Lumen Technologies Q2 2021 Earnings Call Transcript

Quartr
Provided by Quartr
August 3, 2021

Key Takeaways

  • Lumen agreed to sell its Latin American assets to Stonepeak for $2.7 B, representing a 9x multiple of 2020 adjusted EBITDA and expected to close in the first half of 2022.
  • The company signed a deal to transfer its legacy local exchange business in 20 states to Apollo for $7.5 B, a 5.5x multiple of 2020 adjusted EBITDA, while retaining long-haul fiber and enterprise CLEC assets.
  • These transactions will be free cash flow dilutive in the near term but allow Lumen to simplify its portfolio and redirect investments toward higher-growth areas like Quantum Fiber build-outs, edge computing and its Lumen platform.
  • In Q2, total revenue fell 5.2% year-over-year on sluggish enterprise spending, but mass market fiber net adds reached 31,000, driving a 30% increase in fiber broadband revenue to 17% of mass market broadband revenue.
  • Adjusted EBITDA in Q2 was $2.109 B with a 42.8% margin (up 170 bps), full-year EBITDA guidance remains $8.4–8.6 B, CapEx guidance was lowered to $3.2–3.5 B, free cash flow to $3.1–3.3 B, and the board approved a $1 B buyback program.
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Earnings Conference Call
Lumen Technologies Q2 2021
00:00 / 00:00

There are 11 speakers on the call.

Operator

Greetings, and welcome to Lumen Technologies Second 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, Tuesday, August 3, 2021. It is now my pleasure to turn the conference over to Mike McCormack, Senior Vice President, Investor Relations.

Operator

Please go ahead, sir.

Speaker 1

Thank you, France. Good afternoon, everyone, and thank you for joining us for the Lumen Technologies' Q2 2021 earnings call. Joining me on the call today are Jeff Storey, President and Chief Executive Officer and Neel Dev, Executive Vice President and Chief Financial Officer. Before we begin, I need to call your attention to our Safe Harbor statements on Slide 2 of our 2Q 2021 presentation, which notes 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 that can be found in our earnings press release. In addition, certain metrics discussed today exclude costs for special items as detailed in our earnings material, all of which can be found in 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 today's call. It's an exciting day for Lumin, and we have a lot to cover. I'll begin today's call with our recently announced transactions, including the just announced sale of a portion of our legacy local exchange business to Apollo. I'll then ask Neil to review a few second quarter highlights as well as provide a preliminary view of the expected effects of these transactions on Lumin's financial profile. And of course, We'll reserve time for your questions at the end of the call.

Speaker 2

So let's jump in. Last week, we announced the sale of our Latin American assets to Stonepeak at a value of $2,700,000,000 representing an approximately 9x multiple of the Latin American businesses 2020 estimated adjusted EBITDA. There are more details about this transaction in the release materials, but the simplest way to think about LATAM That we will transfer ownership of substantially all our LatAm based customers and assets to Stonepeak and are entering into a services agreement with Stonepeak to continue to serve the needs of our enterprise customers based outside the region. Subject to customary regulatory approvals, we expect this transaction to close in the first half of twenty twenty two. I'm also pleased to share that we have agreed to sell our legacy local exchange business in 20 states to Apollo for $7,500,000,000 representing a multiple of approximately 5.5 times our 2020 estimated adjusted EBITDA.

Speaker 2

In short, with this transaction, we are transferring to Apollo all our legacy local exchange assets in 20 states, along with the consumer, smallmedium business, state and local government, education and wholesale customers served by those assets. Lumin will retain ownership of our non local exchange fiber assets in those 20 states, including our long haul fiber and the enterprise CLEC assets. Lumin will also retain our legacy local exchange assets in another 16 states. In the transferred markets, the service needs of Lumin's enterprise and government customers will be met under a network services agreement to be entered into with Apollo. I'm very pleased with the valuations we were able to achieve for these two sets of assets.

Speaker 2

On the whole, our retained markets have significantly higher fiber penetration, Population density, enterprise demand and overall growth opportunity than the transferred assets. We have spoken about the sum of the parts analysis of Lumin, and I believe multiples of 5.5 times for these 20 states and 9 times for LATAM should shine a bright light on the relative value of our retained business. Don't get me wrong, The 20 states we're selling to Apollo are good markets with quality assets, talented employees and excellent customers. As we looked at these states though, we knew that we were unlikely to prioritize investments in these markets ahead of our other opportunities in enterprise in Quantum Fiber. After closing of this transaction, approximately 70% of our remaining mass market footprint is well suited for Quantum Fiber Investment.

Speaker 2

This transaction will allow the transferred assets to get the higher level of investment we know they can And we are committed to partnering with Apollo to help them realize their vision for these markets. As I mentioned on our Analyst Day back in April, we have worked very hard over the past 3 years to transform our company, both financially and operationally. We committed to driving growth over the Lumin platform and continue to transform the business. These transactions are fully aligned with that strategy and we believe will drive future growth as we meet the needs of the 4th Industrial Revolution for enterprises and consumers alike. Undertaking these transactions allows us to simplify our business, deliver differentiated products to a higher percentage of our customer base and target our investments to drive higher growth and more attractive long term returns on both the Lumin platform and through our Quantum Fiber Investments.

Speaker 2

Of course, the transactions create pressure as well. While the sale of the consumer assets is expected to have a positive effect on our product mix day 1 after close and an improved growth profile going forward, the high levels of cash flow these markets generate will be free cash flow dilutive in the near term, even at these strong valuations. Even so, we are confident that these transactions are right for our business over the long term and will improve the growth profile of our company. Neil will cover some of the operational financial impacts, but let me take a moment We expect to accelerate the pace of our growth investments in Quantum Fiber. By retaining the 16 states we have, Fiber based consumer and mass market services remain a huge opportunity for us, and we have built a differentiated offering with Quantum Fiber, enabling an all digital customer experience that uniquely positions us among mass market broadband providers.

Speaker 2

As Neel will discuss, our Quantum Fiber results are bearing this out as we saw another quarter of net adds for our fiber And higher speed offerings, continuing results from previous quarters. The jury isn't out on this one. When we invest in consumer fiber, we take share footprint will be the sort of urban and suburban markets that are best addressable with Quantum Fiber Solutions. We are developing an accelerated build plan and we'll share those details as they're finalized. What we can tell you today is that while we remain strategic and disciplined in our approach, we expect to build faster and with more scale in the markets We also believe we have a unique opportunity to grow our enterprise business By leveraging our expansive fiber network to provide essential transport services and further penetrating our on net buildings, Utilizing our edge computing network to move critical workloads closer to the source of data and the use of data and expanding the capabilities of the Lumin platform and enabling greater digital consumption of our services for all of our customers.

Speaker 2

I'm the first to acknowledge that we're not yet seeing the pace of growth that we expect from these initiatives, but we remain confident in the opportunity and are streamlining our focus and further investing to drive that growth. 2nd, I expect we will manage our balance sheet to remain more or less leverage neutral over the next few years as we accelerate investment into our growth initiatives. Longer term, I believe the previously The leverage range is the right one for our business, but I'm prepared to allow the timeline to achieve that range to extend as we work through this investment cycle. Further, beyond fully investing in the growth of our business, we are mindful of being opportunistic in considering share repurchases. We are not choosing share repurchases over funding growth.

Speaker 2

Even as we scale the Quantum Fiber build and the Lumin platform investments, we Expect to have excess capacity to consider opportunistic share repurchases. If we can do so at multiples, it will be accretive to long term share value. To that end, we've also announced today approval by our Board of a $1,000,000,000 buyback program. Lastly, the dividend. We have long stated that we believe return of cash in the form of a dividend is an appropriate capital allocation vehicle in a business like ours.

Speaker 2

However, with these transactions, the profile of our business is changing and will change rapidly going forward as we lean into for growth and continuing to rationalize the portfolio. I do realize that will put pressure on our dividend after we close these transactions and the further we get into our investment program. But as of now, we are not faced with that trade off decision and will continue to balance the return of cash to shareholders through dividends and buybacks, while we accelerate our investment in Enterprise and Quantum Fiber Growth. Let me provide a small bit of color on my views on the 2nd quarter results. While we worked hard to get these transactions announced, We remain very focused on driving performance in those areas that we believe provide the best opportunity for growing revenue and strong returns.

Speaker 2

That said, our 2nd quarter revenue trends were sluggish. We've talked about disclosed sales in the Q4 and the beginning of the Q1 as a result of COVID and delayed decision making. Since then, we've seen good sales growth sequentially and believe our growth initiatives across the Lumin platform will help us improve our revenue trends as we move forward. Before I turn the call over to Neil, let me offer a few points in summary. We're excited about the 2 transactions we've announced.

Speaker 2

We're pleased with the valuations that have also done these transactions to drive investment and operational focus Within the remaining business, sticking to the strategy we discussed since launching Lumin and Quantum Fiber last fall. At 5.5 times on the light business and 9 times adjusted EBITDA on the LATAM business, we believe the valuations highlight and Our view of the sum of the parts for the remaining business. While we already operate 1 of the world's most extensive and powerful fiber infrastructures, We will continue to invest in growth via the Lumin platform, cloud edge initiatives and to accelerate deployment of Quantum Fiber. We believe the recently announced transactions were executed at excellent valuations and are aligned to our strategy of streamlining our business to those markets on which we are best able to profitably invest in growth. With that, I'll turn the call over to Neil to provide a few more details on the quarter and some of the expected effects from the announced transactions.

Speaker 2

Neil?

Speaker 3

Thank you, Jeff, and good afternoon, everyone. I want to leave ample time for your questions on our announced transactions. So I will briefly review our 2nd quarter results. Let me begin with our financial highlights in our earnings presentation. For the Q2 2021, we delivered solid adjusted EBITDA and expanded margins year over year.

Speaker 3

Cash flow remains very robust, providing the opportunity to ramp investment in our key growth areas the second half of the year. However, given our spending in the first half, we are reducing our CapEx guidance to be in the range of 3.2 to $3,500,000,000 and accordingly we are adjusting our free cash flow expectation to $3,100,000,000 to $3,300,000,000 for the full year 2021. As Jeff mentioned, our board has approved a $1,000,000,000 share buyback program over 2 years with which we will be opportunistically buying back shares. Turning to 2nd quarter revenue by sales channel. Total revenue in the 2nd quarter declined 5.2% on a year over year basis to our revenue would have declined 4.9%.

Speaker 3

It is important to remember that year over year metrics were meaningfully affected by the surge in demand for voice collaboration and conferencing in the Q2 of last year, making comparisons less relevant. Moving to business segment. In the 2nd quarter, total business revenue declined 2% sequentially and 5.2 Facility business, the decline was 4.9%. Within our business segment, iGAM revenue declined 0.9% sequentially and 2.6% on a year over year basis. The year over year decline was primarily driven by higher usage in the prior year period related to COVID.

Speaker 3

Within iGAM, compute and application, IP and data in fiber infrastructure services were flat sequentially driven by improvement in sales and installs. Large enterprise declined 0.6% sequentially and 4.3% on a year over year basis. Computer and Application Services and Fiber and Infrastructure Services both grew sequentially. Mid market enterprise declined 4.7% sequentially and 9.7% on a year over year basis. Sequential performance was impacted by strong non recurring revenues we highlighted last quarter.

Speaker 3

This sales channel was also impacted by the previously noted sale of the correctional facility business. Wholesale declined 2.6% sequentially and 5.5% on a year over year basis. As a reminder, The Q1 of this year benefited from carrier settlements. Our overall business segment revenue performance continued to be impacted by delayed decision making by enterprise customers in the current environment. While year over year comparisons this quarter were Moving to business segment revenues by product categories, compute and application services for enterprise channels grew sequentially and was flat year over year.

Speaker 3

We expect compute and application services, which includes CloudEdge and our newer Lumin platform offerings to provide additional growth with increased market traction. IP and data services for enterprise channels declined both sequentially and year over year as increased demand for IP and work from home solutions were offset by continued delayed decision making for enterprise hybrid network deployments. Fiber infrastructure services for enterprise channels grew year over year. Sequential performance was impacted by strength in non recurring revenues for equipment and professional services in our mid market channel last quarter. Voice and other services and the wholesale channel continue to be managed for cash with legacy voice declines in line with our expectations, but year over year comparisons were impacted by higher As Jeff mentioned, we are not pleased with our revenue performance year to date and have a solid plan to improve our revenue trajectory as the economy reopens and our new initiatives take hold.

Speaker 3

Turning to mass markets, 2nd quarter 2021 revenue declined 2.2% sequentially. During the quarter, we added 31,000 Quantum Fiber Customers reaching a total of 746,000. Our mass markets fiber broadband revenue grew 30% year over year to this quarter. Fiber based broadband revenue now represents 17% of mass markets broadband revenues compared to 13% in the year ago quarter. Turning to adjusted EBITDA.

Speaker 3

For the Q2 of 2021, adjusted EBITDA was $2,109,000,000 compared to $2,135,000,000 in the year ago quarter. We expanded adjusted EBITDA margins during the quarter, growing 170 basis points year over year to 42.8%. As we continue to direct Incremental operating expense investments towards key growth areas of the company, we were able to more than offset those investments with our ongoing focus on operational transformation savings. Capital expenditures for the Q2 of 2021 were $646,000,000 As we have mentioned, significant portion of our capital is success based And with the lengthening sales cycles, we were able to calibrate our capital spending to the current environment. As previously mentioned, we have adjusted our CapEx expectations lower for the full year with an expectation that the second half spending will be higher than the first As we start to ramp our mass market investments and business decision making accelerates.

Speaker 3

In the Q2 2021, the company generated free cash flow of 1,044,000,000 and we have adjusted our full year 2021 guidance for free cash flow as a result of lower capital spending year to date. During the Q2, we continued to make progress on our deleveraging initiatives by reducing net debt by more than 700,000,000 We issued $1,000,000,000 of lower coupon debt during the Q2 to refinance more than $1,200,000,000 of debt. On a year over year basis, we have reduced net debt by $2,300,000,000 Moving to the financial outlook For 2021, other than the previously mentioned capital expenditures and resulting free cash flow changes, all other guidance metrics remain unchanged. We remain confident in our adjusted EBITDA target of $8,400,000,000 to $8,600,000,000 Moving on to our announced transactions both today with Apollo for part of our ILEC footprint and last week with Stonepeak for our LATAM business, I would like to provide you with some high level financial impacts that should help inform your modeling as you look past the expected closings in 2022. With respect to the LATAM divestiture, we estimate our 2020 revenue related to the transaction at approximately $800,000,000 estimated adjusted EBITDA a little over $300,000,000 and capital expenditures of about $200,000,000 The estimated adjusted EBITDA includes costs to operate the business on a standalone basis and also elimination of non cash revenues and resulting EBITDA consistent with the proposed sale.

Speaker 3

These impacts predominantly affect our iGAM channel. In terms of the ILEC transaction, we estimate our 2020 revenue related to the divested assets at approximately 2,500,000,000 estimated adjusted EBITDA of $1,400,000,000 and CapEx of about $400,000,000 excluding CAF. Similar to Adam, these estimates include revenue and costs to operate the business on a standalone basis. As far as revenue associated with this transaction, about 70% of the revenue is mass markets and the remainder roughly split between wholesale and enterprise channels. In terms of the product mix, about 50% of the revenue is for voice and other product category and the remainder are largely mass market broadband revenues.

Speaker 3

As with any carve out, we do expect some dis synergies, but We are also confident that we can address those with our focus on cost transformation initiatives. Upon the closing of both transactions, Lumen's NOLs will be substantially utilized and we will become a cash taxpayer. As Jeff mentioned, We will manage our debt profile to ensure that the transactions are leverage neutral and our long term Target leverage of 2.75 to 3.25, net debt to adjusted EBITDA remains unchanged. In summary, We have made significant progress this quarter in optimizing our business with a clear focus on positioning Lumin to capitalize on the growth opportunities. We expect business segment trends to improve driven by our Lumin platform initiatives As enterprise decision making accelerates and we are very excited about the investment and growth opportunity in our mass markets fiber business.

Speaker 3

With that, we'll open it up for your questions.

Operator

Thank Our first question is from the line of Phil Cusick with JPMorgan. Please go ahead.

Speaker 1

Hey, guys. Thanks very much. So much to ask about today. I guess the first question I have is, can you just give us an idea of the you gave us the revenue and EBITDA sold of the U. S.

Speaker 1

But in terms of locations kept and sold at the 2 times, I think it had, and then what's been the growth trajectory of each of these pieces?

Speaker 3

So, Phil, I think if you look, we posted also a map That shows you in terms of the HILAC asset sale transaction, which states we're selling. Now they're not the Power states were selling these to highland operations in those states.

Speaker 4

So we would

Speaker 3

retain the CLEP networks and the IXC networks in those states. So It's about 20 states. And the transaction includes not only our mass markets revenue, but also Think about it as ILEC access revenue for wholesale and enterprise. So roughly $2,500,000,000 of revenue And $1,400,000,000 of EBITDA. In terms of the growth profile you mentioned, 50% of that revenue is voice and other.

Speaker 3

So that revenue is declining, Similar to kind of the rest of the portfolio for mass markets in terms of voice and other. But in terms of mix, Only, call it, less than 10% of our fiber revenues are in that Because that area is largely rural, if you will. Another data point that kind of highlights that is about 60% Of our CAF subsidy, CAF II subsidy and about 60% of our CAF II units are in the footprint that we're selling. And so, but broadband revenues in those states have been relatively stable, because of the competitive landscape Today, we think that's going to change going forward. But so at a high level, that's the summary in terms of

Speaker 1

Thanks, Neil. And if I can, one more. It sounds like buybacks at this point are more of an option or consideration than a plan. Can you just expand on what opportunistic means and how that fits into the leverage plan? Thanks very much.

Speaker 2

Yes, I'll start and I'll let Neil add to that. Our Board has authorized $1,000,000,000 worth of buybacks and what that means for us is if we see good opportunity to buy the stock at prices That we think are undervalued, then we'll do so. And you've heard us talk a lot about some of the parts. And we think That our business in this transaction shows that the sum these two transactions show that the sum of the parts It's pretty strong and pretty good.

Speaker 3

Yes. And in terms of your question, Phil, on leverage, like Jeff We expect to be largely leverage neutral. And as we look forward, the key thing to highlight there is that we're going through an investment cycle. So we do plan to scale up our investment in the remaining 16 states. We've proven out our model with the micro targeting approach.

Speaker 3

And as Jeff highlighted, we're moving more from a micro targeting To really scale up our investment with a market based approach. And so as we go through this investment cycle, Simple way to think about it is, we're directing more of our operating cash flow towards investment versus paying down debt. But we haven't changed on

Speaker 1

long term.

Speaker 5

Thanks, Phil. Operator, next question.

Operator

Our next question is from the line of Eric Lukow with Wells Fargo. Please go

Speaker 6

ahead. Hi, thanks for taking the question. First, you mentioned that the dividend might be pressured Throughout this sorry, the payout ratio might be pressured throughout this investment cycle. So I wonder if you could talk about kind of pro form a What the payout ratio looks like, where you're comfortable with that going over the next couple of years and how are you going to make the decision whether it makes sense to Keep the dividend or potentially reduce it in favor of additional investment?

Speaker 3

So Eric, I think like Jeff summarized that while we've just closed the transaction, we do plan on leaning into investment. And I'll just make a couple of broader comments in terms of the variables that we're Thinking through. One is the capitalization of the company is going to look very different by the time We get to closing the transaction and shortly thereafter, we are paying down debt. We are buying back or We intend to buy back shares, so that's one thing to keep in mind. Jeff also mentioned we continue to rationalize the Portfolio, so we'll be active on that front.

Speaker 3

And then in terms of incremental growth capital, It's a timing and scaling question. We do want to ramp up, but we also want to ramp up in a responsible way where we don't have stranded capital that we're driving penetration where we're investing. And so there's a set of variables that we're working through. And so I can't really give you a payout number as such, but we know that as we scale, like Jeff mentioned, It will put pressure on the payout ratio, but we're far from that point today. But that was just something we wanted to highlight.

Speaker 3

But the net point there also is the pressure comes from us investing in an area that we've proven Has good returns and that's not it will be positive for shareholders.

Speaker 2

And the only thing that I'll add is that We have the benefit of a strong balance sheet and we continue to invest in growth and also return cash to shareholders through dividend and share And so we view that as a strength for us and will be part of our balanced approach to capital allocation moving forward.

Speaker 6

And just maybe one more on the fiber expansion in consumer fiber. You have 2,400,000 fiber enabled homes today. I know you've said in the past you still think you're under penetrated. I mean, How meaningful do you think that business can become? I mean, where are you seeing opportunities where returns or penetration levels you can get are attractive?

Speaker 6

Maybe you could just expand a little On where you plan to take that business in the next few years?

Speaker 2

Sure. And we'll give you more information in coming quarters About the plans there, but we've looked at this business, we've been doing our micro targeting that Neil mentioned, And we've been growing our penetration pretty successfully. And so we believe there's a lot of opportunity. If you look at the retained 16 states that something like a little more than 20,000,000 homes passed and 70% of those we consider in urban or suburban Markets, so that's 15,000,000 homes, something like that. We think all those are great opportunities for us to invest cyber into.

Speaker 2

And so we want to ramp our Plans and put some scale behind them because we think that they are based on our experience over the last couple of years, We've done a very good job at continuing to invest fiber and grow where we invest.

Speaker 6

Great. Thank you.

Speaker 5

Thanks, Eric. Operator, next question.

Operator

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

Speaker 4

Great. Thank you very much. On the CIO and the enterprise spending, I think last quarter you talked about expecting a Exemption or an increase in delayed decision making improving in second half, Is that still your expectation? Have you sort of seen a pickup in activity here? Or when do you think That's going to really become more meaningful in terms of accelerated bookings.

Speaker 4

And then coming back to the deal flow, help us with timing here because you actually took your CapEx guidance down Even though you're highlighting higher CapEx, is the CapEx contingent on closing these deals? Or will you start that More aggressively in the near term and sort of the same with the buyback is that tied to the deal closes or could you start that imminently? Thank you.

Speaker 2

Okay. So I'll try and take all three of your questions and Neil, if I leave one out or answer incompletely, please add to it. Enterprise spending, we I said in the prepared remarks that we've seen we saw the slowdown In the Q4, we saw the slowdown in the first part of the Q1. We've seen sequential improvement since then. That's a true statement.

Speaker 2

And we are seeing sequential improvement in sales. But The Delta variant is here. Our customers are beginning to change the way that they're coming back to work. We're doing that ourselves in response to some of the challenges that are out there. And so we have confidence that the sales cycles will improve And then we'll return to the sales expectations that we have.

Speaker 2

But there are still a number of Factors we're seeing the evidence, but there's still a number of factors that could work against us in that. With respect to the CapEx, That is actually tied to your first question more than it's tied to deal flow. When we see a slowdown in sales cycles and purchasing cycles, we don't spend as much capital. Our And purchasing cycles, we don't spend as much capital. Our capital is highly correlated to our growth.

Speaker 2

And so we haven't spent as much capital in the 1st couple of quarters as we thought. Now we expect all that to improve. So we expect higher capital utilization in the second half of the year As we continue to improve in sales and continue to drive revenue growth through the business. And then the last question with respect to buybacks And is that tied to the deal closing? The answer is no.

Speaker 2

That is not tied to the deal closing. That's tied to our Board has authorized $1,000,000,000 worth of repurchases and that's tied to us evaluating the market and being opportunistic about the timing.

Speaker 4

And when does the quantum acceleration start? Is that kind of early next year? Or could that happen this year?

Speaker 3

Yes, that's what I was going to add, Simon. I think The under run that Jeff highlighted is really related to the current environment in the enterprise built business, and that's what we manage on a success based basis. But we haven't slowed down on Quantum, and we are looking to accelerate that second half of this year and going into And that's not contingent on the deal. But with these things, it takes a while because there is Actual physical deployments of permitting, etcetera. So we're scaling up.

Operator

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

Speaker 7

Great. Thank you. With All the pieces on the financials that you helped us with, I think dividend payout would look more close to 70%, 75% without really leaning into CapEx. So can you please provide a bit more color why you would like To maintain the dividend at these levels now and not maybe accelerate the buyback beyond what you have announced? And just Couple of follow ups on the taxes.

Speaker 7

Would the NOL cover most of the taxes or will there be some leakage? And if you could also talk about how much have subsidy these assets that you're selling were receiving? Thank you.

Speaker 3

So Batya, on the dividend, I would really refer you back to kind of Jeff's comments. In essence, if you look at the deal timing, It's first half of the year, next year for the LATAM sale second half for the Hilec asset sale, we're hoping the Hilec asset sale is 12 months, but it So there is a fair amount of uncertainty, not uncertainty, just the timing associated with all the And like I mentioned, there are a series of variables between now and then in terms of us, Our capitalization of the company going forward, the growth capital, etcetera, etcetera. So we think it's a low premature to kind Declare, it's something that Jeff and the Board are going to be very thoughtful about. But we also thought the math that you're doing is the math everybody is going to do and there is going to be some Trade off between growth capital and how we allocate between growth capital and the dividend. But it's not something we need to decide on today.

Speaker 3

In terms of your question on the NOL, Again, a lot of variables there. 1 is depending on deal timing, there is income that we have in the core business. Then there's the tax regulation at the time when we closed the deal. So That's another variable. But net net, I would say that we know given our NOL balance, these Assets have a low tax basis.

Speaker 3

And so we would be using up all of the NOL and we'll have some cash taxes on top of that By the time we get to closing the deals and we'll become a cash taxpayer after that.

Speaker 5

Operator, next question?

Operator

Our next question is from Brett Feldman with Goldman Sachs. Please go ahead.

Speaker 1

Thanks for taking the question. You obviously had undergone a review, a strategic review of the consumer business a few years ago and decided To move forward, I imagine one of the questions we're going to get is, what changed? Was it really just finding the right counterparty or is there something else that Change that allowed you to pull it together. You've also clearly completed a fairly substantial review of your asset portfolio just based on the transactions you announced. Is that still ongoing or do you feel like these transactions are going to get you to the asset base that you're interested in?

Speaker 1

And then just on an operating question, We've got a lot of questions on this call about how you think about amplifying the investment in fiber and mass markets. But what about on the business side? To the extent you have

Speaker 2

So What's changed? I'm just trying to recap all your questions in my mind, Brett. There's nothing that's changed. I said to you a couple of years ago that we were open minded, that we wanted to do smart decisions for our Shareholders, good returns on any investments we made and the divestitures we did that we wanted to do the smart thing. That's what we've done.

Speaker 2

In working with Apollo, we realized that they are the right partner to do this with and that now is the right time I think that they will invest heavily in these markets to help those markets grow and generate a great business for them. We will work with them closely. They're going to be a key provider to us as we continue to serve our Lumin customers in the 20 states that over the ILEC assets that they're going to be operating. So we'll continue to work with them. But we said we were going to be smart.

Speaker 2

We We said we were going to be open minded and now we have these two transactions to show for that effort. With respect to is that an ongoing position? Absolutely. We will always try and be smart and open minded about the assets that we have and how do we Use those assets to generate the maximum shareholder value. And so we will continue to be open minded.

Speaker 2

We'll continue to look forward toward acquisitions, toward divestitures, Whatever makes sense for us as we continue to evolve our business. And that a little bit ties into your 3rd question about amplifying growth on the business side. We have talked a lot about our Lumin platform. We think that is a growth amplifier On the enterprise side, we've talked a lot about edge cloud and edge computing and the capabilities that we're delivering to our customers. We've talked about the partnerships that we've established with companies like Zoom, with VMware, with IBM, with a variety of other Key industry leaders, where we can partner with them to bring their capabilities to our customers and our capabilities to their customers via the Lumin platform.

Speaker 2

So those are some of the things that we've been doing and will continue to do To amplify, to use your words, the growth from our enterprise customers as well as penetrating buildings more effectively, Continuing to light new buildings, all of those things that we do just as a regular course of our business.

Speaker 1

Thank you.

Speaker 5

Thanks, Brett. Operator, next question?

Operator

Our next question is from the line of Frank Louthan with Raymond James. Please go ahead.

Speaker 1

Great. Thank you. When you

Speaker 8

look out at the ILEC operation that you're retaining, what do you think you can build to those customers per home passed? And it looks like you've got a little over 10% of the addressable locations with fiber. What's the overall broadband penetration? And what percentage of those homes Ultimately, do you think you can target to build fiber?

Speaker 2

So I'll let Neil answer the second question About how many homes and all of that. And I'm not 100% sure I have the first question right, Frank, but I'm going to answer the question as I heard it, Which is what do I think we can build to those customers? I think we can build a great product set that we can deliver In a digitally consumed way, if you look at our fiber based quantum fiber New customer experience, I think our NPS is like positive 74, which I would put up against anybody, anywhere. And so I think that what we're building for them is a great product, is a highly secure, robust Product that can be consumed digitally and through very ease of use for our customers. So we'll continue to Deliver that and then Neil?

Speaker 3

Yes, I think Jeff touched on this earlier. I think if you look at the footprint that we retain, About 15,000,000 of that 21,000,000 homes are urban, suburban and Most of that we think or most of those are addressable. Now we're doing more work on that front and we'll share more in future I won't give you a specific number, but I think we have a very competitive cost structure relative to all the public comps that we've seen. And in terms of penetration for the areas that are where we've been there for a while, We see 40% to 50% type penetration in fiber enabled homes. So and very high EBITDA margins from Jeff's perspective because we're heavily investing in self-service capabilities in terms of not only install For the second, third customers, but also in terms of how we serve the customer on an ongoing basis.

Speaker 8

Okay. Thank you. I apologize. My first question was really more on the cost per home passed. I probably didn't phrase that very well.

Speaker 8

Any insight there on what you think You can build in those states that you're keeping?

Speaker 2

Yes, and I won't give you an exact number, but I'll tell you that we think that We have a good cost advantage based on the retained states that we're looking at. If you look at all of our lines of business That we will build infrastructure for our government, our state and local government, our federal government, our enterprise customers, our small and medium business customers, our If you look at all of those demands, we think we can build at a very attractive price point And we'll continue to focus on doing so. And Frank, we do have a separate slide deck on the website, which can help you get to a sort of enablement percentage.

Operator

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

Speaker 9

Hi, guys. Thanks so much. I guess just two questions, Mostly around the Apollo deal. The way you guys break out the segments, you've got the direct costs. There's historically, there was And then there was a lot of kind of corporately allocated overhead costs.

Speaker 9

Is the way that you're kind of getting to these EBITDA numbers for the divested properties, is this A function of the NSA that you talked about striking with, I guess, both counterparties, Neil. And is that going to kind of Fully reimburse you for what you would have been allocating to these entities, so you're kind of net neutral. And how has that NSA actually been nailed down? And I guess The second question was, Jeff, you mentioned kind of cash flow dilution. As I kind of just try to add up the numbers, The Latin American piece is a negative $100,000,000 in EBITDA minus CapEx, and it's $1,100,000,000 for the ILEC, That's 1.2.

Speaker 9

So we're going to tax effect it because you can become a full taxpayer, so that's like maybe negative 800. Then you're going to be a full cash taxpayer, that's maybe going to be another 700, that's about 1,500,000,000. You're going to lose CAF II, that's about 100,000,000, that's 1,600,000,000 You're going to save some money from the debt, right? So let's just say $10,000,000,000 of cash, 5% interest, after taxes of $3.50 So maybe a negative 1.250 kind of on a pro form a basis. Are there other things, other moving parts, Neil, that we need to be thinking about, like as we try to model out what

Speaker 3

Jin, I would say it's EBITDA on a standalone basis. So it's really direct cost to run the business. Yes. And then there's the NSA, MSA netting out of that. So at a high level, our 20 20 EBITDA, like I mentioned, was $1,400,000,000 That will be the impact to Lumin going forward.

Speaker 3

So that's the simple way of thinking about it. And In terms of the math that you're doing, those are the numbers that we provided. Obviously, like I mentioned a couple of times before, you have to make Assumptions in terms of the capitalization of the company going forward. And keep in mind, there's also CapEx for CAF II that's going to fall off. So, over the last 3 years or so, we've been averaging $300,000,000 or so.

Speaker 3

So that will fall off as well. Now we're ramping up other investments, But that's another data point to keep in mind.

Operator

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

Speaker 1

Hey, thanks for taking my questions. First, a quick one for Neil. Do the revenue EBITDA and CapEx metrics you cited for the divested ILEC assets include or exclude CAF II? So are those going to you said they were 2020. I'm wondering if those are going to step down further in 2021?

Speaker 3

Yes. No, those are 2020, but Includes CAF II. So if you think about the CAF II subsidy, that's something we already it's going to be behind us by the time the deal closes.

Speaker 1

Okay. Okay. So those are clean numbers that won't step down. I guess kind of a bigger picture one regarding The buyback plan, is buying back stock prudent in the context of your leverage, I think which is close to 4x if you adjust for CAF II, the The growth trajectory of the business, the cash flow dilution from the deal, cash taxes coming up. I feel like historically you've run the business And even level 3 before in a fairly conservative manner financially, and it just seems like there's a bit of a philosophical change taking place.

Speaker 2

I don't know if it's a philosophical change. We look at how do we return the best value And we believe that dividend is an important part of that. We believe growth is certainly an important part of that. But we also believe that there are times when it's And our Board has decided that now is an appropriate time for us to authorize 1 and that we will continue to look The market will look at our other opportunities to invest and we'll make those decisions opportunistically.

Speaker 3

Yes. The only thing I'd add is what Jeff just said. The key word is opportunistic. So If we think our equity is undervalued, then that is an opportunistic investment from our perspective.

Speaker 1

Okay, Got it. Thank you,

Speaker 5

guys. Thanks, Nick. Operator, next question?

Operator

Our next question is from Ana Goshko with Bank of America. Please go ahead.

Speaker 7

Hi, thanks very much. So I have two questions. So first, I just wanted to clarify the planned use of proceeds and then I had a second question on leverage. So The total sale price is $10,200,000,000 $1,400,000,000 of that is assumed debt. I think people are assuming that that Embark bond due in $36,000,000 if you can just confirm that.

Speaker 7

But then that leaves $8,800,000,000 of cash proceeds assuming that's all shielded from taxes. Is that all going to debt pay down or is that still TBD? Is some of that potentially earmarked for the fiber investment and or potentially other share buybacks?

Speaker 3

So Anna, the 1.4 is the Embark notes. And then if you think About leverage, our objective is to stay leverage neutral. So If I look at kind of our leverage this quarter, we're based on LTM, we're roughly around 3.5%. If you adjust for CAF, We're probably 3.7. So even with the deals and our investments, we expect to Stay roughly in that zip code as we go through the investment cycle.

Speaker 3

So that's the objective.

Speaker 7

Okay. So then you could dial up or dial down the amount debt that you'll repay because your target really is to maintain kind of neutral leverage at this point. Is that fair?

Speaker 3

Yes, that's right.

Speaker 7

Okay. And then on that topic, so your leverage target has been 2.75 to 3.25. But that's for a business that has is heavily skewed with the EyeLock assets, which based on your own some of the parts presentation and has is a lower valued business. So now that you're going to be skewed arguably toward a higher valued business, is that leverage target potentially something to be reconsidered because on a debt to value business, you may believe that you can kind of absorb and maintain a higher leverage level?

Speaker 3

Yes, that's a Good question. And that's why we're comfortable staying leverage neutral over the next few years as we go through the investment cycle. So to your point, if you were to look at the ILEC assets that we're selling on a standalone You could argue that that business would have a much lower leverage and without an investment Commitment or profile. So we could have argued to pay down a lot less debt as we with that transaction, but we're staying where we are And comfortable with that, as we go through the investment cycle.

Speaker 7

Okay. And then have you socialized any of this with the rating agencies yet? Because they may take that approach to the ratings with even potentially like neutral to higher leverage actually I think that you could have a rate it'd be rating beneficial with the separation of the ILEC assets.

Speaker 3

We just closed the transaction today. And

Operator

so we are

Speaker 7

Okay. Thanks so much.

Speaker 2

Thank you, Anna. And France, I think we have changed time for one more question.

Operator

Okay. And with that, our last question is from James Ratcliffe with Evercore ISI. Please go ahead.

Speaker 10

Great. Thanks for squeezing me in. Just following up on the topic of delevering to make sure I understand how you're talking about this. The transaction itself Clearly should be delevering. I mean looking at the numbers you've provided, you're losing $1,700,000,000 in EBITDA and taking in touch over cutting net debt by $10,000,000,000 or so.

Speaker 10

So are you saying that the investments are going to be a meaningful increase in or if we cut to ongoing EBITDA because of the costs or the free cash flow would run negative. I'm just trying to understand how this isn't a delevering transaction. And just secondly, any thoughts on the Impact of potential, I guess they're calling it digital discrimination related legislation on your ability to efficiently deploy fiber within the remaining outlook footprint? Thanks.

Speaker 3

I'll take the first one and Jeff can touch on the second Part of your question. So I would say our leverage neutral comment is very simple. So don't try to read too much into it. We're not saying it's not a forward looking guidance on EBITDA or cash So that's a combination of organic performance of the business, deal proceeds, etcetera. So today, we're at like I was saying, today, we're at 3

Speaker 2

When it comes to digital discrimination and all of those things, and I'll speak For Lumin, but I'll also point out that Apollo is investing in these 20 states for the opportunity to invest in fiber, for the Opportunity to sell broadband services to homes passed in those areas. And so Lumen is doing the exact same thing. We invest in fiber and we'll intend to grow the penetration of And services for customers, high speed broadband services, it's part of what our investment thesis is, It's part of what we think is good for the communities that we serve. And so we will continue to work with government to make sure that we participate in any programs that they have to ensure that this digital divide is conquered, but it's part of what we want to accomplish As we invest moving forward and if you look at our footprint of the remaining states and we've already said a couple of times that 70% are urban or suburban. That gives us a great opportunity.

Speaker 2

We have a high percentage of NDUs, multiple So that gives us a great opportunity to bring broadband to a very wide footprint of our customers. So with that, thank you for your questions and I'll wrap up briefly. And I appreciate everybody getting on the call with very short notice. We're excited about the 2 transactions we've announced. Our overall company profile is rapidly changing as we invest in the business and continue to rationalize the portfolio at The sum of the parts for the remaining business.

Speaker 2

We're pleased with the valuations, but we've also done these transactions to drive investment and operational focus within the remaining business. With a strong balance sheet, we continue to invest in growth and return cash to shareholders Few years and look forward to the growth opportunities that we see in front of us. So thank you again for your participation in this call And we appreciate it very much. Operator, that concludes the call.

Operator

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

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