Lumen Technologies Q4 2021 Earnings Call Transcript

Quartr
Provided by Quartr
February 9, 2022

Key Takeaways

  • Top-line growth focus: Lumen’s organization is prioritizing turning revenue positive with profitable growth by streamlining assets and investing in enterprise and mass-market initiatives.
  • Quantum Fiber expansion: Q4 saw 22% YOY fiber broadband growth; company plans 1 million new location enablements in 2022 and a run-rate of 1.5–2 million per year, targeting over 40% penetration long term.
  • Portfolio rationalization: Two divestitures of legacy mass-market assets (over one-third of legacy voice exposure) for about $10.2 billion will close in Q3, improving the revenue mix and funding growth.
  • 2022 guidance: Adjusted EBITDA of $6.5–6.7 billion, capital expenditures of $3.2–3.4 billion (including $1 billion on Quantum Fiber), and free cash flow of $1.6–1.8 billion; $1.00/share dividend maintained.
  • Enterprise momentum: Launched fully digital self-service edge compute, won a $1.2 billion USDA contract under the EIS program, and achieved the highest North American enterprise sales month in years.
AI Generated. May Contain Errors.
Earnings Conference Call
Lumen Technologies Q4 2021
00:00 / 00:00

There are 10 speakers on the call.

Operator

Greetings, and welcome to Lumen Technologies 4th 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. As a reminder, this conference is being recorded today, Wednesday, February 9, 2022. It is now my pleasure to turn the conference over to Mike McCormack, Senior Vice President, Investor Relations.

Operator

Please go ahead.

Speaker 1

Thank you, France. Good afternoon, everyone, and thank you for joining us for the Lumen Technologies Q4 2021 earnings call. Joining me on the call today are Jeff Storey, we will begin, I'd need to call your attention to our Safe Harbor statement on Slide 2 of our Q4 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 2 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.

Speaker 1

In addition, 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 Lumin website. With that, I'll turn the call over to Jeff.

Speaker 2

Good afternoon, everyone, and thank you for joining us. 2022 brings new beginnings for Lumin. 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.

Speaker 2

On today's call, I'll provide a few thoughts on our 4th 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 we will discuss the Q4 in more detail, provide our outlook for 2022 and update expectations for the timing and financial impact of our 2 announced transactions. We'll reserve time after Neil's remarks for your questions. Our 4th quarter revenue trend was stable compared to the 3rd quarter and on an organic basis, our business revenue was unchanged from the 3rd 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.

Speaker 2

The Lumin platform is transforming the way businesses approach their technology needs, bringing best in class solutions to enable 4th Industrial Revolution use cases and enabling the digital transformation for enterprises. Enterprises are adjusting to new hybrid workloads and Lumin as well as our world class partners we are delivering the expertise necessary for our customers to succeed. As you can imagine, the excitement within Lumin 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 markets segment, improving the profitability and durability of the business.

Speaker 2

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.

Speaker 2

I hope you can feel our excitement for the future of Lumin 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 form a revenue mix, over 1 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.

Speaker 2

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 Anil 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.

Speaker 2

Let me start with Quantum Fiber. There's a tremendous amount of activity here at Lumin 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 we will

Speaker 3

be able to

Speaker 2

provide more than 12,000,000 locations over the coming years. Quantum Fiber revenue grew 22% year over year 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 Q4, we had approximately 2,600,000 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 1,000,000 new locations with a goal of hitting the run rate of 1,500,000 to 2,000,000 enablements per year as we exit 2022.

Speaker 2

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 will 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 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 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.

Speaker 2

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 $1,200,000,000 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.

Speaker 2

Awarded under the $50,000,000,000 Enterprise Infrastructure Solutions or EIS program, the 11 year task order is illustrative of the broad range of products and services offered on the Lumin platform. This is a long list, our services to the USDA include SD WAN, MTIPS, 0 Trust Networking, Edge Computing, VPN, Managed Security, UCaaS, Voice over IP, Ethernet and Wavelength 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.

Speaker 2

Beyond driving growth, we believe returning cash to shareholders is a very important part of the Lumin strategy and that the $1 per share level is attractive we will be conducting a few questions and sustainable long term. As we 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 expectations of 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 we will be conducting a few

Operator

questions through our Quantum Fiber

Speaker 2

deployment plan, but we do expect the timeline to reach our target net leverage ratio of 2.75 times to 3.25 time's adjusted EBITDA will be extended. To be clear, relatively leverage neutral is inclusive of the impact of not only the transactions, but also the CAF II 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. Let me be clear, there is no urgency for us to divest additional assets and we will only pursue opportunities that offer both a compelling valuation and a clear strategic benefit. Lastly, I want to emphasize that we continue to believe our shares are deeply discounted and do not reflect the tremendous opportunity we see for Lumin going forward.

Speaker 2

Our Board remains prepared to authorize further buybacks on short notice we believe a buyback provides the best and most prudent return for our shareholders. With that, I'll turn the call over to we will discuss our Q4 results. Neil?

Speaker 3

Thank you, Jeff, and good afternoon, everyone. We we will continue to focus on closing 2 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 $8,440,000,000 in 2021 and on a full year basis expanded margins by over 100 basis we continue to make progress on our objective of improving revenue trajectory with 4th quarter down 0.8% sequentially. When adjusted for foreign currency and the sale of our last remaining correctional facilities business during the quarter, our sequential revenue declined 0.5% in the Q4.

Speaker 3

We again delivered solid free cash flow of 3,742,000,000 we returned $2,100,000,000 to our shareholders during the year through quarterly dividend payments and our stock repurchase program. Additionally, we reduced net debt by $1,500,000,000 during 2021 and exited the year with leverage at 3.6 times. We also announced 2 significant transactions at very attractive multiples with an aggregate value of over $10,000,000,000 Turning to revenue, in the 4th quarter, total revenue declined 5.4% on a year over year basis to 4,847,000,000 year over year metrics continue to be impacted by COVID related demand in 2020. On a sequential basis, total revenue declined 0.8%, in on a year over year basis, revenue declined 4.7 percent to $3,494,000,000 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% sequentially and 1.5% on a year over year basis.

Speaker 3

On a constant currency basis, iGAM grew 0.6% sequentially and declined 1% year over year. The year over year decline was due primarily to the large customer disconnect, which I have referenced on previous calls. We saw sequential benefits from compute and application services, which was driven by managed security and cloud services. Within large enterprise, in the Q4, we sold the remainder of our correctional Facilities Communication Services business. The sale of this business at the end of October impacted revenue by about $7,000,000 in the 4th quarter and the impact on a full quarter basis would have been about $10,000,000 Normalizing for the sale, large enterprise declined 0.3% sequentially and declined 5.9% on a year over year basis.

Speaker 3

We have strength sequentially in computer and application services driven by our IT solutions and cloud services. Year over year trends were impacted by the surge in COVID related usage in 2020 and the timing of non recurring revenues in our public sector channel. Mid market enterprise declined 0.2% sequentially and wholesale revenue was essentially flat on a sequential basis and year over year declined 4.3% versus the we have a 7% decline in the 3rd quarter. Wholesale benefited from demand for fiber infrastructure and a few one time items. We continue to manage this business for cash.

Speaker 3

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 Q4 as customers transition to SD WAN in hybrid work environments. Fiber infrastructure services for enterprise channels declined 2.6% sequentially and 2.4% year over year.

Speaker 3

These products have significant professional services and equipment related to complex network deployments. The voice and other services, which include our legacy services declined both sequentially and on a year over year basis as we manage these areas for cash. Voice comparisons continued to be impacted by higher COVID related usage in the year ago quarter. Turning to mass markets, 4th quarter 2021 revenue declined 1.9% sequentially. Our mass markets fiber broadband revenue grew 22% year over year this quarter.

Speaker 3

During the quarter, we added 29,000 Quantum Fiber customers, up from 25,000 ads in the prior year Q4. Turning to adjusted EBITDA. For the Q4 of 2021, adjusted EBITDA excluding special items was $2,080,000,000 compared to $2,188,000,000 in the year ago quarter. Special items this quarter totaled $19,000,000 and were related primarily to transaction and separation activities. We continue to drive healthy EBITDA margins during the quarter, growing by about 40 basis points year over year to 43.1%.

Speaker 3

Capital expenditures for the Q4 2021 were $848,000,000 While we continue to focus on capital efficiencies, capital spending was up both sequentially and year over year as we increased success based spending and invested in the accelerated quantum fiber build plan. We expect capital expenditures to increase going forward as our quantum fiber build ramps. In the Q4 of 2021, the company generated free cash flow of 776,000,000 at the beginning of each year, we evaluate our external reporting and make adjustments to better align our financial reporting we will continue to focus on our business. In 2022, we are adjusting our mass markets product revenue reporting categories to fiber broadband, other broadband and voice and other. The two key reasons for these changes are the increasing importance of our Quantum Fiber platform and the completion of the CAF II program.

Speaker 3

Given its relatively small impact, the RDOF subsidy revenue will be included in the voice and other category in our new reporting structure. We do not contemplate making any additional changes to our reporting at this time. Moving on to the business outlook for of 2022. As we focus on portfolio rationalization and 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.

Speaker 3

First of all, as a reminder, the CAF II subsidy ended in 2021, which will impact year over year adjusted EBITDA by about $500,000,000 when combined, the 2 divested assets are expected to generate about $1,700,000,000 of EBITDA with capital spending of about $450,000,000 in 2022. We now expect the transactions we will close in early Q3 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 6,500,000,000 to $6,700,000,000 When bridging to our 2022 full year adjusted EBITDA guidance, in addition to the obvious after completion and divested business EBITDA, there are a few other drivers to keep in mind.

Speaker 3

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 $3,200,000,000 to 3,400,000,000 within that, we expect to spend about $1,000,000,000 of capital on Quantum during 2022. We expect to generate free cash flow in the range of $1,600,000,000 to $1,800,000,000 for the full year 2022.

Speaker 3

For 2022, we do not have any required contributions to the pension fund and our free cash flow guidance does not include any discretionary contributions. As a reminder, our Q1 typically has higher working capital use, driven by timing of bonus payments and other prepaid expenses. We expect net cash interest expense in the range of $300,000,000 to $1,400,000,000 for 2022. As Jeff mentioned, we 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.

Speaker 3

The reimbursement for these services will be in other income with no material net impact to our cash flows. In closing, 2022 is all about executing on our growth initiatives for the enterprise Lumin 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, we expect about $7,000,000,000 in discretionary cash proceeds from the transactions after the transfer of debt and transaction costs. 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.

Operator

Thank please press the one followed by the 3. Our first question is from the line of Michael Rollins with Citi. Please go ahead.

Speaker 4

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 67 Kind of layout the year over year changes in revenue versus the sequential changes in revenue. Where should investors focus more in trying to think about the evolution of performance? Is the sequential much more relevant or is the year over year as sometimes beginning of the year you have price changes and other annual updates to your customers and your sales. And then just separately one I think there was a mention earlier that in wholesale, there were some one time items.

Speaker 4

Just curious if you can unpack the amount of those one time items impacting the wholesale revenues. Thanks.

Speaker 3

Sure. So I'll start with The wholesale one time, in the wholesale channel, you always have carrier settlements and things like that. So there's always one time, but just stepping back, roughly $10,000,000 $15,000,000 more than what we Typically see, so that's wholesale. In terms of your question on sequential 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, Q1, we always tend to have some large rebates, etcetera, nothing specific to highlight, but that's generally when we have some contract rebate pressure, etcetera, and 4th quarter tends to We'll have a little bit of that seasonality.

Speaker 3

But other than that, 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

Operator

our next question is from Eric Luthko with Wells Fargo. Please go ahead.

Speaker 5

Quickly, I just wanted to talk about the capital allocation Obviously, your dividend coverage on free cash flow is tightening this year as you ramp up fiber spending. And beyond this year, as As you ramp that up even more, wondering if that will even be fully covered. And if it's not, how should we think about the split between one time fiber expansion CapEx versus recurring capital intensity in the business and how we should think about that through the investment cycle. And then second, I just wanted to get a sense, Neil, if you could help size up some of the cost synergies. I think if you take out the $500,000,000 of CAF II and the divested assets, a half Your contribution, you get to about $7,000,000,000 of EBITDA in your guide, which is for about $400,000,000 decline from that level for the full year.

Speaker 5

So just wondering how we should think about how those impact the outlook for the full year? Thank you.

Speaker 2

Sure. Eric, I'll take the first part and then let Neil take the second question. 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

Speaker 3

we expect to deliver

Speaker 2

shareholder value proposition. We think the dollar per share is attractive to investors and it's it's sustainable. So we're very comfortable with the dividend there. I've also said that in 2022, in the next few years, we are going to be investing And you mentioned Quantum Fiber and with the Quantum Fiber build, we think that that should be viewed as a discrete project that starts already and ends in a few years as we complete the 12,000,000 enablements we expect over the coming years. We also expect to return to top line revenue growth.

Speaker 2

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

Speaker 3

So Eric, on your question on dis synergies, I think just to step back a little bit, and if You think about the transaction EBITDA, those are deal basis EBITDA, if you will. So we have allocated costs for shared function, etcetera. 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 rightsizing we'll continue to do so as we go forward. And the other thing I mentioned as much on transformation. And so our savings will be a little lighter.

Speaker 3

And so we factored all of that into But the savings don't go away. And so we'll continue to focus on our transformation savings. And we'll be able you know, get a focus on driving those costs out of the business.

Operator

Our our next question is from Simon Flannery with Morgan Stanley. Please go ahead.

Speaker 6

Great. 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 Thank you to $400,000 this year.

Speaker 6

Should we think about the $1,000,000 this year as being fairly linear or will that is it still very much second half loaded, I guess, to About $1,500,000 to $2,000,000 And I guess the question is why not go faster? We've obviously seen The infrastructure bill awarded 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?

Speaker 6

And then Neil, just one on taxes. I saw you highlighting, I think, dollars 100,000,000 of cash taxes. But what should we be thinking about run rate Cash taxes once the transactions are complete in terms of the ongoing as a sort of a full taxpayer, does that go up a few 100,000,000 as we get out of 'twenty two into 'twenty three? Thanks.

Speaker 2

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 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, call it, 500,000 homes, 400,000, 500,000 homes and business locations, so there's going to be that as a starting point, but we'll get to the full million toward the end of of the year, obviously. So it's a little back end loaded, but not substantially.

Speaker 2

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.

Speaker 2

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 1,500,000 to 2,000,000 homes by the end of the year.

Speaker 2

So we want to be 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?

Speaker 3

Yes. 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 $100,000,000 that we guided to this year is fairly close to what it has been in the past. But going forward, a good assumption is our cash taxes will be fairly close we have a lot of capital expenditures and at this point, the 26% effective rate is probably a pretty good assumption.

Speaker 7

Great. Thanks a lot.

Speaker 3

Thanks, Simon. Next question, France?

Operator

Our next question is from Phil Cusick with JPMorgan. Please go ahead.

Speaker 1

Hi, guys. Forgive me if we just sort of go back to this, but I wanted to talk about the CapEx pace and that acceleration into the back half. You've talked in the past about other projects like network transformation that wouldn't need to be done this year as an offset. And so I wanted to sort of quantify what that the 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 'twenty three CapEx, can you help us with that? Thanks.

Speaker 2

Yes, let me take a first pass and then let Neil add to it. I I want to get into discrete projects that we're funding and not funding, but let me give you a sense of the CapEx and what we there is a certain amount of capital that we call just ongoing operational capital, keep the lights on type stuff. But the majority of our capital funding is success based or project based. And the project based things that we've talked about in 2021, we spent a lot of money on edge computing, building a coverage model we finished the year with 90 more than 95% of our U. S.

Speaker 2

Enterprises within 5 milliseconds 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 products and services. So we spend a substantial amount of money on that success stage stuff. On fiber, we spent money to enable 400,000 homes in 2021, we will spend money to enable 1,000,000 homes and get to the run rate that I talked about in answering Simon's question.

Speaker 2

We'll continue to spend on that project and really focus there. Beyond that, we manage projects in and out. We're not starving anything to do those activities. We are investing heavily in growth. And I say that on CapEx, I also say it on OpEx.

Speaker 2

We're investing heavily in growth on OpEx 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. With the results in the Q4, we're seeing all of that continuing to benefit the company. Yes,

Speaker 3

just to underline the point that Jeff made on we're not constraining anything. Today, I mentioned in my prepared remarks that we have about $1,000,000,000 for Quantum Fiber in the capital guidance that we provided. And to the extent that we can scale faster, if you look at the combination of our free cash flow and deal proceeds, we can easily ramp up more spending for Quantum Fiber. That won't be the constraint. The constraint really is going to be mundane things like permitting, I think we'll lean into it.

Speaker 2

And just one other follow-up comment, Phil, and then you can ask your follow-up In the meantime, we're focused on our existing 2,600,000 enablements that we have in we're at around 29% penetration, but that includes homes that we just turned of last month, we want to make sure that we continue to focus on driving the penetration in those existing in the existing footprint.

Speaker 1

Thanks. If I can just follow-up quickly, and again, I'm trying to think of the exit run rate this year. You've talked about the exit run rate in builds, also I'm thinking about CapEx. I mean it seems like there could be another $700,000,000 to $1,000,000,000 of CapEx next year in fiber in Quantum, is it are there other projects that are still happening this year that we could think about sort of dropping away? Or should we think about next year being sort of the peak of capex on Quantum?

Speaker 3

So Phil, I think the key point there is, our plan, like Jeff said, on capital is dynamic. So it's not the same priorities that we support every year. So for example, on Edge, a lot of the investments we made, The step function investments, I would say, were more in 2020. And This year, it's more success based at lower much lower intensity. So without getting into specifics around 2023, I think you're right, ONPAP will ramp up.

Speaker 3

We do view that as a discrete project, But the rest of the plan will be dynamic and will be success based.

Operator

Our next question is from David Barden with Bank of America. Please go ahead.

Speaker 8

Hey, guys. 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 Some of the stuff you've shared on the EBITDA, the cash flow side. And then the second question, I guess, Jeff, is if we take that 1.7% and I subtract that from the free cash flow guidance. It says that the kind of second half of the year, the dividend is barely covered, maybe a little covered.

Speaker 8

You talked about buybacks being in the mix with the Board. I was wondering if you could kind of elaborate On that a little bit, but where that money would come from, would you lever up to buy back stock if it got to that point? That would

Speaker 4

be helpful. Thank you.

Speaker 2

Let me David, I'm not going to speculate on what the Board might decide and how we might decide to do it. I am Very clear, I hope I'm very clear on the priorities for our capital allocation and the first one being investing in growth. So, as we look at the CapEx, we are very committed to investing in Quantum Fiber. We are very committed to investing in SASE and IT solutions and edge computing and those types of things, where we think significant growth can come from over the next few years. Secondly, we've talked about the dividend and we want to maintain the dividend.

Speaker 2

I will point out that our last buyback reduced our dividend obligation by about 81 $1,000,000 a year. So that's not exclusive issue to just the dividend that also factored in by the buybacks. And we want to maintain relatively leverage neutral, meaning roughly where we are, maybe not exactly where we are, but roughly where we are. And then if we think it's appropriate, we will come up with plan to make additional buybacks, but I'm not going to speculate on what that plan would be or how the Board would view it. I I just want you to know that we are open to that.

Speaker 3

And on your first question, David, you know we don't provide revenue guidance. So I'm not going to get into providing guidance for revenue guidance for divested assets. But like I said on EBITDA, our expectation is $1,700,000,000 and our guidance assumes that we have half year's worth

Speaker 2

And one other point, we're getting $10,200,000,000 for the 2 transactions that we're doing. And so there are other sources of funds.

Speaker 8

Got it. And 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 the kind of the business that you'll have, which you're investing to grow?

Speaker 3

Yes, you're right. It's a higher EBITDA margin business. Generally, our legacy revenues are higher margins. So, yes, post the transactions, you'll see a dip in our EBITDA margin, which also means we'll have more opportunity to expand margins

Speaker 2

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 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 at a lower cost, helps us operate And we're moving to the all digital experience that those customers have.

Speaker 2

And so we expect good things from our Quantum business.

Speaker 4

All right. Thanks guys. Appreciate it.

Speaker 3

Thanks David. Next question.

Operator

Our next question is from Batya Levi with UBS. Please go ahead.

Speaker 9

Great. Thank you. Can you provide 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 pacing through the year? And the second question on subsidies with CavCon, can you just remind us how much subsidy dollars are left in the model.

Speaker 9

And I think you applied for $200,000,000 in subsidies to replace some foreign equipment in the network. To the extent that you get that approved, how would you account for it and if the does the guidance include it? Thank you.

Speaker 2

There's a lot packed in there, Batya. So, what quantum fiber investments are we going to make in 2022 that could come off in 2023? We're not giving guidance for 2023, but we do plan to ramp our Quantum Fiber investments. We said that our plan for the year in 2022 is 1,000,000 homes and that we plan to do 1,500,000 to 2,000,000 at a run rate basis By the end of the year, so we're not giving forward looking guidance, but we have given you an indication of what we expect And how we expect to build, Neil, I'll let you take the question on how do we account for 200,000,000

Speaker 3

Yes. On the I think your other question was CAF II to RDOF. Obviously, CAF II is roughly $500,000,000 RDOF is about $26,000,000 a year, but just keep in mind significant part of that will move with Divested assets. So it's not going to be that material going forward. In terms of the equipment reimbursement, we're still working through the details on that.

Speaker 3

So there's that's probably too premature to comment

Speaker 9

So just one quick follow-up on the investment. I appreciate the CapEx part. But in terms of the OpEx 5% could hit this year. Is there any way you could provide some color around that?

Speaker 3

Yes. So, but that's all incorporated into our EBITDA guidance, and I think it will be start to ramp a little bit and it's 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 you have mentioned is improved revenue and EBITDA trajectory in the other years and we're confident of that.

Speaker 9

Okay. Thank you.

Speaker 3

Thanks, Sasha. Brent, next question please.

Operator

Our next question is from Nick Del Deo with MoffettNathanson. Please go ahead.

Speaker 4

Hey, thanks for taking my questions. One for Jeff and one for Neil. 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 $1,500,000 to $2,000,000 passing target in the coming years, is that predicated on

Speaker 1

the supply chain situation improving?

Speaker 4

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 staying relatively leverage neutral. Are you talking about a quarter turn, a half turn, what sort of balance should we think about?

Speaker 2

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 there's 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. We see it on all fronts of the business.

Speaker 2

Again, I don't want to by focusing on this, I don't want I won't 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, 9 month orders for our vendors 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 will highlight as a real one that we have to mitigate.

Speaker 3

Neil? 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 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 fiber, that's going to be a high growth business and 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 the 36 is probably a good assumption. Now we have said that it will be roughly in that zip code.

Speaker 3

So any quarter over quarter, you might see some fluctuations. But until the business profile changes significantly, we don't see the need to change that at this point. And like Jeff has mentioned several times is we're going through an investment cycle and it truly is a discrete project. It is upgrading our copper network to fiber 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.

Speaker 4

Okay. Thank you both.

Speaker 3

Thanks Nick. Next question for us.

Operator

The next question is from Greg Williams with Cowen. Please go ahead.

Speaker 4

Great. Thanks for taking my questions. First one is just on rising rates. I mean, you have a couple of commitments here, the fiber to the home builds So, investing leverage neutral through the build and the dividend. How should we think about your priorities if it's changing your cap allocation and your balance sheet amid second question is just on the penetration goals for your fiber to the home plans.

Speaker 4

I see you have 29% and you noted it's nascent markets and And unlimited marketing. So as you ramp up that marketing engine, what are your longer term penetration targets or terminal penetration targets as we just think about your revenue inflection and free cash flow growth in the outer years. Thanks.

Speaker 2

Okay. So rising rates, Neil, I'll let you take penetration. I'll take and I'm sorry, Greg, the third one was?

Speaker 4

Just the penetration, as I think about the revenue inflection and your outer year free cash flow.

Speaker 2

Okay. Well, first of all, we are always focused on free cash flow. We think that is the primary driver of business success in free cash flow is sustainable long term free cash flow growth is what we're after. 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 to the level that we think they can tolerate, but it's why we're investing in the 16 retained states.

Speaker 2

It's why we're investing in our growth initiatives on the enterprise side. It'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 But that's always going to be a blended average of new homes, new business locations for mass markets that we've just added with ones that we've been marketing at for a while, but we expect when we reach steady state, it will be north of 40%. And every indicator is there supporting it.

Speaker 2

If you look at the quality of the product that we have, We have a very effective competitive product and even with the limited marketing, we're doubling our penetration rates in our traditional copper areas, the symmetrical nature of our product is far better for work from anywhere environment and the capacity needs continue to expand for consumers just like they are for businesses and business So we see lots of factors in addition to our all digital world class experience that we're offering to customers, our great NPS scores. We see a lot of factors that give us high confidence in the 40% plus numbers. Neil, on the rising rates? Yes. So,

Speaker 3

all the points. 1, about 80% of our debt is fixed. If you combine that with the We refinanced about $20,000,000,000 plus in the last 3 years and the fact that we're In terms of tapping the market. So, I think we're in very well positioned in terms of our balance sheet for to negotiate a rising

Operator

our next question is from Frank Louthan with Raymond James. Please go ahead.

Speaker 7

Great. Thank you. I wanted to ask Throughout the longer term top line growth. And I want to take Quantum Fiber out of it. You've set some aggressive goals there.

Speaker 7

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 we've been very pleased with the progress we've made in the past several years. We've made a lot of progress in the past several years.

Speaker 3

We've made a lot of progress

Speaker 7

in the past several years. We've made a lot of progress in the past several years. We've made a lot of progress in the past several years. We've made a lot of progress in the past 2 to 3 years to hit the overall top line growth goal that will really affect meaningful change in that business?

Speaker 2

Well, it's all the things that I've talked about today and some before. Edge Computing, 95%, 97% of U. S. Enterprises are within 5 milliseconds of our network. That makes machine to machine control possible for our as they enter into the 4th industrial revolution and their ability to acquire, analyze and act on their data.

Speaker 2

It's things like SaaS. We'll continue to move SaaS as secure access service edge. It's software defined networking at 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 a variety of cloud service providers, it's orchestration of those capabilities And making it easier and more manageable for customers to maintain their connectivity in In very complex environment, and it's helping them do that with our IT solutions capabilities. So it's kind of a host of things that we're launching and really showing success

Speaker 7

So that network proximity has been the case for a while. But are so 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 are ahead Your competitors may begin, what's sort of different about this opportunity with these new products that's going to change versus the last several years?

Speaker 2

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. We have a couple of questions. And so those are different capabilities.

Speaker 2

There's nobody out there that's really been able to provide network as a service we'll integrate security into access solutions. And so we'll continue to focus on that. And I'd argue there's nobody better in helping people build and manage networks and orchestrate their connectivity needs And Lumin, and so we'll continue to differentiate. I'd also throw in the all digital experience. Our Lumin platform brings the world's best partners to our customers for different types of applications, whether it's T Mobile for wireless or VMware for virtual machines, we have partnered and I always feel bad when I start listing partners ad hoc because we got some great ones and I don't want to leave anybody out, I'm not going to go through an exhaustive list, but we've got great partners bringing those capabilities.

Speaker 2

And so I think it's the total package of solutions and I don't think you're right in thinking that there are other people out there that have all those capabilities.

Speaker 3

Thanks, Frank.

Speaker 7

Okay. Thank you very much.

Speaker 1

Prash, we have time for just one more.

Operator

Very good. And then our last question will be from the line of Tim Horan with Oppenheimer. Please go ahead.

Speaker 4

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

Speaker 2

use cases. 1st of all, storage. Edge computing and storage capabilities are very important. They want to store their data 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 and the proximity of their own data center.

Speaker 2

And that's what our edge does. We we'll see retail customers that are exploring how can they take all their video feeds, all their camera feeds from their store And process those for 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 1,000 of miles to some remote compute resource, they want to 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 4th Industrial Revolution, I already said this, the amount of data is exploding.

Speaker 2

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 we have 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. So we're starting with bare metal. We've moved into storage solutions. We'll continue to augment with the virtual machines and all sorts of other edge computing capabilities will layer on top of that orchestration so that our customers can manage the hybrid cloud environment that they And really be effective in managing their IT environment, be really agile in their response to IT changes.

Speaker 2

Hope that helps today.

Speaker 4

Thank you. On the fiber side, 12,000,000 homes, what percentage of your homes will that be? And will the infrastructure bill enable you maybe to expand that or help get subsidies to that for that 12,000,000 homes?

Speaker 3

Yes, Tim, too early on the infrastructure bill, but the $12,000,000 I think it's about 21 we have post the transaction, the 12 gets to kind of the large urban areas. But that doesn't mean that's the total opportunity as we continue to build out, we'll continue to evaluate the footprint and we also look at different technology solutions to kind of reduce the build And so we'll continue to evaluate that aspect of it as well. Thanks.

Speaker 2

So let me wrap up. I hope that you all on the call today get a sense of the excitement that we have here at Lumin, 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 Loom. And with that, I'll end the call to thank you all for joining today.

Operator

We would like to thank everyone for your participation and for using the Lumin conferencing service today. This does conclude the conference call. We ask that you please disconnect your lines. Have a great day, everyone.

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