return to growth. As a reminder, in addition to free cash flow generated from the business, the combination of free cash flow from the business and proceeds from portfolio rationalization efforts support our capital allocation priorities that Jeff highlighted. With that, we are ready for your questions.
spk01: Thank you. If you would like to register a question, please press the 1 followed by the 4 on your telephone. You will hear a three-tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw, please press the 1 followed by the 3. Our first question is from the line of Michael Rollins with Citi. Please go ahead.
spk13: Thanks and good afternoon. As you're thinking about the opportunities in 2022 to improve revenue with some of the priorities you mentioned earlier in the call. Just curious, as you look at the charts, like on page six and seven, that kind of way out the year-over-year changes in revenue versus the sequential changes in revenue, where should investors focus more in trying to think about is the sequential year-over-year as sometimes
spk12: price changes and other dates to your customers in your sales. And then just separately, one housekeeping item. I think there was a mention earlier that in wholesale, there were some one-time items.
spk13: I'm just curious if you can unpack the amount of those one-time items impacting the wholesale revenues. Thanks.
spk10: Sure. So I'll start with the wholesale one time, you know, in the wholesale channel, you always have carrier settlements and things like that. So there's always one time, but just stepping back roughly, you know, 10, 15 million more than what we typically see. So that's wholesale. In terms of your question on sequential versus year over year, In 2020, obviously, we had a fair amount of revenue driven by COVID in our legacy services. So going forward, I think sequential and both sequential and year-over-year are going to become more meaningful. Having said that, as you highlighted, first quarter, we always tend to have you know, some large re-rates, et cetera, nothing specific to highlight, but that's generally when we have some contract re-rate pressure, et cetera, and fourth quarter tends to be seasonally strong. So we'll have a little bit of that seasonality. But other than that, nothing, nothing specific to call out. The other thing I'll highlight is Jeff touched on that in his remarks is as we close the transactions, the mix will significantly improve. So there is a fair amount of voice and other legacy revenues that move with the transaction so that that will be a positive impact in terms of the mix going forward.
spk13: Thanks.
spk02: Thanks, Michael.
spk15: Our next question is from... Thanks for taking the question. Allocation priorities.
spk12: Obviously, tightening this year as you ramp up fiber spending. And, you know, beyond this year, if that will even be fully covered, about the split between, you know, one-time fiber expansion capex versus into business and how we should think about that through the investment cycle.
spk15: And then, second, I just want to size up some of the you know, cost, the synergies. I think if you take out the $500 million of CAP2 and the divested assets, the half of your contribution, you get to about $7 billion of EBITDA on your guide is for about $400 million decline from that level for the full year. So just wondering how we should think about how those impact the outlook for the full year.
spk09: Eric, I'll take the first part.
spk12: But, Neil, as we look at the dividend and the payout ratio, and I've said this, before, we think that the dividend is an important part .
spk09: We think the dollar per share is attractive to investors, and it's sustainable, so the dividend there. I've also said that in 2022 and the next few years, we are going to be investing in growth, and you mentioned quantum fiber, and with the quantum fiber build, we think that that should be viewed as a discrete project that's
spk12: starts already and ends in a few years as we complete the 12 million enablements that we expect over the coming years.
spk09: We also expect to return to top-line revenue growth, and with those two things, while we do see the payout ratio rising in the near term, with those two things, we think that it will return to more normal levels over time.
spk10: So, Eric, on your question on disk synergies, I think just to step back a little bit, a little basis even, if you will, so we have allocated costs for shared function, et cetera. And so it's a little bit of a moving target in terms of we know what they are going to be, but we're already working on right-sizing those costs, and we'll continue to do so. as we go forward. And another thing I mentioned is that there's also a little bit of an opportunity cost in 2022. As we focus on the separation of the business and as we focus on all the investments for growth, Just think about our IT resources. We are not focused as much on transformation. And so our savings will be a little lighter. And so we factored all of that into the guidance. But the savings don't go away. And so we'll continue to focus on our transformation savings. And we'll be able to... Morgan Stanley, please go ahead.
spk08: Thank you. Good evening. So good to hear on the quantum fiber revenue growth. And the build plans, I guess on the build plans, should we think about the, you're doing, I think you did 400,000 this year. Should we think about the 1 million this year as being fairly linear or is it still very much second half loaded, I guess, to get to that 1.5 to 2 million? And I guess the question is, why not go faster? We've obviously seen the infrastructure bill award a lot of funding. We've seen fixed wireless gain some traction here. So if you see the opportunity here, you've got obviously a lot of homes with potential. So what's keeping you from accelerating that pace?
spk12: I saw you highlighting run rate cash taxes once the transactions are complete. in terms of the ongoing, you know, as a sort of a full taxpayer.
spk08: Does that go up a few hundred million as we get out of 22 into 23? Thanks.
spk09: So, Simon, on the build plan for quantum fiber, it's not going to be linear. It takes a while to ramp these capabilities, to ramp, to do the engineering, to make sure that that we've got the construction resources in place. So it's not going to be linear, but it's not going to be fully back-end loaded either. We're already at a pace of, you know, call it 500,000 homes, 400,000, 500,000 homes and business locations. So, you know, there's going to be that as a starting point, but we'll get to the full million toward the end of the year, obviously. So it's a little back-end loaded, but not substantially. What keeps us from going faster? This is hard work. It's hard work. There's a lot of things to do. We want to make sure that we do it right. We're exceptionally good at building networks, and we will continue to do that with the quantum fiber build. But there's hard work. We also have supply chain challenges, and I mentioned that in the prepared remarks. I don't want to overemphasize it, but it's an issue, and we see it with equipment vendors and their chips and them getting access to chips. So we'll continue to manage that, but that's also a constraining factor on how to accelerate faster. Now, the main point is we want to accelerate to a point of 1.5 million to 2 million homes by the end of the year. on that run rate finishing the year and going into 2023. And that's really a large effort to make sure that we do go as fast as we possibly can. Neil, do you want to take the cash taxes?
spk10: Yeah. Simon, on cash taxes, as we've mentioned before, we'll use up most of the substantial part of the NOLs. This year, a combination of our operating income and the transactions, and you can see that $100 million that we got into this year, at this point, the 26% effective rate is probably a pretty good assumption.
spk08: Great. Thanks, Don.
spk10: Thanks, Don. Next question, France?
spk01: Our next question is from Phil Cusick with J.P. Morgan. Please go ahead.
spk05: Hi, guys. Forgive me if we just sort of go back to this, but I wanted to talk about the sort of CapEx pace and that acceleration into the back half.
spk12: You've talked in the past about other projects like network transformation that wouldn't need to be done this year as an offset.
spk05: And so I wanted to sort of quantify what that reduction might be as we think about the growth in fiber spending this year and the pace that we're going to exit as we start to think about 23 capex. Can you help us with that? Thanks.
spk09: Yeah, let me take a first pass and then let Neil add to it. I don't want to get into discrete projects that we're funding and not funding, but let me give you a sense. There is a certain amount of capital that we call just on. things that we've talked about in 2021, we spent a lot of money on edge computing, building a coverage model for edge computing. We finished the year with more than 95% of our U.S.
spk12: enterprises within five milliseconds of our
spk09: of our footprint. We're not going to spend that money again next year. Now, what I hope we do, or this year in 2022, what I hope we do is continue to densify the equipment in those locations because that means we're being successful in selling our product in that success-based step. Autumn fiber, we spent money to enable 400,000 homes to enable a million homes and get to the road during Simon's question.
spk12: We'll continue to spend on that project and really focus there. Beyond that, we manage projects in and out.
spk09: We're not starving anything to do those activities. We're investing heavily in growth. And I say that on CAPEX. I also say it on OPEX. We're investing heavily in growth on optics to make sure that we have the product capabilities, to make sure that we have the go-to-market strategy, the brand awareness, all of the things that go into effective selling.
spk10: We're seeing with the results in the fourth underline the point that Jeff made on we're not screening anything.
spk12: I mentioned in my prepared remarks that we have about
spk10: a billion for quantum fiber in the capital guidance that we provided. And to the extent that we can scale faster, it won't be the constraint. The constraint really is going to be mundane things like permitting, construction, getting it built, and those are the things that we're focused on scaling.
spk12: And if we can scale those things, spending more, I think we'll lean into
spk09: In the meantime, we're focused on our existing 2.6 million enablements that we have and driving penetration in those. We're at around 29% penetration, but that includes homes that we just turned up last month. We want to make sure that we continue to focus on driving the penetration in the existing footprint.
spk05: Thanks. If I can just follow up quickly, and again, I'm trying to talk CapEx.
spk12: I mean, it seems like there's $700 to $1 billion of CapEx next year in fiber in quantum. Are there other projects that are still happening this year that we could think about sort of dropping? away?
spk05: Or should we think about next year being sort of the peak of CapEx on quantum?
spk10: So, Phil, I think the key point there is, you know, our plan, like Jeff said, on capital is dynamic every year. So, for example, on edge, a lot of the investments would say were, you know, more in 2020. And This year it's more success-based at a much lower intensity. So without getting into specifics around 2023, we do view that as a discrete project, but the rest of the plan will be dynamic and will be success-based.
spk04: Thanks, Bill. Next question.
spk11: David Barden with the Bank of America. Please go ahead.
spk12: Hey, guys.
spk16: Thanks so much for taking the questions, I guess. The first one would be, Neil, if you could kind of give us any color about the revenue that we need to be taking out of the model when we're thinking about the second half of the year alongside some of the stuff you've shared on the EBITDA, the cash flow side. And then the second question, I guess, Jeff, 50 capex and divide it in half at $625 million and then subtract that from the free cash flow guidance. You know, it says that the kind of second half of the year, you know, the dividends barely covered maybe in the mix with the board. I wonder if you could kind of elaborate on that a little bit, but where that money would come from.
spk12: Would you, if it got to that point, that'd be helpful. Thank you. Let me do the second question first. I'm not going to and how we might decide to do it.
spk09: I am very clear, I hope I'm very clear, on the priorities for our capital growth. So, you know, as we look at the CapEx, we are very committed to investing in quantum fiber. We are very committed to investing and FASI and IT solutions and where we think significant growth can be.
spk12: Secondly, we've talked about the dividend. And I will point out that our last buyback reduced our dividend obligation by about $81 million a year.
spk09: So it's not just an issue to just the dividend. That also is factors in by the buybacks, maintain relatively leverage where we are, maybe not exactly where we are, and then if we think it's appropriate, we will come up with a plan to make additional buybacks. But I'm not going to be bored with view it.
spk12: We are open to that. First question, David, you know we don't provide revenue guidance, but like I said on EBITDA, our expectation is $1.7 billion, and our guidance assumes that we have half years' worth of EBITDA in our consolidated results.
spk07: What are we doing?
spk16: If I could just maybe just one quick follow-up, Neil. Based on kind of some of the revenue mix benefits that you've talked about getting out of this thing, would it be fair to say that the margin on this portfolio, the Apollo portfolio in particular, it's going to be a higher margin portfolio than kind of the business that you'll have, which you're investing to grow?
spk10: Yes, you're right. It's a higher EBITDA margin business. Generally, our legacy revenues are higher margins. So, yeah, post the transactions, you'll see a dip in our EBITDA margin, which also means we'll have more opportunity to expand margins going forward.
spk09: And we also expect quantum fiber to be successful. If you look at the markets that we retain, they have a couple of things going for us. Most of those big markets are growing markets. More people are moving to them. They're higher tech markets. We see a lot of opportunity in those states. And we have incumbency. And incumbency helps us build. It helps us build. It helps us build at a lower cost. helps us operate, and we're moving to the all-digital experience that those customers have. And so we expect good things from our quantum business.
spk11: Our next question is from Batcha Levy with UBS. Please go ahead. Add more color and maybe quantify the. planned investment for growth specific for this year that could come off next year and how we should think about the pace through the year.
spk00: And a second question on subsidies. With CAFCON, can you just remind us how much subsidy dollars are left in the model? And I think you applied for $200 million in subsidies to replace for it. Does the guidance include it? Thank you.
spk12: There's a lot packed in there, Bhatia. ...to come off in 2023.
spk09: We're not giving guidance for 2023, but we do plan to ramp our quantum fiber investment for the year in 2020.
spk12: We plan to do $1.5 million to $2 million at a run rate basis by the end of the year. I've given you an indication of how we expect to build.
spk09: Neil, I'll let you take the question on how do we account for $200 million.
spk10: Yeah, I think your other question was CAF 2 to RDOF.
spk12: Obviously, CAF 2 is $6 million a year, but just keep in mind a significant part of that
spk10: will move with the divested assets. So it's not going to be that material going forward.
spk12: In terms of the equipment, so, you know, there's premature to comment on that.
spk11: So just one quick follow-up on the investment. I appreciate the CapEx part, but in terms of the
spk10: the opex pipe that could hit this year is there any way you could provide some color around that yeah so but that's all incorporated into our uh you know ebitda guidance um and uh you know i think it'll be in this you know start to stamp uh ramp a little bit and uh but not going to be materially different quarter over quarter maybe a little higher in the second half of the year but the whole reason we're making those investments, like Jeff mentioned, is improved revenue and EBITDA trajectory in the other years, and we're confident of that.
spk01: Okay. Thank you.
spk10: Thanks, Dr. Brent. Next question, please.
spk01: Our next question is from Nick DelDeo with Moffitt Nathanson. Please go ahead.
spk05: Hey, thanks for taking my questions. One for Jeff and one for Neil. You know, Jeff, on the supply chain, you said it's an issue, but you didn't want to overstate it. I guess as we think about your 1.5 to 2 million passings target in the coming years, is that predicated on the supply chain situation improving, or is that achievable if things stay stressed? And I guess more generally, what's your outlook on the supply chain? And then for Neil, I was wondering if you could help us better understand what relatively means in the context of Spain relatively think about?
spk09: Yes, so let me take the first one, Nick. On supply chain, what's my general attitude towards supply chain? We are monitoring closely, and we have vendors on the enterprise side and vendors on the consumer side, the mass market side, and vendors on the fiber side, where we are continuing to work closely with them and put in mitigation plans in the event that they're unable to deliver for us. But we see it on all fronts of the business. Again, I don't want to, by focusing on this, I don't want to overstate the issue, but it's something that we're really paying attention to and working with vendors. Months ago, we put in full-year orders, nine-month orders for our vendors to and making sure that we were in the queue early and often to ensure that we got equipment and that we get the resources that we need. We're starting to see some companies hold off on taking new orders. And as we see that, then we're working to put in our mitigation plans to make sure. It's factored in to our build plan, but it is an issue that I that I will highlight as a real one that we have to mitigate. Neil?
spk10: Neil Rosenberg- On the leverage, Nick, if you look at 2020, we were at about roughly around 3.6. 2021, we exited about 3.6. So, and we've played down about $6 billion of debt since we announced our deleveraging plan, $7 billion since we, since the close of the level three transaction. The key point is I think we've been pretty good about calibrating our leverage to the business profile. So even though we're divesting a fair amount of legacy revenues, we haven't really levered up. If you think about quantum fiber, that's going to be a high-growth business, an infrastructure business. So you always have to think about de-averaging our leverage and think about whether that's appropriate going forward. Our view right now is that the P6 is probably a good assumption. Now, we have said that it will be roughly in that zip code. But until the business profile changes, we don't really need to change that at this point. And like Jeff has mentioned several times, we're going through an investment cycle. And it truly is a discrete project in a proper network to fiber.
spk12: And it's a long life asset. And so as we do that, we're okay with the leverage fluctuating a little bit as we fund that build.
spk01: Okay. Thank you both.
spk04: Thanks, Nick. Next question, France?
spk01: The next question is from Greg Williams with Cowan. Please go ahead.
spk14: Great. Thanks for taking my questions. First, with fiber to the home builds and staying leveraged neutral through the build and the dividend, how should we think about your priorities if this changes in your cap allocation and your balance sheet amid an escalating rate environment? Second question is just on the penetration goals for your fiber to the home plans. That's that marketing engine. What are your longer-term goals? as we just think about, you know, your revenue inflection and free cash flow growth in the outer years. Thanks.
spk09: Okay, so rising rates.
spk12: Neil, I'll let you take penetration.
spk14: Just the penetration, you know, as I think about the revenue inflection and your outer year free cash flow.
spk09: Okay. Well, first of all, we are always focused on free cash flow. We think that is the primary driver of business success. And for sustainable long-term free cash flow growth, that's why we're investing today. That's why we divested or divesting the properties that we're divesting, because we weren't going to invest in things that we can tolerate. But it's why we're investing in the 16 retained states. It's why we're investing in our growth initiatives on the enterprise side. That's why we've invested in our relationship with the federal government. That's why we're investing is to drive long-term sustainable free cash flow. Penetration for quantum fiber, and we're at 29% average of new homes, new business locations for mass markets that we've just added for a while.
spk12: But we've When we reach steady state, it will be north of 40%.
spk09: The quality of the product that we have, you know, we have a very effective, competitive product. And even with the limited marketing, we're doubling our penetration rates. And the symmetrical nature of our product is far better for workforce from anywhere environment, and the capacity needs continue to expand for consumers just like they with the abundance of streaming providers and the bundling of video. We see lots of factors in addition to our all-digital customers, our great NPS scores. We see a lot of factors that give us high confidence in the 40%.
spk12: you know, on the rising rates? Yeah. So, um, the points one, about 80 fixed. Um, if you combine that with the fact that, um, you know, 20 plus billion in the last and, uh, the fact that we're going to be amount of debt,
spk10: and you look at our maturity profile, we have very minimal needs in terms of tapping the market. So I think we're very well positioned in terms of our balance sheet to negotiate a rising rate environment.
spk01: Great.
spk10: Thank you. Operator, next question.
spk01: Our next question is from Frank Loutzen with Raymond James. Please go ahead.
spk03: Great. Thank you. I wanted to ask you about the longer-term top-line growth. And I want to take quantum fiber out of it. You've set some aggressive goals there. That's a great opportunity. I'm sure you'll be able to show the growth. But post these deals, you can have close to 80% of your revenue from the enterprise side, which has struggled for many months, period.
spk12: What's going to change or what are you going to be doing differently over the next two to three years to hit the overall top line growth goal that will really affect meaningful change in that business?
spk09: Well, it's all the things that I've talked about today and some before. Edge computing, 95%, 97% of the U.S. makes machine-to-machine control possible for our customers. That makes AI applications and machine learning applications a real possibility for our customers as they enter into the fourth industrial revolution and their ability to acquire, analyze, and act on their data. It's things like SASE. We'll continue to move SASE as secure access service edge. It's software-defined networking at the customer premise for connectivity and security capabilities. It's things like dynamic connections, which is really network as a service. That's more of an enabling technology, but it enables our customers to use their network that they buy from us to connect to cloud a variety of cloud service providers. It's orchestration of those capabilities and making it easier and more manageable for connectivity.
spk12: And in a very complex environment with our IT solutions capabilities, that we're launching and really showing success in.
spk03: So that network proximity has been the case for a while, but are you saying there are new sales people you're hiring or a significant number of new products that you're bringing to market that you're ahead of your competitors? I mean, again, what's sort of different about this opportunity with these new products that's going to change versus the last several years?
spk09: Well, so all of the above, but the fundamental nature of the products are different. There's nobody else out there. You say network proximity has been there for a while. It's been there for a while for us, but there's no milliseconds of the customers. And so those are different capabilities. There's nobody out there that's really been able to or integrate security into access solutions. So we'll continue to focus on that.
spk12: And I argue there's nobody better.
spk09: in helping people build and manage networks and orchestrate their connectivity needs than Lumen. And so we'll continue to differentiate and also throw in the all-digital experience. Our Lumen platform brings the world's best partners to our customers for different types of applications, whether it's T-Mobile for wireless or, you know, we have partnered. And I always feel bad when I start listing partners ad hoc because we've got some great ones and I don't want to leave anybody out. But I'm not going to go through and exhaust. There are other people out there that have all those capabilities.
spk04: Thanks, Frank. Okay. Thank you very much. Frank, we have time for just one more.
spk01: Very good. And then our last question will be from the line of Tim Horan with Oppenheimer. Please go ahead.
spk02: Thanks, guys. The Edge Compute product, can you talk about maybe some new use cases? Because I guess a lot of what we're predicated on the growth here is for kind of new use cases and uniqueness of the infrastructure. And any color of what you're seeing out there now would be great.
spk09: Yeah, we're seeing a lot of different use cases. First of all, storage. Storage capabilities are very important. Our customers want to store their data close to their in-house compute resources, but they don't want to have to store it within their own facilities. They want the benefit of the cloud data center. And that's what our edge retail customers that are exploring how can they take all their video feeds, all their camera feeds from their store, and process those for We're watching for shoplifting or looking at shelf restocking. How can they take all of that information and utilize it? Now they don't want to haul that traffic thousands of miles to some remote compute resource. They also don't want to build a data center in every one of their stores. So they come to us and looking for us to help them. build compute resources to take an entire market, aggregate it within very slow, very quick connectivity and very short hauling across the country and so forth. And so those are some of the use cases. If you think about the fourth industrial revolution, I already said this, but the amount of data is exploding. I mean, it's just exploding. And the applications to use that data is exploding. And our customers want to acquire that data, they want to analyze that data, and they want to be able to act on that data quickly and effectively. And that's what our edge compute applications are all about, is helping them do that.
spk12: So we're starting with bare metal.
spk09: We've moved into storage solutions. We'll continue to augment with the virtual machines and manage the hybrid cloud environment that they have and really be effective in managing their environment, be really agile in their response to IT changes. Hope that helps, Tim.
spk02: Thank you. On the fiber side, 12 million homes, what percentage of your home infrastructure bill enable you maybe to, you know, after that 12 million homes?
spk12: Yeah.
spk10: Too early on the infrastructure bill, but it's about $21 million. We have post the transaction, the 12 gets to. But that doesn't mean that's the total opportunity. As we continue to build out, we'll continue to evaluate. We'll also look at different technology solutions to kind of reduce the build cost. And so we'll continue to evaluate. that aspect of it as well.
spk09: Thank you. So let me wrap up. All on the call today, get a sense of the excitement that we have here at Lumen. We're poised for growth and expect our investments in the business to not only give strong growth in revenue and earnings, but also deliver value creation for our stakeholders. So we're excited about what we're doing. We see progress in our results, and we appreciate all of your interest in Lumen. With that, I'll end the call, but thank you all for joining today.
spk01: We would like to thank everyone for your participation and for using the Lumen conferencing service today.
spk11: This does conclude the conference call. We ask that you please disconnect your lines. Have a great day, everyone.
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