Christopher David Stansbury
Executive Vice President & Chief Financial Officer at Lumen Technologies
Thank you, Jeff, and good afternoon, everyone. I want to begin by thanking the team here at Lumen for a warm welcome. While it's only been a few weeks since coming on board, I can tell you that the excitement for our goals and initiatives is palpable. I look forward to being a part of the transformation occurring at Lumen and believe I bring a unique perspective as we execute on our plan. I'll begin with the financial summary of our first quarter. We reported adjusted EBITDA, excluding special items, of $1.966 billion and generated a 42% margin. A number of items impacted margins this quarter, which I will discuss in more detail later in my remarks. Our reported revenue was down 7%, meaningfully impacted by the completion of the CAF II program and seasonal factors within our Enterprise business.
Our free cash flow was $846 million. We returned $271 million to our shareholders during the quarter through our quarterly dividend. Additionally, we reduced net debt by over $450 million during the first quarter and by approximately $1.5 billion since the same time last year. As we announced on our last earnings call, we are adjusting our mass markets product revenue reporting categories this quarter to fiber broadband, other broadband and voice and other. The two key reasons for these changes are the increasing importance of our Quantum Fiber platform and the completion of the CAF II program. Given this relatively small impact, RDOF support revenue will be included in the voice and other category in our new reporting structure, consistent with other state support payments. We currently expect to begin recognizing RDOF support revenue during the second quarter. But even on a full year basis, RDOF will have a very small impact on our results, particularly after the expected sale of our ILEC assets in the fourth quarter.
We've also provided added disclosures for our mass market segment associated with our 16 retained states, which we have referred to as RemainCo in our earnings materials, and those are internal estimates, which may be subject to change. These materials can be found in the Investor Relations section of our website. Our goal is to allow investors and others to begin to model our mass market segment as we near the divestiture of the 20-state ILEC business to Apollo. Given the complexity, we do not intent to provide prior period estimates, but will provide RemainCo estimated quarterly results through the close of the transaction with Apollo. In addition, we're actively working to help investors better understand the drivers of our business segment and hope to provide additional disclosures in future periods. We experienced typical sequential seasonal pressures on revenue in the first quarter with an added headwind from supply chain constraints. With respect to supply chains, we've been managing through the impact well, but this is an ongoing issue that we will continue to manage and watch very closely, and the same can be said for the impacts of inflation. Moving on to revenue performance
On an adjusted basis, revenue was down 2.2% sequentially, similar to the 2% sequential decline we had in the first quarter of last year. On a year-over-year basis, total revenue declined 7% in the first quarter to $4.676 billion. Year-over-year metrics were materially impacted by the end of the CAF II program, which was partially offset by a related onetime CAF II revenue release in the first quarter of 2022. When adjusted for CAF II, foreign currency and the sale of our last remaining correctional facilities business last quarter, the year-over-year rate of decline was 5.5% versus a decline of 5.2% last quarter on the same basis. Within our two key segments, business revenue declined 5.4% to $3.401 billion year-over-year. When excluding foreign currency headwinds and the sale of our correctional facilities business, revenue declined 4.9% year-over-year. Mass markets revenue declined 11.1% to $1.275 billion year-over-year. Adjusting for the CAF II impacts mentioned earlier, mass markets revenue was down 7.2%, in line with the performance in the fourth quarter. This will be the last quarter with the year-over-year negative impact of our Prism TV shutdown which was about a 70-basis point headwind to growth this quarter.
Wholesale revenue was down 4.3% year-over-year similar to last quarter's performance. We continue to manage this business for cash. As you look at our enterprise channels, which is our business segment, excluding wholesale, reported revenue declined 5.8% year-over-year. When adjusting for the impacts of foreign currency, and the sale of the correctional facilities business, revenue was down 5.1%. Our exposure to legacy voice and other revenue which we also manage for cash has dropped by 340 basis points year-over-year and now represents less than 21% of enterprise channel revenue. IGAM revenue declined 2.1% year-over-year. On a constant currency basis, IGAM declined 1.3% year-over-year versus a 1% year-over-year decline in the fourth quarter on the same basis. We had particular strength in our managed security, cloud services and IP services. Large enterprise revenue declined 8% year-over-year.
The sale of the correctional facilities business is reflected in this channel and resulted in an approximate $10 million negative impact year-over-year. Normalizing for this sale, large enterprise declined 6.9% year-over-year. We had growth in managed security, cloud services, unified communications and IP services. Overall, large enterprise growth was negatively impacted by equipment in our IT Solutions business, both of which tend to experience quarterly fluctuations. Mid-market enterprise declined 8.2% year-over-year. As Jeff said, we're not yet satisfied with the mid-market results but see the subsiding of COVID as positive for this channel. We had growth in cloud, IT services and IP services as well as wavelengths, offset by lower voice revenue and onetime revenue from CPE sales. As I mentioned earlier, on an adjusted basis, mass markets revenue declined 7.2% year-over-year. For ease of comparison and footnoted on our slide, we recognized approximately $14 million of our $59 million CAF II benefit this quarter within the 16 retained states. This compares to approximately $53 million and $54 million of CAF II revenue recognized in the retained states in the fourth quarter of 2021 and the first quarter of 2021, respectively.
Our mass markets fiber broadband revenue within our RemainCo footprint grew by nearly 18% year-over-year and in the first quarter represented more than 15% of our total mass market revenue. With the anticipated close of our ILEC sale, our exposure to legacy voice and other services will improve and reduce our annualized voice and other revenue by over $650 million based on our first quarter 2022 results and after adjusting for the CAF II release. During the quarter, we added 27,000 Quantum Fiber customers, roughly in line with last quarter as we pivot to our market-based approach and prepared for our significant shift in the go-to-market strategy. This brings our total quantum subscribers to 830,000 with 762,000 of the subscribers within the 16 retained states. During the quarter, total enablements were approximately 160,000 with approximately 130,000 of those enablements located in our 16 retained states, bringing total enablements in the retained states to $2.67 million as of March 31, with approximately 250,000 additional locations enabled in the business to be sold to Apollo. ARPU in the retained states was approximately $59 million. And we see ARPU expansion opportunities with the adoption of in-home WiFi solutions, security services and multi-gig speeds among others.
As you frame our quantum journey, we wanted to share a few important expectations for the positive impact product will have in our future results. We expect that as Quantum ramps, we will achieve overall broadband revenue and subscriber growth within mass markets in the second half of 2023. As of March 31, our penetration of legacy broadband subscribers in our retained 16 states was down to approximately 13%, highlighting the low risk of quantum cannibalization and our significant share-taking opportunity as we accelerate the quantum build. In fact, roughly 90% of our 2021 fiber gross adds were new to Lumen. Within the same footprint, our quantum penetration stood at approximately 29%, but we would expect that to fall in the near term as we ramp enablements. That said, today, we are pleased to announce that our Quantum 2020 vintage penetration is greater than 22% and ramping nicely, supporting our expectations for the longer-term penetration opportunity.
This is bolstered by our current Quantum NPS score within RemainCo, which is greater than positive 50, highlighting the quality, speed and customer-friendly nature of our fiber offering. Quantum is an all-digital prepaid product that features simple pricing with no contracts, helping reduce call center volumes and bolstering our NPS scores. Turning to adjusted EBITDA. For the first quarter of 2022, adjusted EBITDA, excluding special items, was $1.966 billion compared to $2.165 billion in the year ago quarter. Our adjusted EBITDA this quarter benefited from $59 million from the CAF II revenue release mentioned earlier. Special items this quarter totaled $52 million and were related primarily to transaction and separation activities. Our adjusted EBITDA margin was 42% this quarter. When comparing margins to the year-ago period, you should consider the nonrecurring CAF II benefit of $59 million this quarter and the $123 million of high-margin CAF II subsidy revenue in the prior year period. When adjusting for these impacts, our first quarter 2022 margin would have been 41.3% compared to 41.6% in the year ago period. Capital expenditures for the first quarter of 2022 were $577 million.
We continue to focus on capital efficiencies; however, when you think about our capital spending, be aware that we had a meaningful year-end 2021 spend ahead of our quantum acceleration. Lower capital expenditures this quarter does not change our outlook for the year. In the first quarter, capital expenditures represent accelerated investment in engineering and preconstruction activities. Future quarters will represent accelerated construction results. Also note that there will be timing differences with respect to reported capex based upon payment terms for our purchases. Our full year capital guidance remains unchanged. With respect to our maintenance capital spending, as we look at the average over the last few years, it has been in the $400 million to $500 million a year range. In the first quarter of 2022, the company generated free cash flow of $846 million which was positively impacted by the timing of capital expenditures, as I mentioned. Moving on to our outlook. We are adjusting our expectations for both EBITDA and free cash flow to reflect the expected closing date of our ILEC transaction, as Jeff highlighted earlier. Our capital expenditure guidance range remains unchanged given the relatively small impact of the new expected ILEC closing date on that metric.
We now expect 2022 adjusted EBITDA between $6.9 billion and $7.1 billion and free cash flow between $2 billion and $2.2 billion. In order to provide a bit more detail on the other category within the waterfall chart in our earnings presentation, you should consider three main moving parts: investing in opex for growth, the synergies expected related to transactions and lower transformation cost savings expected in 2022 as we focus resources on separating the pending divestitures. I think it's fair to consider these three items as roughly equal in size. Also, be aware that we expect both the synergies as well as the pause on transformation savings to be transitory in nature. Recall that in terms of special items for 2022, we expect a significant ramp-up in costs compared to prior years, primarily driven by dedicated third-party costs to support transition services for the divestitures. The cost for these services are removed from adjusted EBITDA.
The reimbursement for these services will be in other income with no material net impact to our cash flows and reflected in our schedules of non-GAAP items impacting net income. In closing, I look forward to engaging with all of you and our analysts and investor communities and hope to have an opportunity as the year progresses to meet many of you in person to discuss what I see as a tremendous opportunity for shareholder returns here at Lumen. Our team is focused on executing on our growth initiatives for Lumen Enterprise and scaling our Quantum Fiber business, which we expect as we drive ourline growth. As a reminder, in addition to free cash flow generated from the business, we expect about $7 billion in discretionary cash proceeds later this year from the transactions after the transfer of debt, taxes and transaction-related costs. The combination of free cash flow from the business and proceeds from portfolio rationalization efforts support our 2022 capital allocation priorities. With that, we are ready for your questions.