Lumen Technologies Q3 2021 Earnings Call Transcript

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Provided by Quartr
November 2, 2021

Key Takeaways

  • Lumen recorded sequential revenue growth in iGAM and Large Enterprise segments, driven by diminishing COVID headwinds and a growing sales funnel.
  • The Quantum Fiber platform delivered 25% year-over-year revenue growth in Q3, with 2.5 million enabled locations and plans to add over 1 million more in 2022 toward a 12 million location total addressable market.
  • Lumen is accelerating enterprise investments in edge compute, storage, managed services, and security across its fiber network, securing new contracts with a cloud TV enabler, a clean-tech energy provider, a hyperscaler, and the U.S. Postal Service.
  • The company expects to close its Latin America and ILEC divestitures by late 2022 for net proceeds of ~$7 billion, which will fund growth investments, maintain a $1/share dividend, and target neutral leverage.
  • In Q3, total revenue declined 5.4% year-over-year (–0.8% sequentially), but adjusted EBITDA rose to $2.078 billion with 42.5% margins and free cash flow of $1.072 billion, leading to higher full-year cash flow guidance.
AI Generated. May Contain Errors.
Earnings Conference Call
Lumen Technologies Q3 2021
00:00 / 00:00

There are 10 speakers on the call.

Operator

21 Earnings Conference Call. During the presentation, all participants will be in a listen only mode. Afterwards, we will conduct a question and answer session. Followed by the phone on your telephone. As a reminder, this conference is being recorded, Wednesday, November 3, 2021.

Operator

It is now my pleasure to turn the conference over to Mike McCormack, Senior Vice President, Investor Relations.

Speaker 1

Please go

Operator

ahead, sir.

Speaker 2

Thank you, France. Good afternoon, everyone, and thank you for joining us for the Lumen Technologies Q3 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 statement on Slide 2 of our Q3 2021 presentation, which notes that this conference call may include forward looking statements subject to certain risks and uncertainties. All forward looking statements to be considered in conjunction with the cautionary statements on Slide 2 and the risk factors in our SEC filings.

Speaker 2

We will be referring to certain non GAAP financial measures reconciled with 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 on

Speaker 3

the Investor Relations section of

Speaker 2

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

Speaker 4

Good afternoon, everyone, and thank you for joining us. On today's call, I'll provide a few thoughts on our Q3 An update on our recently announced transactions, a review of our key capital allocation priorities and outline our investment plans as we I'll then ask Neil to discuss the 3rd quarter in more We're pleased with our Q3 sequential revenue progression. In fact, We showed sequential growth in both iGAM and Large Enterprise, showing the resilience of our business as COVID related headwinds begin to diminish. We're also pleased with the continuation of the strong sales we saw in the Q2 and our growing funnel, which should provide a Strong foundation as we drive toward growth. Overall, it's an exciting time for Lumin as we continue evolving and transforming the company for long term growth.

Speaker 4

Our Lumin platform continues to resonate with customers and is the cornerstone of our digital transformation for enterprises. In addition, I believe our Quantum Fiber platform is unique in the market and not only drives an enhanced customer experience, but also drives revenue growth and even lowers the operating costs for our mass market segment, improving the profitability and sustainability of the business. I'm excited to The investments we're making to drive enterprise and Quantum Fiber growth, let me start with an update on our previously announced transactions. For the long term. Those transactions materially change the mix of our business operations, which will amplify and accelerate the positive outcomes for our focused investments in our retained markets.

Speaker 4

Both transactions were executed with strong valuations, which we believe validate a much higher value for our retained portfolio of assets. Worth more than $10,000,000,000 collectively, We're making excellent progress toward closing both deals. We currently expect the LATAM transaction with Stonepeak to close during the first half of twenty twenty two and believe the Apollo transaction will close in the second half of twenty twenty two. After considering the transfer of our Enbark debt to Apollo, pension and OPEB liabilities, tax and other transaction adjustments, We estimate that we will receive approximately $7,000,000,000 in combined net proceeds from the deals. Looking beyond the transactions, if you turn to Slide 4 in our investor presentation, you can see our top five priorities for putting to work The significant free cash flow we generate and the proceeds from these transactions.

Speaker 4

As this slide illustrates, investing in growth It is always our highest priority and we're very excited about what we see as high return, high confidence opportunities to invest in both Enterprise and Quantum Fiber Growth. Let me start with Quantum Fiber. First of all, the Quantum Acceleration On our last earnings call, I highlighted the attractiveness of our mass market assets in the 16 states We will retain after the sale to Apollo and noted that approximately 70% of our footprint or about 15,000,000 locations will be in urban and suburban areas, the majority of which are economically attractive for our Quantum expansion. Our Quantum Fiber Initiatives continue to deliver, growing 3rd quarter revenue 25% year over year. As we transition from micro targeting to a broader market approach for deployment, we have high confidence in our ability to drive significant revenue growth for years to come.

Speaker 4

As I mentioned during the Q2 call, we plan to accelerate Quantum Fiber Investments in our As of the end of Q3, we had approximately 2,500,000 enabled locations within the retained 16 states. Historically, we've enabled around 400,000 locations per year and we expect that pace will continue in the Q4. As we accelerate our investment in Quantum Fiber, in 2022, we expect to ramp that enablement base to over a 1000000 new locations On our way to hitting a run rate of 1,500,000 to 2,000,000 enablements per year as we exit 2022. When deploying Quantum Fiber, we typically expect penetration rates of 40% or better with average build costs of less than After a thorough review of our footprint and given these economics, We expect our total addressable opportunities to be more than 12,000,000 locations. Our Quantum Fiber plan for 2022 is fully funded, And we're very excited about these investments.

Speaker 4

But it's not just excitement born from hope. It's excitement born from experience and accomplishment. As we built Quantum Fiber, we've done more than simply construct new fiber. We built an excellent Quantum experience and product capability Over the past couple of years, we have executed a successful fiber deployment program using a deliberate and micro targeted approach. This approach has enhanced, improved in our capabilities, and we are positioned to execute on our much more aggressive plan.

Speaker 4

Our custom algorithms predict the cost to build and likely penetration levels for our fiber enablement opportunities, maximizing the efficiency of our capital spend. Our experienced and actively engaged is already ramping for our accelerated quantum fiber build plan, and we are confident in our employees' ability to deliver on our plan. We know supply chain is a major topic currently, so let me address that head on. We've been in close communication with our diverse and reliable supplier base and have commitments from them on their ability to deliver. However, we take nothing for granted and this is an area where we will continue to closely Moving to our Enterprise business.

Speaker 4

Rest assured, this much larger segment of Lumin is equally exciting for us, and we will continue to invest aggressively in our edge compute and storage platforms, our managed service offerings and our security products, as well as continuing to automate and improve our customers' digital experience across many of the core networking services. With our extensive long haul and dense metro infrastructure, our network provides low latency, Ultra high capacity, resilience and cost advantages over many of our competitors. We have a robust and extensive fiber footprint for enterprises and that allows us to continue to focus our capital investment on our platform experience, higher penetration in existing buildings, New product offerings and when driven by customer opportunities, success based fiber expansions. A few examples of recent wins in our business These wins include a cloud TV enabler, an independent renewable energy clean technology provider and a hyperscaler. All of this is in addition to our recently announced network modernization contract for the U.

Speaker 4

S. Postal Service. There is strong demand for the enterprise services we enable, and we continually evolve our product portfolio to to leverage our robust fiber network and provide services our customers need to drive success in their businesses. We believe our growth investments coupled with our streamlined post divestiture portfolio will create tremendous The transactions will improve our revenue quality from day 1 and allow for focused investment We will invest for growth and grow where we invest. Another key priority for Lumin is the importance we place on returning cash to Therefore, we have no plans to modify our dividend, which we believe is sustainable at the $1 per share level.

Speaker 4

Although our payout ratio We expect our focused operations to provide the underpinnings for top line growth in 2 to 3 years, which we expect will drive a more normalized dividend payout ratio over time. Our Board believes the return of cash in the form of a dividend is an important of our value proposition, and we are focused on supporting our dividend even as we make the investments necessary to reach our growth As I mentioned on our last earnings call and as you can see in priority 3, we will manage our balance sheet to remain more or less leverage neutral over the next few years. As we accelerate our Quantum Fiber deployment plan, we do expect the Time line to reach our target net leverage ratio of 2.75 times to 3.25 times adjusted EBITDA With our 2 announced transactions, I'm not just using CEO speak when I say But we've also demonstrated our discipline in driving and working for the right deal, not just a deal to get something There is no urgency for us to divest assets and our thoughtful approach to the ILEC sale resulted in additional years of cash flow from operations, A stronger multiple received and a strong partner in Apollo as we move our business forward.

Speaker 4

We'll continue the same open minded, disciplined approach to assess further optimization, both to improve our business mix and to fund growth Lastly, let me talk for a minute about share buybacks. As you've seen, we completed the $1,000,000,000 share buyback We announced last quarter, reducing our share count by about 81,000,000 shares or approximately 7% at our total shares outstanding. I'll also note we funded this buyback largely with our Q3 2021 free cash We executed this buyback quickly because we believe our shares are deeply discounted and do not reflect the significant opportunity for Lumin going forward. Our Board continues to believe this and is prepared to authorize further buybacks on short notice if we believe this presents a With that, I'll turn the call over to Neil to discuss our Q3 results. Neil?

Speaker 5

Thank you, Jeff, and good afternoon, everyone. As Jeff said, we're very excited about the transformation of our company and our plans to drive future growth. Let me begin with our financial summary. For the Q3 of 2021, iGAM and Large Enterprise sequential revenue performance returned to growth. We again delivered solid adjusted EBITDA and expanded margins year over year.

Speaker 5

Cash flow remains robust, providing the flexibility to support Capital allocation priorities. With respect to capital expenditures, enterprise customer demand has been centered around existing on net buildings and less capital intensive higher layer services. We are also seeing benefits from our continued focus on capital efficiency initiatives. As a result, we are reducing our capital expenditure guidance to be in the range of $2,800,000,000 to $3,000,000,000 Note that as we transition from micro targeting to a market based approach for quantum fiber In enterprise decision making, our new network deployment accelerates, we expect capital expenditures to ramp going forward. We remain confident in our EBITDA guidance range of $8,400,000,000 to 8,600,000,000 And as a result of lower capital spending and lower net cash interest expense, our new outlook for free cash flow is 3.6 to $3,800,000,000 Turning to revenue.

Speaker 5

In the 3rd quarter, total revenue declined 5.4% on a year over year basis to $4,887,000,000 It is important to remember that year over year metrics were meaningfully affected by COVID related demand last year, making comparisons less relevant. From a sequential perspective, total revenue declined by 0.8%, an improvement from the 2.1% sequential rate of decline in the 2nd quarter. Business revenue in the 3rd quarter declined 0.4% versus a decline of 2% last quarter. On a year over year basis, revenue declined 5.1% to 3 point $508,000,000,000 Normalizing for the sale of the correctional facility business in the Q3 of last year, the decline was 4.9%. Within our business segment, iGAM revenue grew 1.5% sequentially and 0.6% on a year over year basis.

Speaker 5

The year over year and sequential improvement was primarily driven by increased demand for wavelengths and dark fiber within fiber infrastructure services. IP and data services also grew sequentially within iGAM. Large enterprise grew 0.1% sequentially and declined 5.9% on a year over year basis. Sequential improvement was driven by strength in our federal, state, local and education businesses. While year over year trends were impacted by the surge in COVID related usage last year.

Speaker 5

Mid market enterprise declined 2.3% sequentially and 9.6% on a year over year basis, While sequential performance improved in 3rd quarter, trends continue to be pressured by the delayed decision making environment. Year over year trends were also impacted by the previously noted sale of the correctional facility business. Revenue within our enterprise channels now represents about 75% of our total business revenue. Despite the mid market headwind, enterprise channel revenue was flat on a sequential basis in the Q3 of 2021. Wholesale declined 1.5% sequentially and 7% on a year over year basis.

Speaker 5

And year over year primarily by the large iGAM customer disconnect we referenced in Q1. Computer and application services grew both sequentially and year over year for large enterprise. IP and data services for enterprise channels declined both sequentially and year over year due to declines in new VPN hybrid network deployments. We have, however, seen increased demand for IP on a year over year basis as customers transition to SD WAN and work from home technologies. Fiber Infrastructure Services grew sequentially, while declining on a year over year basis.

Speaker 5

The sequential growth was due to dark fiber And wavelength demand, primarily for our large customers. Year over year declines were largely due to timing of Equipment sales within our federal business. Voice and other services and the wholesale channel declined both sequentially and on year over year basis, in line with our expectations as we manage these areas for cash. Keep in mind that voice comparisons continue to be impacted by higher COVID related usage in the year ago quarter. Turning to mass markets, 3rd quarter 2021 revenue declined 1.6% sequentially.

Speaker 5

Our mass markets fiber broadband revenue grew 25 For the Q3 of 2021, adjusted EBITDA excluding special items was 2,078,000,000 compared to $2,132,000,000 in the

Speaker 6

year ago

Speaker 5

quarter. In addition to $9,000,000 for transactions and separation costs, Special items this quarter include a net benefit of $40,000,000 SG and A benefited by $70,000,000 from a real estate asset sale, while cost of We continue to drive healthy adjusted EBITDA margins during the quarter, growing 120 basis points year over year to 42.5%. As a reminder, our Q3 is impacted by seasonally higher utility costs. Capital expenditures for the Q3 of 2021 were $690,000,000 As discussed earlier, We are focused on capital efficiencies, penetrating existing on net buildings, while supporting our Customers' digital transformation efforts with higher layer services. In the Q3 of 2021, the company generated Free cash flow of $1,072,000,000 and we have increased our full year 2021 guidance for free cash flow as a result of our reduced outlook for both capital spending and net cash interest expense.

Speaker 5

During October 2021, We completed our previously announced $1,000,000,000 share repurchase program. In total, We repurchased 81,000,000 shares, reducing our annualized dividend obligation by $81,000,000 and reducing our shares outstanding by approximately 7%. We have also reduced Our gross pension obligation by approximately $1,400,000,000 by transferring that obligation conjunction with transferring $2,500,000,000 of gross pension obligations as part of our ILIFE transaction. On a pro form a basis, We have reduced our gross pension obligations by approximately $3,900,000,000 At this point, We don't anticipate any required pension contributions over the next few years. Moving on to the business outlook for 2021.

Speaker 5

In addition to the previously mentioned free cash flow and capital expenditure changes, We are updating our net cash interest expense to now be in the range of $1,475,000,000 to 1,525,000,000 and our non cash compensation expense to be approximately $150,000,000 For depreciation and amortization, We now expect a range of $3,900,000,000 to $4,100,000,000 as we have removed D and A expense related to the assets held for sale. As Jeff mentioned, we will manage our debt profile to ensure The recently announced transactions are relatively leverage neutral and our long term net debt to adjusted EBITDA leverage target of 2.75 to 3.25 remains unchanged. As you think about any coverage ratios, it is important to remember that the announced transactions reduce our exposure to legacy revenues and significantly improve the quality and durability of earnings and cash flows going forward. Moreover, a significant portion of capital investments are expected to go towards long life fiber infrastructure with predictable returns. In closing, our company will look very different a year from now.

Speaker 5

We have made significant progress this quarter in taking steps to optimize our asset portfolio with a clear focus on positioning Lumin to capitalize on the growing and most profitable areas of our business. We are encouraged by our sequential revenue performance this quarter and expect business trends to improve as the economy continues to reopen. With a strong balance sheet, we remain very excited about scaling our Lumin Enterprise platform as well as our significant and unique Quantum Fiber opportunity. With that, France, we are ready to open it up for your questions.

Operator

Thank you. Our first Question is from the line of Brett Feldman with Goldman Sachs. Please go ahead.

Speaker 3

Thanks for taking the question and thanks for all that color. We've been getting a lot of questions since the last call about this plan to maintain and operate the business in a way that would seem leverage neutral. And I think the assumption a lot of Investors had is that inevitably we need a very meaningful uplift in investment and as a result might change the way you would approach Dividend, if I listen to the comments you laid out for us today, I think maybe the interpretation has evolved a little bit or it improved. I think that what you're saying is you're comfortable keeping your balance sheet at its current level of leverage in order to fund your entire Capital allocation program, be that dividends, potentially buybacks

Speaker 4

as well as

Speaker 3

the CapEx program and if not as if the balance sheet is specifically Funding any one of those things, but the collection of those things combined. Is that the right way to understand what you've articulated for us today?

Speaker 4

Yes, Brett. Thanks for the question. I think that's right. If you listen to our comments, our prepared comments, We noted that our 2022 plan is fully funded. And while it's way too premature to talk about things beyond that, there are a number of We've been improving our capital efficiency.

Speaker 4

You saw that in this year's results. We'll continue to look at Non strategic assets that we can divest, if that makes sense. And our capital spend is evolving. We're not necessarily spending on certain capabilities where the heavy lifting is already behind us. So a lot of our transformation capabilities and And so there are a number of levers, but we believe that the 5 key priorities that I outlined earlier and they're in the Investor presentation are the key things for our business, and we think we have the funds to do them all.

Speaker 3

If you wouldn't mind, if I can ask Bob question about the fiber deployment. I think you identified something like 12,000,000 locations that you I think there's going to be 21,000,000 locations in the remaining properties. So there's going to be another 9,000,000 or so that Prajwal.

Speaker 4

Yes. We're open to a number of outcomes. What we will do immediately is continue to operate them to provide a great customer to retain the business as much as we can and to manage it for cash flow the way that we've been managing Some of that. And so you are right, there's something like 21,000,000 homes in our overall footprint, and we'll continue to figure out how best to optimize those homes for free cash flow over time. And Neil, do you want to add to that?

Speaker 4

Yes.

Speaker 6

The only thing I'd add, Brett, the $12,000,000 is a view right now based on all the work We've done, but as the technology evolves, we're always looking at different technologies. That number could grow over

Speaker 4

And the $15,000,000 just one last clarification was the homes that We thought we're in urban and suburban areas, the locations in urban and suburban areas. So we'll continue to manage the overall business For free cash flow, like we've done, continue to manage it to provide a great customer experience so that we keep our customers happy and they stay with

Speaker 3

Thank you.

Operator

Our next question is from the line of Eric Luebco with Wells Fargo.

Speaker 7

Any parameters you can give us on how quickly you think you could get to 12,000,000 homes, 5 years, 7 years? And how much of that will be impacted by the decision to keep the dividend in terms of your ability to lean more heavily into CapEx in the coming years?

Speaker 4

Yes. So I haven't put a pin to exactly how many years this is, but I can give you some rough figures that I gave in the comments, which we do about 400,000 homes today with our micro targeting approach. We've been Working to ramp our capabilities and expect to do something like 1,000,000 homes next year in 2022. And then by the end of the year, being at a run rate of about 1,500,000 to 2,000,000 homes per year. And So we'll work that out.

Speaker 4

It's going to be more driven by the mundane things associated with building Infrastructure than any other constraint. But we think that we've got a great team with experience, With capabilities, and we have very high confidence in our ability to hit those numbers and grow the business aggressively.

Speaker 7

Great. And just one more for me. I think you mentioned, correct me if I'm wrong, that you expected you could return to revenue growth in 2 to 3 years. So maybe you could provide us some color on your pathway to Is there an expectation obviously that consumer fiber is growing meaningfully? I assume that's the case, but also that some of your legacy Clients improve or that you improve the revenue trajectory on the enterprise side as well?

Speaker 4

Yes. So first of all, there is the improving We would expect to improve that as well. And we believe in our products and our capabilities. We've been working hard for the last couple of years To build out our capabilities across a broad platform of services and we're focused as a company. We're a fiber Platform company.

Speaker 4

If you listen to the earnings calls of our competitors, you'll hear about theme parks and television networks and wireless spectrum When you listen to Lumin, you hear about 2 things, fiber and how we use our platforms to seamlessly integrate Our capabilities within our customers' businesses or within our customers' homes. So it's fiber to enterprises, it's fiber to consumer, It's fiber to small and medium business and it's the platform in which we deliver those to create a unique and differentiated experience for our customers.

Speaker 8

Great. Thank you.

Speaker 4

Thank you, guys.

Operator

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

Speaker 3

Hey, guys. Thanks. I wonder if you can talk about the enterprise Earlier in the year, the hope was that things would ramp up and help revenue in the back half. Where are we in any one timers in revenue this quarter? And just to push this a little bit, you're maintaining the dividend, you ran through the buyback really quickly, Accelerating investment over time, but revenue this year didn't come through the way you expected early in the year.

Speaker 3

And it seems like you have a lot more confidence In the improvement in the business and is justified by the results this year, our investors believe in. So Just help us think about what you're seeing in the business that's different than what's coming through in the results maybe? Thanks very much.

Speaker 4

Sure. Thanks, So, let me start with the enterprise sales. We're pleased with our sales momentum in the Q3. Nothing is ever linear and it's lumpy sometimes in our business. There's seasonality.

Speaker 4

There are other factors that go into it. But if you look at iGAM, our international and GAM business and our large enterprise, they were particularly strong. And so we're pleased with the momentum that we've seen. The funnel has been building since about midway through the Q1. So we've seen the funnel return To our pre pandemic levels, we continue to augment our products and capabilities.

Speaker 4

We believe the fiber infrastructure we have is a unique Value proposition brings unique value proposition to our customers. And so we're pleased with our competitive position and our ability to take share moving forward. Again, nothing's ever linear, But we have high confidence in our revenue growth and it's part of the reason you did see us go through the buyback so quickly. We Absolutely believe that our business is undervalued. And I've got data points that I can point to.

Speaker 4

We've done some of the parts analysis for you before. If you look at the sale of 20 Kind of out of region, small ILEC states, we sold those places we were not investing. So So you would expect to be at a lower multiple than the places where we were investing. We sold those for 5.5x adjusted EBITDA. So we think that was a very good valuation for that business.

Speaker 4

If you look at LatAm, we sold it for 9 times EBITDA, and we think that's a good valuation For that business, if you look at the remain total within Lumin in the context of that, you can hopefully, you can see why I think We're so undervalued. Then if you couple with that our confidence in our ability to grow, our confidence in the investments that we're making in Quantum Fiber, Our confidence in the investments that we've made in edge computing, edge storage, managed services, The platform to deliver all of our core networking services, our security capabilities, if you look at those things Combined together, you can see why we've decided it was good to be aggressive in the pace of buyback.

Speaker 6

Yes. On Your question, Phil, on one time, nothing specific to call out this quarter. If you look at our fiber and infrastructure revenue, we had strong growth sequentially. Now some of that is professional services and equipment, but we see that every quarter. So nothing out of the ordinary.

Speaker 6

In fact, those types of non recurring revenues were actually down on a year over year basis. So and that tends to be

Operator

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

Speaker 9

Great. Thank you. Maybe just to follow-up on the first question. Do you expect the sequential improvement that we saw in the revenue Can you give us a little bit more in terms of the mix of maybe new customers versus existing and any trends that you could point to in terms of on pricing. Thank you.

Speaker 4

Yes. I'll let Neil chime in on this. That'd be the kind of a big picture. Look, we don't typically We like the sales that we saw in the Q3. Nothing is ever linear, but We're executing and working hard in the Q4 to drive our sales, to drive our revenue growth.

Speaker 4

There's another part of your question I was going to address.

Speaker 6

I can, thank you. So I think on your question on new and existing customers, Keep in mind that when it comes to large customers, we do some level of On the mid market side, we do have a focus on new logos, but that environment has been for obvious reasons been In terms of your specific to sequential improvement, I'll just underline what Jeff said, it's not going to be linear. But as Jeff highlighted, we do see the leading indicators in addition to the mix change from the transaction and The growth we see in the areas that we're investing, we feel confident that in 2 to 3 years, we'll see the top line inflection. And then you also had a question about you on pricing. We don't really the pricing environment continues To be very healthy, we don't see any issues from that perspective and you can see that in our margin expansion.

Speaker 9

Got it. Thank you.

Operator

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

Speaker 8

Hey, guys. Thanks for taking the questions. Neil and Jeff, I guess, you talked about kind of how the portfolio will pivot More towards enterprise, obviously, and away from some of the what you might have described as more challenged kind of consumer businesses. As we look at the Consumer mass market business performance right now, how would you characterize the relative performance of the piece you're going to keep And the piece you're getting rid of from the pro form a look perspective. I guess the second question is, with the coming end of CAF II,

Speaker 4

I think you guys said even

Speaker 8

though you're cutting CapEx that you're expecting to spend more on the core initiatives next year, Maintaining high leverage, I just want to kind of maybe talk about the elephant in the room, which is that right now, You're a 5% declining revenue company with very high leverage, cutting your CapEx. And after 3 months, Telling us that you're after reconsidering the dividend, now you're definitely going to keep paying it and maybe even spend some more on stock buybacks. I mean, It's a story that feels like we've seen it before and it hasn't ended well. So I think we just need to talk about it, Jeff, and maybe just Explain it. Thanks.

Speaker 4

Sure. I'll tee up and then let Neil try. There's a lot packed in there. Legacy consumer versus the business that we're selling versus business that we're keeping. We don't really look at it and certainly don't give out information on it separately.

Speaker 4

But the legacy business is performing Like we've seen it perform, and our team has done a really good job of managing that business for cash. And we have invested as we thought was appropriate to continue to expand our homes. Past, if you look at The retained 16 states at the end of the year will have something like 2,600,000 fiber enabled homes. You've seen us grow our consumer and mass market business on At the rate of, I don't know, 45,000 subscribers over 100 megabits per quarter, something like 28,000,000, 30000 of those on PureFibre. And so we continue to have the parts of the business where we're investing And we continue to have the parts where we're not investing, we manage those for cash.

Speaker 4

Part of the rationale behind the sale To Apollo was that they will invest more in those markets. We think there's great opportunity in them. We just weren't going to invest in them at that we thought that they deserved and we think that Apollo will do that and gave us good valuation for it. And so it's Part of our funding philosophy is how do we fund what we want to do. Part of it is to sell assets, but part of it also is to Shift some of that funding obligation to somebody else.

Speaker 4

They can grow that and we don't spend the money there. Now we have I've gone through it. I can go through it again. But we have lots of sources of we have significant free cash flow that we generate, And we have opportunities to continue to rationalize parts of the business that make sense for us And parts that don't make sense for us, but we think that we're in a very good position to do the things that you sound a little dubious about. But we think we're in a good position to do those things, and we'll continue to focus on making sure that we maintain our dividend, that we Invest in growth, 1st and foremost, that we invest in the growth that we think we can drive, and we can maintain our dividend, and we can But stay relatively leverage neutral.

Speaker 4

And I've not made any commitment to doing a share buyback, additional share buybacks. But I do want you to know that our Board is very prepared to authorize 1 if we thought that was appropriate. And so, Neil, I don't know if you want to add to that.

Speaker 6

Yes. So I'd add, David, I think on the mass market, we're scaling up our fiber investment. And And so we see that as a significant opportunity. I think the economics are fairly well understood. And so you're going to see us ramping That business and it's a long life asset with predictable returns.

Speaker 6

On your comment on the 5%, you should also look at our sequential performance. So, yeah, We're talking about COVID last year where we had a fair amount of COVID related demand and voice performance. So a better number to look at is sequentially. Yes, we did decline what we declined 0.8 percent and iGAM and Large Enterprise grew on a sequential basis. So, yeah, like I mentioned before, it's not going to be linear, but we are encouraged by the revenue trends we see.

Speaker 6

And the other thing to keep in mind is the capitalization of this business is rapidly changing and it's going to change rapidly Going forward, since the Level 3 acquisition, we paid down about $7,000,000,000 of debt. We just announced $10,000,000,000 Transaction in a quarter, we have 7% less outstanding shares. So yes, we'll continue to transform the business and try to support the capital priorities that

Speaker 8

That's right. All good points. Thank you.

Operator

Our next question is from the line of Mike Rollins with Citi. Please go ahead.

Speaker 3

Thanks and good afternoon. First, I was just curious if you can unpack the reasons why the gross Proceeds of $10,200,000,000 drops to about $7,000,000,000 on a net basis on Slide 5. Second, I was Curious if you could just unpack if there are any costs or dilution that you had to incur to transfer the Pension liabilities to another entity. And then just finally, while we're on the subject of kind of cash Well, curious if you could just talk about some of the moving pieces for 2022 that everyone should be mindful of, whether it's on the cash Tax front or the CAF II front or any other significant moving pieces that could affect just recurring cash flow in a positive or negative way. Thanks.

Speaker 4

Yes. So why don't I try and unpack the 10.2 To $7,000,000,000 in the near, you might want to talk about cash flow for 2022. So look, in big pictures, It's what I said in my prepared remarks. There are a lot of puts and takes. But starting with the Embark debt, We're transferring $1,400,000,000 worth of Embark debt.

Speaker 4

That's a liability that we're eliminating on the Lumin side And transferring over, so that's actually one of the proceeds of the deal is that we're using that to transfer that liability. Then there are things like pension and OPEB liabilities in there, a few $100,000,000 and And we have taxes and deal costs. And so we can at some point kind of break some of those down, but those are the big picture items. And it goes from 10.2 to 7.

Speaker 6

Yes. So I think if I can add, Jeff, I think the big ones are, like Jeff said, And the purchase agreement has been filed, so feel free to look through it. So there's $1,400,000,000 of Embark debt. We provided debt adjustment. So that's another $100,000,000 between pension and OPEB liabilities, that's another $300,000,000 So that's bulk of it.

Speaker 6

So like Jeff said, Just to underline that point, that's a liability transfer. And the rest of it is basically transaction costs and taxes that we And now keep in mind, these assets have very low tax basis. And if you think about, we will be using NOLs, But at the same time, we are also using NOLs for our operating income. So it depends on the timing of the deal. And so it is an estimate.

Speaker 6

The The $7,000,000,000 is an estimate. The key word there is that's discretionary cash flow that we can decide on How do we support our capital priorities, whether to invest in the business, pay down debt, and we'll do that as we go along. So from a cash flow perspective, That's something to keep in mind. Also keep in mind that we are generating strong free cash flow today. So if you just look at our Q4 guidance, based on our updated guidance, we'll generate strong free cash flow there even after factoring in the dividend.

Speaker 6

So we feel pretty good about supporting all the capital priorities that Jeff laid out. Nothing specific to highlight in terms of 20 22, I think we've already talked about cap. You need to make sure you factored in the capital reduction there as well. And then we'll have more to say when we Provide next year's guidance. In terms of the pension liability transfer, I won't get into the specifics, but like we said

Speaker 3

And so just to follow-up, and I appreciate all that So the $7,000,000,000 cash does not include the $1,400,000,000 debt reduction. So the Kind of enterprise value would be the 7 plus the 1.4 for 8.4. Is that the way to think about it?

Speaker 6

Well, the transaction value is the 10.2. The 1.4 would be on top of the 7. So the Southern is truly discretionary cash.

Speaker 4

And the 1.4 is a debt reduction, But it's through a transfer rather than just use of discretionary cash. So you're right.

Speaker 8

Thanks.

Operator

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

Speaker 3

Hey, thanks for taking my questions. First, I appreciate the new disclosures on the fiber to the home front. When you point to enablement costs being sub $1,000 per location,

Speaker 4

Should we think of that

Speaker 3

as being well below $1,000 in the earlier years and increasing over time? Or should it be relatively consistent over the course of the project? And to confirm, is the $12,000,000 opportunity inclusive of the fiber locations you have today or is that incremental to them?

Speaker 6

Yes. So the 12 is the total. So the incremental would be roughly in the 10 zip So we have about 2.5 today in the retained states. In terms of the 1,000, We are building at a significantly lower cost today. So that's kind of think of it as what we think as an average.

Speaker 6

But the reality is given Yes. The macro conditions in terms of labor costs, etcetera, Trying to give you a number 2, 3 years out, I don't think anybody has that level of visibility, but what we are And is the return profile of that business, because we also see a lot of opportunities in terms of We're going to increase ARPU, not only just for the base service, but all the things that we're investing in, in terms of managed Wi Fi, security and other capabilities. So we still irrespective of the actual cost, we think we have a Really big margin of error, if you will, in terms of generating great returns.

Speaker 3

Okay. And then can I ask one EBITDA related question too? If I look at your implied EBITDA guidance range for Q4, the EBITDA you generated in Q3 is towards the low end, what you did in Q2 is in the lower half. I know you don't give specific quarterly guidance, but is there anything we should be cognizant above that prevent EBITDA from coming in toward the lower end of the range in Q4.

Speaker 6

Well, we haven't changed the guidance all year. So what I would say is we Providing annual guidance and our guidance has been the same from the beginning of the year and the range is the range.

Speaker 3

Okay. All right. Well, thank you, Neil.

Operator

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

Speaker 8

Great. Thank you. So if you're not intending to cut the dividend even after the Apollo deal, is there a certain point where You guys can put a line in the sand and say, at this point, we really think we can have positive sustainable top line growth. Is that a year out, 2 years, 3 years? How should we think about that?

Speaker 4

Well, I said earlier that With the what we are investing in through Quantum Fiber, through our edge compute and all of our other capabilities, the Lumin platform, We believe that we'll and the divestiture of certain assets, we believe that we'll return to top line growth in 2 to 3 years.

Operator

Our next question is from the line of James Svetlquist with Evercore ISI. Please go ahead.

Speaker 1

Thanks. If you could give a little more color on the CapEx front. I know it's clearly going to ramp next year as you accelerate the quantum fiber build out. But in terms of the and you gave some commentary in the quarter of what to the decline. But what sort of ROIs are you getting on this lower capital level?

Speaker 1

Are they sort of higher or similar? And absent the quantum fiber ramp, how should we be thinking about the capital intensity of essentially of the business side of the business going forward. Thanks.

Speaker 6

So on capital, First thing to keep in mind is, we are leveraging a fairly large investment, right, in terms of the infrastructure that And so we're focusing a lot on that buildings. Part of that is the current environment, But as the economy continues to reopen and enterprise start investing in new locations, we will also ramp up Adding new locations. In terms of ROIs, we continue to see very good ROIs On the investment that we make on the enterprise side and I think the consumer, most folks are familiar with the dynamics there. So that's ROI is not an issue for us. It is really managing the legacy revenues for cash that really yields The returns, if you will, from our perspective.

Speaker 6

In addition to that, we continue to focus on capital efficiency initiatives. So we We continue to focus on how we get more efficiency in terms of our processes, how we deploy capital, Unit cost of capacity, so those things continue to be areas of focus for us.

Speaker 4

Yes. Just to augment Looking at us from the outside, you probably discount that capital efficiency. Looking at us from the inside, we do not discount that. Those are real numbers that we see benefit from. And if you look at what we've been investing in On the enterprise side, it's been pretty significant.

Speaker 4

We first of all invested in making sure that our cost structure is appropriate, that we can deliver A level of service with a lower cost every year to deliver that and make sure that we're improving our service quality. We've done that. We continue to invest in edge computing and edge storage. We think those are great opportunities for us. We gave you at the beginning of the year, we said we'd have 95% of The U.

Speaker 4

S. Within 5 milliseconds of our Edge facilities by the end of the year. We finished that somewhere at the end of the second quarter, beginning of the third quarter. We actually over exceeded in the coverage and in the timeframe, we were much faster And then in the cost to deliver. And so we are very careful with our investments.

Speaker 4

We've augmented our adaptive networking, Our connected security, we're working on our unified communications and collaborations capabilities. We're continuing to augment our platform and our services, And we see success in the market with those. Now all that's in addition to Quantum Fiber, Which we intend to ramp as I've already talked about a couple of times. Thanks for the question, James.

Speaker 3

Thank you.

Speaker 2

Francie, time for just one more question.

Operator

Very good. Our last question then will be from the line of Jonathan Chaplin with New Street Research. Please go ahead.

Speaker 3

Hey, guys. Thanks so much for squeezing me in. So I just wanted to follow-up on the consumer business. Over the If we think of 2019 as sort of a baseline year, it looks like The pace of net adds in the fiber business and even in the non fiber business on the consumer side has slowed quite a lot. And on the fiber business, that's despite increasing your addressable footprint.

Speaker 3

I'm wondering if you could just talk to What you're seeing in the market on the in broadband, what might be sort of creating headwinds for growth there? And the reason I ask is, we're on record of saying if you can put the $10,000,000,000 into deploying fiber, It creates an incredible amount of value for you. But obviously, it's a 6 to 7 year process. You're asking investors to look many years ahead before we'll see cash flow falling through from this project in a material way. And so sort of gaining confidence in your ability to drive penetration into those markets, I think, is really key To getting an appropriate multiple for what you're building here.

Speaker 3

And then Second question is, if I may, Jesse, the you sold you have conviction that the stock is worth a lot more The way it's trading at the moment and that was reflected in the share repurchase that you guys did in the Q3. Why not funnel All the cash that you're paying in dividends into share repurchase, if it's that undervalued. You're obviously not getting credit for the dividend based on the yield. So why not just put it all into share repurchases? Thanks.

Speaker 4

Yes. So let me take The first question, I'll let Neil go through some of the detailed answers and then I'll come back with the stock price conviction and what we're doing there. If you embedded in your question about consumer is kind of well, Do you believe that the $10,000,000,000 is a good use of investment? We agree with that. We agree with that.

Speaker 4

Ben, I'm just going to go a little bit into Why not do stock repurchases because we believe they're investments that are good for shareholders. But then we also kind of Introduce the notion of, yes, we got to prove it, that it's good. And that's exactly what we've been doing over the last couple of years. We know that building fiber is not the hardest thing in the world. We can build fiber.

Speaker 4

We can build fiber to a bunch of locations. But then how do you deliver the service to customers? And so we've been working on our best in the business capabilities, our Quantum fiber capabilities to turn up customers with low touch with a digital experience in the way that they want to have the experience, to be able to layer other capabilities on top of that. And then we wanted to prove to ourselves as we moved away from investing in bonding And vectoring and things you have not heard us talk about for several years because we stopped doing them. As we put all of our focus on fiber, We wanted to prove that we could get to the penetration rates that we expect, and we can, and we have.

Speaker 4

And we give you some insights Thinking that should be 40 plus percent penetration in places where we've been marketing for periods of time. And We've done exactly what some of your question implied, which is prove that you can do this and prove that you have the And build those capabilities so that we can do it quickly, not just wait 6, 7 years to start seeing The return. On the stock price conviction, we're absolutely convicted that the stock price is undervalued and it's Part of our capital allocation process, but that we have other aspects of the capital allocation that we want to do too, investing in growth, Investing in the Quantum Fiber business, investing in our fiber footprint for enterprises, investing in our platform and our services that we layer On top of those things and then maintaining the dividend, maintaining our leverage range and Those are in some ways competing uses of our capital. But to several questions We've already answered. We think we're in a good position to deliver on all of those.

Speaker 4

We will be in a position if we if the Board decides that it's Appropriate for us to do an additional buyback, we will act quickly and we'll do so. It may not be the same pace of buyback that we did in the last 1, we were pretty aggressive about that, but we will authorize 1 if the Board thinks that's the appropriate thing to do.

Speaker 6

Yes, I think Jeff, you covered most of it. I think your question on the fundamental thesis in terms of the market and the All of that we see and we're leaning in. Our fiber net adds were a little softer this quarter than we would like and that is I have to prove this out first. So we had a micro targeting strategy and we've proven it out. We've seen You know, how it resonates with customer, we've invested in our processes and capabilities, and Now we're doing the pivot to go to a more market based approach.

Speaker 6

And that takes a little bit of time to get an organization our size to scale up is something we see as creating a fair amount of value and we're not constraining it. Like Jeff said, in In terms of the priorities, there's a reason why number 1 is invest to drive growth and that's something we will prioritize.

Speaker 4

So thank you, Jonathan, for the question. And as you heard in our answers to Jonathan's questions and all of your questions today, we have a lot of optimism And excitement here at Lumin is we're growing markets, investing for growth through Quantum Fiber. We continue to enhance our already powerful enterprise platform And capabilities, we continue to return cash to shareholders. We're bullish on our future and excited for the ongoing transformational work that lies ahead. So I want to thank all of you for joining today's call and as always the interest in Lumin.

Speaker 4

Thank you all.

Operator

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

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