Lumen Technologies Q4 2023 Earnings Report

Lumen Technologies EPS Results

• Actual EPS: $0.08
• Consensus EPS: -$0.03
• Beat/Miss: Beat by +$0.11
• One Year Ago EPS: $0.43

Lumen Technologies Revenue Results

• Actual Revenue: $3.52 billion
• Expected Revenue: $3.45 billion
• Beat/Miss: Beat by +$64.26 million
• YoY Revenue Growth: -7.40%

Lumen Technologies Announcement Details

• Quarter: Q4 2023
• Date: 2/6/2024
• Time: After Market Closes
• Conference Call Date: Tuesday, February 6, 2024
• Conference Call Time: 5:00PM ET

Lumen Technologies Q4 2023 Earnings Call Transcript

[Operator]

Greetings, and welcome to Lumen Technologies 4th Quarter 2023 Earnings Call. During the presentation, all participants will be in a listen only mode. Afterwards, we will conduct a question and answer session. As a reminder, this conference is being recorded on Tuesday, February 6, 2024. I would now like to turn our conference over to Mike McCormack, Senior Vice President, Investor Relations.

[Operator]

Please go ahead.

[Speaker 1]

You, Aaron. Good afternoon, everyone, and thank you for joining Lumen Technologies' 4th quarter 2023 earnings call. On the call today are Kate Johnson, President and Chief Executive Officer and Chris Stansbury, Executive Vice President and Chief Financial Officer. Before we begin, I need to call your attention to our Safe Harbor statement on slide 2 of our Q4 2023 presentation, which notes that this conference call may include forward looking statements subject to certain risks and uncertainties. All forward looking statements should be considered in conjunction with the cautionary statements on Slide 2 and the risk factors in our SEC filings.

[Speaker 1]

We will be referring to certain non GAAP financial measures reconciled to the most comparable GAAP measures, which can be found in our earnings press release. In addition, certain metrics discussed today exclude costs for special items as detailed in our earnings materials, which can be found on the Investor Relations section of the Lumin website. With that, I'll turn it over to Kate.

[Speaker 2]

Thanks, Mike. Good afternoon, everyone, and thanks for joining us today. I'm excited to provide an update on the significant progress we're making on Lumen's business transformation. A year ago, I shared that 2023 was a reset year for this company with new mission and vision, a new executive team and a newly redesigned culture. And importantly, we aspire to restore confidence in Lumin, not only with improved financial results, But with execution excellence that delivers on our commitments.

[Speaker 2]

We outlined big multi year strategic priorities including strengthening our balance sheet, executing on key programs to turn the core business around by 2025 and igniting new growth by delivering disruptive innovations that help our customers solve their next gen networking needs. And now I'm pleased to report that we both delivered on our 2023 EBITDA and free cash flow guidance and we made material progress on our strategic priorities. I'll start with the balance sheet. As we announced in late January, we entered into an agreement with a significant number of our creditors That clears the path for our turnaround. The deal extends most of our debt maturities to 2029 beyond, injects $1,325,000,000 of net new financing into the business and gives us access to a new approximately $1,000,000,000 revolving credit facility to support our operations.

[Speaker 2]

It's a strong indication of the confidence of our bondholders and the broader debt markets that they have in our strategy and it allows us to focus our energy on executing our business transformation. All right. So how is the pivot to growth going? While we have a lot of work left to do, we're seeing progress as evidenced by our North American business performance compared to other industry competitors. While 2 large Telco Companies saw Q4 revenue declines in their Business Wireline segment of roughly 8% to 10% year over year.

[Speaker 2]

Lumen's business Q4 revenue decline was only 3.5% year over year, breaking away from the others for the 2nd straight quarter. We believe our positive peer group performance is due both to our strategy and our turnaround execution. Simply put, Lumen stands alone in how we think about the industry. In today's digital economy, technology environments are complex and multilayered, Whether it's hybrid or multi cloud or edge compute or emerging technologies like GenAI, businesses need fiber networks With digital services that deliver blazing fast speeds, ultra low latency, massive capacity for growing data workloads in proximity to widely distributed users, all in a secure environment. While our competitors harvest their business wireline segments for cash, Lumen is building a fully digital platform to deliver important new capabilities to these customers.

[Speaker 2]

And importantly, We're tailoring our go to market approach to get them there. So let's dig a little deeper into that go to market execution progress. I'll start with our commercial excellence efforts in the business segment, which is all about driving better sales execution, securing our base of customers and creating a world class digital customer experience. In 2023, we tailored our go to market approach to each customer segment. This focus is allowing us to meet customers where they are and provide unique and tailored paths to our modern communication infrastructure.

[Speaker 2]

And not surprisingly, it's driving better sales execution. This year with the North America enterprise, we added over 3,000 customers and increased new logo sales by 13% sequentially in Q4. Specifically, our Public Sector segment grew double digits quarter over quarter and year over year in Q4 powering our strong revenue performance. Year over year, we sold 29% more grow products to existing public sector customers in Q4 and we increased seller productivity by 18% for the full year. With this momentum, we expect this segment to be the 1st to bend the revenue curve back to growth.

[Speaker 2]

And we think bid market segment will follow suit. Since establishing the dedicated go to market team for bid markets last June, Tenured direct sales productivity increased 26%, while we simultaneously grew the sales force by 15%. Importantly, we exited 2023 by outperforming market growth rates and taking share in both Sassy and IP. In our Large Enterprise segment, we're winning business with sophisticated digitally native companies like Uber, who recently chose Lumin's 400 gig wave service to ensure that they can scale and accelerate their company's growth with greater agility. Okay.

[Speaker 2]

Let's turn to securing the base. This is all about installs, disconnects, renewals, migrations and usage. This program is the most challenging part of executing Lumin's turnaround for sure. The good news is we're making progress in mid markets and large enterprise Shown by our sequential results for the second half, installations were up 13%, migrations were up 4%, renewals were up 50% And in Q4, usage was up 3%, helping us end the year strong. Now that said, we're just not satisfied We'll be focusing on improving performance here in this part of our turnaround using data and analytics and AI to help determine the right action for each unique customer at the right time.

[Speaker 2]

The 3rd piece of commercial excellence is all about customer experience. The Lumin Operations and IT teams did a fantastic job building the digital CX foundation in 2023, redesigning our processes from order to cash, Starting to implement new state of the art systems and infusing GenAI into our service delivery and assurance. And while we're still in the initial stages, we're seeing signs of impact. For example, in our North American business pilot, We were able to reduce order processing time by 70% for Dedicated Internet Access or DIA, one of our highest volume products. And across all products for large enterprise and public sector customers, we're already seeing a 17 point year over year improvement in Net Promoter Scores based on our process improvement work.

[Speaker 2]

Time to talk about innovation. Innovating for growth. As we announced last month, Doctor. Satish Lakshmanan joined Lumin as our Chief Product Officer. Satish comes to us from AWS and brings a highly valuable combination of cloud, artificial intelligence and product development experience that will be an important part of fueling our innovation engine.

[Speaker 2]

And just this morning, we announced that Dave Ward is joining Lumin as our Chief Technology Officer. Dave has a long history of successful executive leadership, Having served as CTO for Cisco Systems and most recently as the CEO of Packet Fabric, a network as a service provider. Talented visionaries like Satish and Dave are joining because they see the potential for Lumin to innovate, disrupt the industry and create major value for customers and therefore major value for investors. And I'm delighted to report that we are well on our way. In 2023, Lumin co created with customers and launched several new digital that take advantage of our world class cyber network.

[Speaker 2]

Our vision is to empower enterprises to leverage the Lumin Digital platform, as we are calling it, enabling customers to digitally consume our secure network services. This innovative platform will help customers build AI powered applications across on prem, colo and cloud environments seamlessly, while also simplifying network onboarding and management to save costs. In the latter half of this year, we'll share new reporting for Lumin Digital to allow you to better understand our growth trajectory. Let me highlight a few important capabilities in the Lumin digital platform. 1st is network as a service or NAS.

[Speaker 2]

We continue to enrich our NAS offering with more capability. And Just last week, we announced the availability of 2 new NAS solutions with private connections. As a recent customer Element Materials remarked, Lumen's NAS solution was not just timely but transformative. It highlighted the untapped potential of such innovative network solutions. Another Lumin Digital breakthrough capability is Exaswitch, our high capacity optical switching platform originally conceived for direct inter cloud peering.

[Speaker 2]

It's performing extremely well in the market. And as Microsoft shared, they highly value the Exoswitch platform for the fast and scalable interconnections that it provides and they're eager and excited to expand Exoswitch to new metros in 2024. Lumency's Exoswitch is assumed to be must have solution for any corporation needing simplified, low latency, high capacity direct cloud connectivity. Finally, Lumen Security. You may have read in the Washington Post that the Department of Justice announced that it disrupted the Volt typhoon botnet used by a major Chinese government backed effort to hack the U.

[Speaker 2]

S. Critical infrastructure. I'm incredibly proud of our Black Lotus Labs team for identifying this threat and being credited by the DOJ for helping to keep the United States safe. Soon you'll see Black Lotus Labs powering the Lumin Digital platform with some highly valuable security services. Now the initial capabilities in the platform give Lumin access to around $40,000,000,000 in net new available market.

[Speaker 2]

And to be clear, We're just getting started. We're bullish on the impact that Lumen Digital will have on helping pivot our company to growth. Finally, let's cover mass markets. We're executing our strategy to deploy capital where we see the greatest opportunities with the goal of continuing to evolve our business across a portfolio of markets, investing wisely and driving fiber market penetration. Some quick notes to share about 2023 in mass markets.

[Speaker 2]

We delivered our commitment to grow our fiber network by more than 500,000 locations and intend to maintain that similar robust rate in 2024. While we weren't happy with our net ads performance in 2023 all up, Our sales and marketing engine is now gaining momentum as we close the year strongly with record high December sales And we continued to see this pace hold through January. Quantum Fiber is the best multi gig product in the market. And to maintain that status, we know that constant innovation is a priority. That's why we made sure we were the 1st company in the industry to achieve Wi Fi 7 certification.

[Speaker 2]

And finally, Quantum Fiber customers continue to be delighted as shown by our Q4 Net Promoter Score of +64, improving both quarter over quarter and year over year customer satisfaction. One last exciting note. I talked about rebuilding this company from the people up and how important culture change is to supporting our transformation. In just the Q4 alone, we won 4 different culture awards, most notably U. S.

[Speaker 2]

News and World Report named Lewin Technologies 1 of the company. To sum it up, 2023, we made great progress pitching Lumin for growth. We believe our strategy is the right one and we're executing well. So our plan is to hold steady on that strategy through 2024. We'll continue to strengthen our balance sheet.

[Speaker 2]

We'll drive commercial excellence to return the business to growth by 2025 and we'll co create innovative new capabilities that delight customers and give Lumin access to net new profit pools. And we'll do all of that while keeping you apprised of our progress, being transparent about our wins and our struggles and delivering on our commitments every step of the way. And with that, I'll turn the call over to Chris.

[Speaker 3]

Thanks, Kate, and good afternoon, everyone. Kate spoke about our progress and how we are disrupting an industry ripe for change as Lumin transforms into the leading digital enterprise solutions provider. She also spoke of our success in reaching agreement on an amended TSA with a broadened group of creditors to extend our debt maturities. On our Q2 earnings call, we said we viewed the formation of the Creditor Group as an opportunity to address a large part of the capital structure in a very efficient way and the amended agreement we announced in January accomplishes that. The amended TSA has support from a broadened group of creditors And when finalized, we'll address approximately $9,000,000,000 of outstanding indebtedness, including more than 77% of debt maturing through 2027.

[Speaker 3]

The TSA transactions will extend debt maturities to primarily 2029 and beyond, provide $1,325,000,000 of new money and provide access to a new approximately $1,000,000,000 revolver. This agreement and the broad support for it speaks to the confidence our banks and creditors have in our plan and provides Lumin ample runway to execute on our business turnaround. In short, our capital structure is no longer a limiting factor in our transformation. We expect to complete the transactions contemplated by the TSA in the first quarter subject to the satisfaction of limited remaining closing conditions. Before covering our 4th quarter results, like to take a moment to discuss some changes to our 2024 financial reporting to enhance comparability with prior periods and better align with how we manage the business.

[Speaker 3]

1st, we're updating our business sales channel reporting by breaking out a new international and other channel including CDN. Secondly, given the sale of substantially all of our CDN contracts during the Q4 of 2023, We are updating our business product category reporting to move CDM from harvest to other within the international and other channel. And finally, with the sale of our EMEA business and select CDN contracts completed in the Q4 of 2023, We have updated our financial training schedules to provide the historical contributions of these sales as well as the associated commercial agreement impacts. Keep in mind when these impacts are excluded from results, our sequential and year over year growth rates are substantially better than the reported rates. I'll now discuss the financial summary of our Q4.

[Speaker 3]

Our 4th quarter total reported revenue declined 7.4% year over year to $3,517,000,000 Approximately 39% of the decline was due to the impact of divestitures, commercial agreements and CDN. Adjusted EBITDA was $1,090,000,000 in 4th quarter with a 31.2 percent margin. Free cash flow was $50,000,000 in the 4th quarter. In 2023, we delivered on our expectations for both adjusted EBITDA and free cash flow. Next, I'll review our detailed revenue results for the quarter on a year over year basis.

[Speaker 3]

Within our North America enterprise channels, which is our business segment excluding wholesale and international and other, Revenue declined 0.1%. This quarter, we had a public sector benefit in our other product group. As a reminder, our other category tends fluctuate quarter to quarter given the nature of these revenue streams. Overall, North America business declined 3.5%. We again significantly outperformed our 2 largest historical competitors in the Q4.

[Speaker 3]

While results can vary in any given quarter, we expect this trend of divergence between performance at Lumin and the legacy business wireline providers to continue to widen over time as we expand our digital service offerings. Large enterprise revenue declined 3.6% in the 4th quarter. Large enterprise revenue was impacted by lower other product revenue and also the timing of large infrastructure revenue benefiting the year ago quarter. Our year over year growth rate with in grow moderated. We expect continued variability in trends as we drive toward overall stabilization.

[Speaker 3]

Now moving on to mid markets. Revenue declined 6% year over year. Mid markets is a very important channel for us and one where we had lost considerable share prior to our focus and investment in this important area. We are leaning into this channel with products and buying tools to make ordering and provisioning more frictionless. As Kate mentioned, we're seeing improved leading indicators and are taking share in both IP and Sassy products.

[Speaker 3]

This is a channel that we expect will be extremely interested in our NAS offering given the flexibility and the ease of provisioning it provides. Public sector revenue grew 14.8% year over year. Trends improved driven primarily by continued strength in grow revenue, moderating declines in Nurture and higher other revenue as mentioned earlier. Over the past 12 months to 18 months, investors have asked us when we will start to see the benefits of the big contracts signed with the USDA, the U. S.

[Speaker 3]

Postal Service, the Department of Defense and other public sector wins. As our results demonstrate, we are seeing revenue strength in part due to those and other deals ramping as we work diligently to deploy these mission critical services. Given our visibility to sales bookings and the longer install cycles related to the complexity of the solutions we're deploying within public sector, We have high confidence that we'll be the 1st sales channel to return to sustainable growth. Wholesale revenue declined 11.2% year over year. The majority of wholesale represents the balance of trade with other carriers as we negotiate with each other on buy side and sell side arrangements.

[Speaker 3]

The historical industry behavior between carriers has been to leverage pricing and rate changes to drive results instead of delivering incremental value to customers. In our opinion, these actions are often to the detriment of the industry's customers and is also generally unhealthy for the industry, while also creating volatility in our and others results. Within wholesale, approximately 39% of our revenue comes from harvest products, which declined 15.9% year over year in Q4 and contributed to a majority of the 11.2% decline. Our Harvest product revenue will likely continue to decline over time and is an area we will continue to manage for cash. International and other revenue declined 43.5% year over year driven by the divestiture of our EMEA business and the sale of select CDN contracts in the Q4 of 2023.

[Speaker 3]

Moving to our business product life cycle reporting. I'll reference results based on our North America enterprise channels, which represent our core strategic categories. Grow products revenue increased 5.7% driven by strength in IP across all enterprise channels, Cloud Services and Infrastructure product growth, particularly within colocation and dark fiber. Gro represented approximately 40% of our North America enterprise revenue and for our total business segment carried an approximate 80% direct margin this quarter. Within Nurture and Harvest, we continue to expect headwinds in these categories as we take proactive steps to migrate customers to newer technologies.

[Speaker 3]

These actions improve our customers' experience and provide an uplift customer lifetime value for Lumin. As Kate mentioned, we continue to see positive leading indicators that our initiatives are working and it will take some time to be reflected in our results. Nurture products revenue declined 9.7% year over year. Pressure within VPN and Ethernet services drove the decline. Nurture represents about 30% of our North America enterprise revenue and for our total business segment carried an approximate 69% direct margin this quarter.

[Speaker 3]

Harvest products revenue declined 10.4% year over year. Harvest continues to be negatively impacted by declines in TDM based voice and other legacy services. Now I want to take a minute to discuss Harvest in more detail. We have a very tactical approach to our Harvest portfolio, which contains a mixture of customers that are on net as well as off net. These off net customer contracts carry a much different margin profile and in some cases are margin dilutive.

[Speaker 3]

We utilize rerates to manage the margin and in some cases this can result in non regrettable churn. In other cases, We will seek to migrate customers to our newer Grow technologies. Another set of customers within Harvest are quite profitable and their needs can be met with existing services. Our data driven approach drives our product migration and pricing strategies for each of these customers, enabling us to optimize our return profile. Harvest represented less than 17% of our North America enterprise revenue in the 4th quarter, an improvement of approximately 200 basis points year over year.

[Speaker 3]

For our total business segment, it carried an approximate 81% direct margin this quarter. Other products revenue grew 31.7%. As I mentioned earlier, public sector showed particular strength in this product set. Now moving on to mass markets. Revenue declined 8.3% year over year.

[Speaker 3]

Our mass markets fiber broadband revenue grew 11.5% and represented approximately a third of mass markets broadband revenue. Also note that our exposure to legacy voice and other services revenue continues to improve with an approximate 200 basis point reduction year over year. During the quarter, fiber broadband enabled location adds were 126,000 bringing our total to approximately $3,700,000 as of December 31. As Kate mentioned, we intend to maintain the same 500,000 build pace this year. And during the Q4, we added 20,000 Quantum Fiber customers And this brings our total to $916,000 Fiber ARPU was flat sequentially and increased on a year over year basis to approximately $61 in the 4th quarter.

[Speaker 3]

At the end of the quarter, our penetration of legacy copper broadband was approximately 10% and our Quantum Fiber penetration stood at approximately 25%. Our 12 month frozen penetration of our 2022 enablement cohort was 18% at December 31, while our 24 month frozen penetration of our 2021 enablement cohort was 25%. Turning to adjusted EBITDA. For the Q4 of 2023, adjusted EBITDA was $1,090,000,000 compared to $1,393,000,000 in the year ago quarter. The Q4 of this year included a net headwind of $13,000,000 related to the divested EMEA business, a net benefit of $3,000,000 from divestiture related post closing commercial agreements and a net headwind of $16,000,000 from the sale of select CDN contracts.

[Speaker 3]

These items represent approximately 9% of the year over year decline. Special items impacting adjusted EBITDA this quarter totaled $211,000,000 Our 4th quarter EBITDA margin was 31.2%. Capital expenditures for the Q4 of 2023 were $821,000,000 and the company generated free cash flow of $50,000,000 in the 4th quarter. Moving to our financial outlook the full year 2024, we expect adjusted EBITDA to be in the range of $4,100,000,000 to $4,300,000,000 Our EBITDA guidance includes an expected 2% to 5% organic decline, a significant and roughly 600 basis point improvement from the organic decline included in our 2023 outlook as our transformation initiatives take hold. Moving to capital spending and our other outlook metrics.

[Speaker 3]

For the full year 2024, we expect total capital expenditures in the range $2,700,000,000 to $2,900,000,000 We expect to generate free cash flow in the range of $100,000,000 to $300,000,000 for the full year of 2024 And this includes an approximate $700,000,000 tax refund received during the Q1 of this year. We expect free cash flow to be impacted by higher interest expense related to our new TSA agreement and based on our initial analysis, We've included an incremental $125,000,000 to $225,000,000 of cash interest in 2024 versus 2023. We do not have any required or planned discretionary pension fund contributions in 2024. In terms of special items for 2024, we continue to expect Dedicated third party costs to support transition services for the divestitures. The reimbursement for these services will be in other income with no material net impact to our cash flows.

[Speaker 3]

In addition, in the Q1 of 2024, we expect to recognize meaningful charges related to the negotiation and execution of our TSA agreement. Before we move to Q and A, just a couple of housekeeping items. First, please remember that the Q1 typically has seasonally higher related to the timing of bonus payments and other prepaid expenses. Additionally, while we are happy to discuss the recent TSA announcement in further detail, Our focus is now on our business and the financial results as we move forward. Accordingly, we would prefer to be oriented to questions around the business.

[Operator]

And our first question for today comes from the line of Simon Flannery with Morgan Stanley. Your line is live.

[Speaker 4]

Great. Thank you very much and good evening. Thanks for all the color. I was wondering if you could just help us with the updated trajectory of revenues through the quarter. I think In the past, you've talked about a second half acceleration after some first half noise.

[Speaker 4]

You didn't really Talked to that during your prepared remarks. So any updates there would be great. And then thanks for the color on Q1 OpEx. How should we think about some of the OpEx savings from some of the severance and other actions that you've recently been taking? How does that flow through the quarters in 2024?

[Speaker 4]

Thank you.

[Speaker 3]

Yes, Simon. On the revenue side, We would expect the public sector implementation and the conversion from sales to revenue to accelerate as we move through the year. And to Kate's point, we continue to see improvement in the other channels as well, but mid markets, We expect to continue to improve over the course of the year as well. Obviously, wholesale can be a little more choppy, so that's a harder one to predict. As it relates to OpEx, most of the savings that related to the action we took last year will be realized this year and I would expect that to be fairly even quarter to quarter.

[Speaker 3]

It's a full year impact.

[Speaker 4]

Great. And just on that public sector, I mean to what extent was the Q4 number including, I don't know, CPE sales or other things that may not recur next quarter?

[Speaker 3]

So, we did say that other product revenue, impacted the Q4 and that's the bulk of it. I would say that Our commentary around our confidence in public sector really relates to the revenue recognition associated with the installs from those big deals we announced over the last 12 to 18 months. Great.

[Speaker 4]

Thanks a lot.

[Speaker 5]

Thanks, Amit. Next question, Aaron.

[Operator]

Thanks for your question. Our next question comes from the line of Batya Levi with UBS. Your line is live.

[Speaker 6]

Great. Thank you. On the enterprise trends, earlier you had mentioned that you were concerned about Some of the upcoming maturities and the conversations with enterprises were kind of on a hold. Can you provide more color on maybe recent conversations with some of those larger clients and how the sales funnel is shaping up? And maybe just another follow-up on the on 1Q.

[Speaker 6]

Can you quantify the seasonal expenses we should think about for the Q1? And lastly, taxes, how should we think about tax range if bonus depreciation or other credits are extended? Thank you.

[Speaker 2]

Thanks, Batya. I'll handle the debt one and give you the 2 pieces to Chris. The clarity of having this TSA updated and amended has been great for our customer conversations. It basically Shifts the maturities to 29, it provides the ability to focus on our transformation efforts and have conversations with customers without That question. And so we've really been relishing that.

[Speaker 2]

Our pipeline and conversations with customers are positive and growing and a lot of that has to do with the sales excellence that we've put in place in terms of supporting our people with world class platforms and driving AI for sales productivity and things like that. So I think we're in a good spot. Chris?

[Speaker 3]

Yes. And on taxes, our guidance, we gave a cash tax amount that we feel is the best way to look at it. Obviously, with The one time expenses and special charges associated with the debt transaction, the impact from an ETR standpoint on net income can be really sensitive. So that's why we chose to guide the cash tax amount. As it relates to legislation, Again, we're really pleased with the momentum around that.

[Speaker 3]

We would expect that if everything was enacted that's out there that the benefit to us could be in the $300,000,000 to $400,000,000 range on an annual basis, but we'll have to wait and see.

[Speaker 6]

Got it. Thank you.

[Speaker 5]

Thanks, Batya. Next question please, Aaron.

[Operator]

Our next question comes from the line of David Barden with Bank of America. Your line is live.

[Speaker 7]

Hey guys, thanks so much for taking the questions. I guess 2, if I could. The first would be, just, Chris, how you could maybe put some guardrails around how a successful TSA conclusion would impact the free cash flow guidance outlook that you're presenting here today, which does not appear to have it in there. And the second question would be, and sorry to go back to the public sector, but given that this is kind of the tip of the iceberg of the growth turnaround, Q3 to Q4 was up $30,000,000 3rd quarter to 4th quarter, it's up another $50,000,000 Most of all of that was attributed to kind of one time items. Where you say it's going to be the 1st return to growth, from what number should we assume that growth begins?

[Speaker 7]

Thank you.

[Speaker 3]

Yes. So I'll answer the last part first. Again, you're right. We did we have said that over the last quarters there were some one time benefits that have repeated themselves and certainly helped us. But as we look into the year From here forward, David, we should continue to see growth in public sector as the installs around those big contracts build their pace.

[Speaker 3]

So we do expect public sector revenue to be increasing as we go forward from here. And as it relates to the free cash flow guidance, it does include all of the TSA costs. So successful closure means closing in Q1 and we've got line of sight to doing that. We'll certainly get more commentary around that as that gets finalized. But it is contemplated.

[Speaker 3]

And I think part of the confusion may be that included in that free cash flow guidance is the 700 dollar tax refund impact that hit in Q1.

[Speaker 7]

Right. Those are the offsetting forces. Perfect. All right. That's all helpful.

[Speaker 7]

Thank you, Chris.

[Speaker 5]

Yes. Thanks, David. Next question please.

[Operator]

Our next question is from the line of Michael Rollins with Citi. Michael, your line is live.

[Speaker 8]

Thanks and good afternoon. A couple of questions.

[Speaker 5]

The first one is, if we go

[Speaker 8]

back to the Analyst Day slide

[Operator]

from a

[Speaker 8]

few months back, The EBITDA guidance range is lower at 4.1% to 4.3% versus the 4.3% to 4.6%. Can you remind us of just some of the influences and some of the developments that got you to the current range. And then, can you also give us an update on How the revenue range should look? After all this time, I think it was originally at 13.6% to 14.1% for 2024. Thanks.

[Speaker 3]

Yes. So a few things. So what's changed versus Investor Day? Obviously, the EMEA sale, the CDN sale And last but not least, just the impact of the debt discussions and that overhang in our business. We were pretty clear, I think on the Q2 and Q3 calls that customers were concerned and certainly the size of the 27 debt tower and our ability to execute the turnaround in time to refinance that, particularly the Lumin debt in that was of particular concern.

[Speaker 3]

So we adjusted for that And with the negotiations behind us, we see positive momentum there. As it relates to revenue, We're not guiding revenue at this point. And I would say that's conscious because the revenue piece is going to be choppy as we go forward. Want to be really transparent about that. It's hard to predict what totals will do.

[Speaker 3]

It's easier to predict channel by channel that when we would expect to see a turnaround. But to try to give that with some level of confidence at this point is just a little too early. So we've chosen to stick to EBITDA where we obviously have more levers to pull and more control around that.

[Speaker 8]

And then just second, in the past, you've talked about the opportunities to proactively churn some of the legacy revenue and convert that into the strategic revenue. Can you share maybe some additional details or developments there's some numbers where you're able to show the financial benefit of being able to migrate customers more quickly to fresher strategic services?

[Speaker 2]

So a couple of things. There's number 1, the using AI to reach out to customers In a programmatic fashion at scale to drive productivity of the outbound calling that we do is the first step. And so we've made a lot of progress there putting the platform together. Number 2, taking a migration factory approach. So for each legacy platform that customers are on, understanding the behavior signals that drive likelihood to churn and approaching them in cohorts and then meeting them where they are in terms of what they have and the best solution that we can migrate them to and doing as much of that in an automated fashion as possible.

[Speaker 2]

All of that is the chassis that we built in 2023. Now we're starting to and in Q4, we had some pretty significant progress numbers we don't report on, but in terms of doing the reach outs and in making progress with migrations, etcetera. So We'll continue to monitor it. And as we get to a place of growth and stability and productivity of those teams, in a way that we can share, we certainly will.

[Speaker 8]

Thanks.

[Speaker 5]

Thanks Mike. Next question, Aaron.

[Operator]

Next question is from the line of Eric Liubchow with Wells Fargo. Your line is live.

[Speaker 3]

Great. Appreciate it. Maybe you could touch on mid market a little bit. I know that's been a big focus of the In terms of new salespeople and new logo generation, I mean, when do you think is that more of a 2025 story when we start to see the revenue line really turn in that segment? And then secondly, maybe you could just touch on your interest in additional asset sales or divestitures as you look out, I think you've been pretty open about the consumer or mass markets business potentially making sense being separate from the enterprise segment.

[Speaker 3]

Is that something that you would actively evaluate? Thank you.

[Speaker 2]

So starting with mid markets, this is actually the first market segment, customer segment that we stood up, our squads, our scrum teams to go after. And that's everybody from sales, marketing, customer success, IT operations, finance, billing, etcetera, All kind of circling around the customer segment to say, what are the offerings that we need? What's the price we need to win? What does the marketplace look like? How do we swarm them and cover the markets both direct and indirect because that's we want to continue to leverage our ecosystems for more feet on the street from a sales And all of that work happened in 2023.

[Speaker 2]

What's most remarkable about that is, It set the tone and context for how we then do turnarounds in the other segments, because we got this learning mojo thing happening where The teams are meeting with daily stand ups and weekly stand ups and reporting back on the challenges that they were experiencing. And then using an agile methodology, whether it's building a piece of IT functionality or it's working with the product team say we need these net new capabilities or the marketing team to say how can we do better account based marketing, etcetera. And that method of working across functions with no silos in an agile rapid fashion has set the context for basically how we treat all the other segments. So that's thing 1. Thing 2 is, Internally, there's a bit of camaraderie and healthy competition.

[Speaker 2]

And I call my mid markets teams as handbaggers, Because basically, they're always coming in a little bit better than they say they're going to and I think they're starting to get their chops. And so, we're excited by our improvement in productivity. We're excited about, our improvement in sales and revenue, etcetera. I think what we'd like to do next and where you'll see us sort of Target the guns is on the ecosystem side, making sure that we have a platform that is partner friendly, so we can drive sales productivity indirect, because we all know that that's what we need for total coverage. So you want to handle the other?

[Speaker 3]

Yes. I mean, and on asset sales, We'll obviously continue to evaluate the entire portfolio. What I would say specifically about the mass markets business is really a few things. One, that's an enormously valuable asset and we know that and that's why we're continuing to invest at the pace that we're at right now and getting more fiber in the ground and pushing really hard to drive subscriber growth. That said, we've been very public about saying that's a space where consolidation is necessary and we will not be the consolidator.

[Speaker 3]

So I think you've seen in the last few days some noise in the industry as people are I think taking more active positions around what happens next with that sector. So we're going to keep our heads down, continue to focus on execution and building out the value of that asset and we'll evaluate as we go. All right. Thank you.

[Speaker 5]

Thanks, Eric. Next question, Aaron.

[Operator]

Our next question is from the line of Nick Del Deo with MoffettNathanson. Your line is live.

[Speaker 9]

Hey, thanks for taking my questions. I've got 2 guidance related ones for Chris. The first one on CapEx. So it looks like Your midpoint for CapEx this year is $2,800,000,000 It was about $3,000,000,000 in 2023 ex EMEA. Your fiber to the home passings are about the same in 2024 versus 23.

[Speaker 9]

So it seems like the CapEx for everything else is ticking down some. I was just wondering if you could talk a little bit about what's behind that reduction assuming that observation is correct?

[Speaker 3]

It's really driven by our continued focus on efficiency. And so we continue to push on both OpEx as well as CapEx And we will continue to do so. But it's not don't view it as a signal of us pulling back anywhere. We are investing aggressively and we'll continue to invest aggressively in both enterprise and mass markets as well as just the broader Simplification of Lumin as we go forward. There's an enormous amount of effort that's taking place, in particular this year around Financial systems as well as operations, that will dramatically improve, the customer experience.

[Speaker 10]

Okay. So you'd say you're getting

[Speaker 9]

a similar bang for your or more of a CapEx bang for your buck this year than last year and that kind of explains it?

[Speaker 3]

That's right.

[Speaker 9]

Okay. And then second on cash taxes, it looks like Cash taxes paid excluding the refund are going to be in the $400,000,000 to $500,000,000 range, which is a pretty big number. I guess barring any change in the Tax code, is this a reasonable starting point to think about for the next few years? Or are the debt transactions or other things kind of throwing it off?

[Speaker 3]

Yes. I don't want to try to estimate what 25% is right now. We're obviously not doing guidance there. As I said earlier, we gave the guidance, the cash tax guidance we gave this year just because of the sensitivity in net income with all the other special charges hitting this year. I will give you a little bit here though on the interest because I think it's important.

[Speaker 3]

I think the cash interest in 2025 will not be materially different than it is in 2024. And the key thing there is just for your modeling is While we don't have a full year impact under the TSA in 2024, at the execution of the TSA, We do basically have to pull forward interest expense. So when we look at it, that variable is going to be roughly the same 24 and 5, I think that I'll give you that much on 25.

[Speaker 9]

Okay. I guess maybe I'll phrase it differently. Are there kind of one time tax items that we should Bear in mind that are baked into that guidance?

[Speaker 3]

Yes. No, not materially, no.

[Speaker 9]

Okay. Okay.

[Speaker 8]

Thank you, Chris.

[Speaker 5]

Next questioner.

[Operator]

Our next question is from the line of Greg Williams from TD Cowen. Your line is live.

[Speaker 8]

Great. Thanks for taking my questions. Chris, I realize you typically guide EBITDA in that $200,000,000 range. And I'm just wondering if there's any particular puts and takes to consider what's driving that range this year? I know you mentioned some levers that you can pull.

[Speaker 8]

And then the second question is Just on the ABS debt markets, if you're looking at that in the year now that you've got the clean runway from the TSA and maybe you can leverage some of these fiber homes? Thanks.

[Speaker 3]

Yes, we'll continue to look at the capital structure and for ways to make it more efficient forward. So we're not done. That was a big one, but we're not done. I'm sorry, repeat the first part of the question.

[Speaker 8]

Just the EBITDA range, if there's any puts and takes to consider and leverage the pull?

[Speaker 3]

Yes. No, I mean, we just we felt that the plus or minus $100,000,000 was the way to go. The comment that I made earlier On just the levers we have, obviously, we're doing a number of things, right? The primary objective is to get revenue growing as we shift aggressively from kind of legacy services to digital service offerings. But at the same time, we are fixing the internal workings of Lumin.

[Speaker 3]

I mean, multiple billing systems, multiple GLs, inventory, frankly, a really poor customer experience. And Kate spoke to some of the progress we're making there. So as those things get fixed, That obviously gives us the opportunity to drive more efficiency in addition to a better customer experience and that also has EBITDA effect. So EBITDA, we get the double benefit obviously of the revenue as well as those efficiency plans.

[Speaker 8]

That's helpful. Thank you.

[Speaker 5]

Thanks, Greg. Next question please.

[Operator]

We have another question from the line of Frank Waltham with Raymond James. Your line is live.

[Speaker 11]

Great. Great. Thank you. Just wanted to go to Slide 6 and the different opportunities you have there. Can you characterize that as what sort of potential revenue that is?

[Speaker 11]

Is that a multi $1,000,000,000 opportunity For Lumin, how should we think about that? And then you mentioned something on the recognition of the revenues For the public sector business, is there some sort of timing

[Speaker 9]

difference in

[Speaker 11]

the cash flow of some of those that we should be aware of? Thanks.

[Speaker 3]

So really on the public sector, Frank, that's the longest kind of sale to install interval of anything we sell. They're big complex deals. Obviously, we're working with government agencies and they've got to go through their processes and that takes time. So you can have a 12 to an 18 month lag as I mentioned until that starts to get recognized in revenue. As it relates To the cash flows around that, it will increase as time goes on because obviously the pace of the installs increase.

[Speaker 3]

But in

[Speaker 11]

terms of It's a book to bill difference is what you're talking about, not a cash recognition difference.

[Speaker 3]

Exactly. And they're just massive contracts. So

[Operator]

Yes. But I'll turn it

[Speaker 3]

back to Kate for the first part of your question.

[Speaker 2]

Sure. On Page 6, we just for everybody's edification here, so Lumen Digital platform and we have The portfolio outlined with a totally digital customer experience wrapped around 2 important things. The first is Our network, our core network services, because none of these digital services are relevant without total integration into the network. Customers Our demanding left to right, top to bottom integration, quick, secure, effortless, it needs to be exactly that in order to be relevant in the digital economy. And I think you can look to other Companies that have some of these digital services and they don't have the fiber network and they just can't get the economics and they can't get the customer service, right.

[Speaker 2]

So we're kind of excited about There are 4 core capabilities that we have right now for Lumen Digital. We're just getting started as I said. The ones that we have here represent a total available market of around $40,000,000,000 but I think that's actually understating it Because we have a couple of really interesting opportunities emerging that we'll talk about as we get a little bit closer to shaping them. Think of it this way, NAS is cloudifying telco. It's digital everything, any port, any service, anytime, anywhere.

[Speaker 2]

Exoswitch is the center of connectivity, fast path into the cloud, any cloud and across clouds. The edge is becoming more and more germane, especially with a totally digital network and high capacity switching because users are everywhere. And the expectation is that I'm going to process all of that data that's generated at the speed of thought. And so proximity really matters. And then the last thing is security and we have huge muscle here that's Totally under commercialized.

[Speaker 2]

So we're excited about the future. And right now, we're just kind of calling it a very big opportunity for net new profit pools, which is going to really help our growth curve.

[Speaker 11]

All right, great. Thank you.

[Speaker 5]

Thanks, Frank. I think we have time for just one more question, Aaron.

[Operator]

Perfect. We have one final question here for today that is from the line of Jonathan Chaplin with New Street, your line is live.

[Speaker 10]

Thanks. Thanks for squeezing me in guys. Actually, 2 very quick ones. So, Chris, given that it may make sense at some point to separate mass markets out, could you give us a sense for The EBITDA that you're generating in that business today? And then maybe a more conceptual question for you guys.

[Speaker 10]

It's As you sort of run through the trends in the business, which seem to be improving in a little in a lot of areas, and it seems like you're taking share in the core segments that you're focused on and you're struggling against a sort of an industry backdrop that's just really, really tough. It strikes me that the business segment in aggregate is just fragmented and that's part of the problem. And I'm wondering if there's A consolidation opportunity there and whether you'd be a consolidator or whether a big consolidation transaction would just give you exposure to revenue streams that you're looking to move away from? Thank you.

[Speaker 2]

Yes. So I'll take the second part of the question. It's an interesting one for sure. And I think you should think of us as seeing huge opportunity in the business segment by providing digital services that are integrated into the network and getting smarter and smarter about how We can take advantage of these really, really complex environments, hybrid cloud, multi cloud, Gen AI, etcetera. We have not only the right team as I've talked about, we've got a world class network, which I've talked about and we've already got a head start With a lot of intellectual property, protected by patents that sort of uniquely positions us to take advantage of this.

[Speaker 2]

That's where our focus is. We're maniacally focused on delivering value to customers and obsessing about their needs, As time goes on, we will strategically look at every single one of those as is our fiduciary responsibility. And as they make sense, We'll go

[Speaker 5]

after them.

[Speaker 10]

Got it.

[Speaker 3]

Okay. And on the EBITDA, We don't guide to that. It is in our filings. So I think that's where I would point you to in terms of the splits between mass markets and enterprise. But as it relates to a potential split of the businesses, what I really want to emphasize is, we're not looking to fire sale any assets.

[Speaker 3]

We're investing in good assets to make them great. And that's our focus first and foremost, because that's how we see the path to maximizing value as we go forward. So definitely on the radar screen, but we've got a really dedicated group of people We're very focused on the quantum fiber build out and the great customer experience that it brings and we're going to continue on that path.

[Speaker 10]

Great to hear. Thanks guys.

[Speaker 5]

Thanks, Jonathan. Thank you. Aaron, with that, we're going to end the call.

[Operator]

Thank you. Ladies and gentlemen, this will conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line. Have a great day, everyone. We'll see you next time.