Lumen Technologies Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 31, 2023

Key Takeaways

  • Sale of the EMEA business and majority of CDN contracts is expected to generate approximately $1.5 billion in net proceeds for debt reduction and allow greater focus on differentiated core operations.
  • Agreement with creditors holding over $7 billion of debt extends a large portion of maturities to 2029 and secures $1.2 billion of new financing, reducing covenant risk.
  • Cost optimization measures, including a 4% workforce reduction and other initiatives, are projected to deliver around $300 million in annualized savings to boost agility and efficiency.
  • Sequential Q3 operational improvements—disconnects down 4%, installations up 9%, usage up 5%, VPN renewals up 4% and voice migrations up 21%—are lowering churn and improving revenue performance.
  • Launch of the new Network-as-a-Service offering, Lumen Internet On Demand, now generally available with lighthouse customers across 13 industries, underscores the company’s push into new digital growth areas.
AI Generated. May Contain Errors.
Earnings Conference Call
Lumen Technologies Q3 2023
00:00 / 00:00

There are 11 speakers on the call.

Operator

Lumen for growth. I'll start with some major structural accomplishments. 1st, we've made significant progress in simplifying Lumen with 2 divestitures. We expect to close the sale of our EMEA business to Culp tomorrow, November 1, earlier than planned. This transaction will generate approximately $1,500,000,000 in net after tax proceeds, which we anticipate will be used for debt reduction.

Operator

2nd, 2 weeks ago, we announced the sale of the majority of our CDN contracts, a transaction that will enable us to continue to focus our resources on businesses is where we can differentiate ourselves in the market at scale. Next, the balance sheet. We successfully reached a broad agreement with creditors that hold over $7,000,000,000 of the outstanding debt of the company and its subsidiaries. The transaction will extend a large portion of our debt maturities and remove questions regarding the company's compliance with its debt covenants. The creditor group will also provide $1,200,000,000 of new financing.

Operator

The closing of the transaction is subject to the satisfaction of certain conditions, including completing work with our banks to extend our revolver in term loan A and getting approval from other creditors as needed. In addition to restructuring the balance sheet, we've made the difficult decision to reshape and right size Lumin for Growth. We're taking immediate actions, which will result in about 4% fewer people inside the company. This reorg, along with additional optimization initiatives, will generate annualized savings of approximately $300,000,000 As you might expect, this is a difficult but necessary decision given the revenue pressure we felt from the noise in the market regarding our creditor discussions as well as global macroeconomic pressures. These proactive steps to address our balance sheet and lower our cost base will reduce the noise, It will improve our agility and efficiency and it will enable us to better compete in the markets we serve.

Operator

Now I'd like to talk about some of the operational improvements we're seeing in our business segment. As we've shared, we have a 3 pronged strategy to transform this business. 1, secure the base 2, drive commercial excellence and 3, innovate for growth. And we're making progress against all three. Securing the base boils down to 5 things: minimizing disconnects, maximizing installations, driving increased usage, renewing customer contracts and migrating our customers to newer technologies.

Operator

If we get these five things right, We reduced churn. So let me share this quarter's sequential performance for these 5 metrics in our North America, large enterprise and mid market sales channels. We saw a 4% reduction in disconnects, a 9% increase in installs, a 5% increase in usage, a 4% increase in VPN customer renewals and a 21% increase in voice migrations. With heavy use of data and analytics to understand customer behavior and an agile approach, we created a win formula to address churn and delivered improved business revenue performance this quarter. Obviously, a lot more work to do here, but we do see a path to success.

Operator

Let's look at driving commercial excellence. This is about sales execution that ultimately yields growth. Simply put, there's just 2 ways to grow. You either sell to net new customers or you sell more products and services to existing ones. We're making progress against both of these growth vectors.

Operator

First, we added more than 2,500 new logo customers so far this year across large enterprise, mid market and public sector segments despite the headwinds I described earlier. Year over year, we've seen 47% more grow products sold to existing customers or 16% normalized for a large deal that I'll talk about in just a moment. Finally, we achieved 14% higher seller productivity year over year, a very impressive metric given how many new sellers we have. A big Part of driving commercial excellence is going after net new markets. For example, we see huge potential in the digital inclusion market, which presents an opportunity for Lumin to help states bring reliable broadband connectivity to unserved and underserved markets.

Operator

We won our 1st large multiyear deal in the space, representing over $400,000,000 of revenue when the State of California chose Lumin as a key strategic partner. We're now bringing the same commercial framework for public private partnerships to other states as they seek to bridge the digital divide. All right. The 3rd prong of our business strategy, innovating for growth. This is all about bringing net new capabilities like Network as a Service or NAS to the market and gaining access to new profit pools.

Operator

We've made great progress driving adoption of our first NAS offering called Lumen Internet On Demand. This new digital capability is now generally available and has lighthouse customers in 13 industries including healthcare, technology, insurance, retail, manufacturing and public sector to name a few. In addition to selling NAS directly to customers, Lumin is also leveraging our partner ecosystem to drive scale. Customers can buy Lumin Internet on Demand through and 36 enabled data centers in 10 different markets across North America through our great partners Digital Realty and Equinix. Our NAS product roadmap is industry defining.

Operator

So we'll be adding soon we'll be adding API capability to allow customers to activate NAS in their own business applications, then we'll layer in security with DDoS and then we'll offer dynamic bandwidth capability for ultimate usage flexibility. Now together with our Edge Fabric and ExaSwitch, Lumin NAS is setting the table for a new market category for the modern communication infrastructure platform, one that optimizes application performance across hybrid architectures of on prem, at the edge and multi cloud and one that makes room for rapidly changing network needs as Gen AI becomes mainstream. We are cloudifying telecom. It's going to be disruptive to the industry and we are playing to win. All right.

Operator

Turning to mass markets. We had strong growth in Quantum Fiber Enablements, where our construction factory is operating well. Now that said, our subscriber adds this quarter were below our expectations. During the quarter, we took significant steps to improve operations as we combine CenturyLink Fiber with Quantum Fiber, merging all inventory and Field Tech systems into 1 and vastly improved order to install commitments. While we believe these operational activities coupled with lower move activity dampened subscriber adds this quarter, we do know that we need to do better selling and penetrating existing bills.

Operator

Therefore, as we face a more constrained capital environment ahead, we'll prioritize sales and marketing investments over enablement growth. While we will still build at a healthy pace, we should see greater penetration rates and a higher return on capital spent in mass markets. All right, to wrap up, I've often spoken about rebuilding Lumin starting with our people. We've been hard at work doing that for the past 12 months. And I'm proud to share that during the Q3, Lumin was recognized by U.

Operator

S. News and World Report as one of the 2024 best places to work in telecom. It's our first time being named to the list and I think it demonstrates the power of creating a culture that enables change. Transformation is messy business. And despite extremely challenging headwinds, we've made big and important structural changes to the company.

Operator

And equally important, we've made significant measurable operational improvements. There's lots more to do, but we're confident in our strategy to pivot Lumin towards stabilization and growth. And with that, I'll turn the call over to Chris.

Speaker 1

Thank you, Kate, and good afternoon, everyone. Kate spoke about our progress in transforming and disrupting telecom and playing to win. She also spoke of our success in reaching an agreement with a group of creditors to extend our debt maturities. On our Q2 earnings call, we said we viewed the formation of the Creditor Group as an opportunity to both fund our future as well as address our challenging maturities profile. The agreement we announced today meets both of those objectives and will allow us to continue our transformation journey and the disruption of telecom.

Speaker 1

Before covering our Q3 results, I would like to take a few minutes to discuss several items, which will impact our financial trends going forward. As Kate mentioned, we closed the CDN sale earlier this month and we expect to close the sale of our EMEA business tomorrow, November 1. The CDN sale will not have a material impact on our financials. We estimate that these CDN contracts contributed roughly $20,000,000 in revenue and $10,000,000 in adjusted EBITDA to our Q3 2023 results. Keep in mind that these CDN contracts were part of our harvest portfolio and have received little capital investment in recent years.

Speaker 1

The valuation, while not disclosed, reflects the declining nature of the revenue of these contracts. We plan to wind down the remaining CDN contracts in 2024. For the pending divestiture of our EMEA business, our 2023 outlook assumed a full 4th quarter contribution of approximately $140,000,000 in revenue, $50,000,000 in adjusted EBITDA and $30,000,000 in CapEx. Separately, we're expecting a tax refund of approximately $900,000,000 previously not included within the financial outlook. Approximately $200,000,000 of the refund will be applied to pay 2023 estimated taxes and we are expecting a cash refund of approximately $700,000,000 in the Q1 of next year.

Speaker 1

While we expect to receive a near term cash benefit, this is in part due to an accelerated use of our NOLs. Some of the benefits will reverse over the next few years. There are counterbalancing impacts related to the CDN contracts and the pending EMEA transaction that make us comfortable keeping our full year 2023 free cash flow guidance of $0,000,000 to $200,000,000 As Kate mentioned, the macro environment and the overhang of our creditor discussions has resulted in revenue headwinds, which will pressure our results over the next few quarters. With the creditor agreement reached today and continued execution against our plan, we expect to see sustained improving revenue trends in mid-twenty 24. In addition, we expect the cost actions that Kate mentioned earlier to help address near term pressures on adjusted EBITDA.

Speaker 1

Additionally, We've been clear that in the wake of transactions over the last year and a half, our organization needs to be more nimble and continue to work through transaction related dis synergies. I'll now discuss in more detail the financial summary of our Q3. As I've done throughout this year, I'll reference our financial performance primarily on a sequential basis for better comparability as the year ago period included the impacts of our divested LATAM and ILEC 20 state businesses. Keep in mind, when the impacts of divestitures and commercial agreements are excluded from results, our year over year growth rates are substantially better than the reported rates. Our 3rd quarter total revenue declined 0.5 percent on a sequential basis to $3,641,000,000 Adjusted EBITDA was $1,040,000,000 in the 3rd quarter with a 28.8% margin.

Speaker 1

Free cash flow was $43,000,000 in the 3rd quarter. Next, I'll review detailed revenue results for the quarter. On a year over year basis, reported revenue was down 17.1% with the impact of divestitures and commercial agreements representing approximately 73% of the reported decline. Within our 2 key segments, business revenue declined 0.1 percent sequentially to $2,894,000,000 and mass markets revenue declined 2.2 percent sequentially to $747,000,000 Within our enterprise channels, which is our business segment excluding wholesale, revenue grew 1.1% sequentially. Be aware that much of this strength is driven by growth in other products, which tend to fluctuate quarter to quarter.

Speaker 1

However, excluding other products and the impact of divested businesses, our subtotal of Grow, Nurture and Harvest revenue declined at the slowest rate we've seen in years. That said, we continue to expect near term variability in the revenue trends. Our exposure to declining harvest revenue is now less than 18% of enterprise channel revenue and was down approximately 70 basis points sequentially. Large enterprise revenue grew 0.3% sequentially in the Q3. Large enterprise revenue trends improved compared to the Q2 year over year when excluding the impact of divested businesses, driven primarily by continued strong trends in the Gro product segment due to demand for IP, dark fiber and colocation and moderating declines in nurture and harvest.

Speaker 1

Moving on to public sector, revenue grew 7.2% sequentially. Excluding the impacts of our divested businesses. Public sector trends improved year over year primarily due to higher other revenue, which includes non recurring equipment and IT solutions, improvement in Grow revenue and moderating declines in Nurture and Harvest products during the Q3. Mid market revenue declined 1.8% sequentially. Excluding the impacts of our divested businesses, 3rd quarter revenue trends worsened year over year.

Speaker 1

Strength in grow products were driven primarily by IP, UC and C and enterprise broadband, which is more than offset by lower VPN revenue within Nurture. Wholesale revenue declined 3.4% sequentially. We expect our wholesale channel will likely continue to decline over time as it is an area we manage for cash. And moving on to business product life cycle reporting. Growth products revenue declined 1.1% sequentially.

Speaker 1

Excluding the impacts of our divested businesses, this quarter's results showed moderating year over year growth. While results can vary in any given quarter, we expect sustained strength in this area as we execute on our turnaround. Grow continues to represent approximately 39% of our business segment and carried an approximate 82% direct margin this quarter. Within Nurture and Harvest, we expect or we continue to expect headwinds in these categories as we take proactive steps to migrate customers to newer technologies. This improves our customers' experience and provides an uplift in the lifetime value of those customers for Lumin.

Speaker 1

As Kate mentioned, we continue to see positive leading indicators that our initiatives are working and it will take some time to be reflected in our results. Nurture product revenue declined 0.5% sequentially due to continued pressure in VPN and Ethernet services. Nurture represents about 30% of our business segment and carried an approximate 69 Percent direct margin this quarter. Harvest products revenue declined 3.8% sequentially. Recall that Harvest is an important part of our business as it generates Cash to fuel our growth initiatives.

Speaker 1

Harvest represents approximately 24% of our business segment and carried an approximate 80% direct margin this quarter. Other products revenue grew 23.7 percent sequentially. Our other product revenue tends to experience fluctuations due to the variable nature of these products. And moving on to mass markets, revenue declined 2.2% sequentially. Our mass markets fiber broadband revenue grew 3.2% sequentially and represented approximately 32% of mass markets broadband revenue.

Speaker 1

Also note that our exposure to legacy voice and other Service revenue continues to improve with a nearly 20 basis point reduction sequentially. During the quarter, Total fiber broadband enablements were 141,000 bringing the total fiber enabled locations to approximately 3,500,000 as of September 30. During the Q3, we added 19,000 Quantum Fiber customers. Fiber ARPU was flat sequentially and increased on a year over year basis to approximately $61 in the 3rd quarter. At the end of the quarter, our penetration of legacy copper broadband Dropped below 11% and our Quantum Fiber penetration stood at approximately 25%.

Speaker 1

The agreements with our creditor groups have given us runway to execute against our turnaround plan, but those agreements will result in interest expense increasing sooner than our forecast had anticipated. This leads to a choice of higher enablements or higher returns for the mass market business and we are choosing higher returns. We will continue to build at a pace similar to what we're doing this year, but we'll increase our focus on driving penetration in ARPU and growth. As I've said many times, our best use of incremental investment is in our business segment where we see faster and better returns. Turning to adjusted EBITDA.

Speaker 1

For the Q3 of 2023, adjusted EBITDA was $1,040,000,000 compared to $1,688,000,000 in the year ago quarter. The Q3 of last year included $332,000,000 related to the divested businesses and the Q3 of this year included a negative impact of $40,000,000 from divestiture related commercial agreements. These items represent approximately 58% of the year over year decline. Special items impacting adjusted EBITDA this quarter totaled $33,000,000 Our Q3 2023 adjusted EBITDA margin, excluding special items, was 28.8% as we lean into growth and optimization efforts. Capital expenditures for the Q3 of 2023 were $843,000,000 In the Q3 of 2023, the company Generated free cash flow of $43,000,000 Now moving on to our outlook.

Speaker 1

Our financial outlook for 2023, We are reiterating all guidance metrics. We'll provide our outlook for 2024 when we report our Q4 results in early February. With that, we're ready for your questions.

Speaker 2

Thank you very much. And our first question comes from the line of Simon Flannery with Morgan Stanley. Please proceed with your question.

Speaker 3

Okay, great. Good evening. Thanks very much. Chris, I know the 8 ks just came out, but it'd be great if you could just give us a little bit more On the debt agreement, perhaps quantify the interest expense impact and what happens to your maturity schedule as well?

Speaker 1

Yes. So there's obviously a lot of work that needs to continue. I would what I would say, Simon, is I'd highlight that The agreement does address the maturities and our need for investment. Depending on participation rates, it really does clear a path largely to 2029, which gives us more than ample time to execute the turnaround. And we do see a pathway to being able to execute against that agreement.

Speaker 1

And we've got the flexibility that we need as we move through that. As it relates to interest expense, again, it varies by year. Obviously, more impact near in, Less further out given the way we modeled higher interest rates at the Investor Day. And the way I look at it is We will be cutting back on CapEx in the $200,000,000 to $300,000,000 range over the next few years to compensate for that.

Speaker 3

Versus the Analyst Day projections?

Speaker 1

Correct.

Speaker 3

And how do you think about bead in the context of today's news? Is that something you kind of deemphasize at this point?

Speaker 1

No. I mean, again, I think our feelings on bead Very similar to what we have said consistently, which is if there's an opportunity, we will participate. But again, we're not Resting a lot of hope on that. Those programs tend to get driven down in terms of the returns, and we were very clear today in saying that our focus So it doesn't mean we won't participate, but we're going to be selective.

Speaker 3

Great. Thanks a lot.

Speaker 2

Our next question comes from the line of Nick Del Deo with MoffettNathanson. Please proceed with your question.

Speaker 4

Hey, thanks for taking my questions. First, Chris, I was just scanning the 8 ks, like Simon, not time to go through everything in detail. But I think one of the bullets noted that You expect the cumulative cash flow that you had previously laid out at the Analyst Day to come in within the range you had targeted, but at the low end. And if I'm reading it correctly, it would seem to include a cumulative $600,000,000 improvement in your cash taxes over that timeframe And presumably some of the lower CapEx you just laid out. So I'm just wondering if you could help us understand the puts and takes there a bit better.

Speaker 1

Yes. I want to make sure I'm answering your question. I mean, the only thing that we've guided obviously is this year. We're still holding the guidance range. As we said, we expected a couple of $100,000,000 to be used this year.

Speaker 1

But when you look at just The other expenses and whatnot that were incurring on some of the closed transactions and whatnot, that kept us within the guidance range.

Speaker 5

Going Go ahead.

Speaker 4

Sorry. Go ahead.

Speaker 1

No, I was just saying going forward, we will have, All other things being equal, a free cash flow shortfall that will be addressed by pulling back On CapEx, as I mentioned in my earlier response.

Speaker 4

Okay. So just to be clear, I was Turning to the first bullet in the cleansing information where you talked about your expectations versus what you had laid out in the Analyst Day.

Speaker 1

I see what you're saying. Yes. So As we look at current performance, which as Kate referenced was impacted by The overhang from all the noise in the market around our debt structure and our ability to refinance it, it unquestionably had a near term impact on sales that we expect will impact revenue. The way we offset that is the cost reduction program that Kate announced today. So We have line of sight to the being within that EBITDA guidance range we talked about at Investor Day.

Speaker 1

We've got work to do obviously To reaffirm that for next year, but that's why we did what we did. There's great stuff going on inside the business in terms of improving revenue trends, and we're excited about that. But there's no question that these near term conditions Have hurt the revenue trend more near term.

Speaker 4

Okay. Okay. And just on the pace of the fiber enablements, What's the magnitude of the change you're thinking? And is the CapEx reduction just a function of lower enablement?

Speaker 1

Yes. I think that's the way to think about it. It will come in the form of lower enablements. And directionally, I think it means that Next year and coming years look relatively flattish to what we're doing this year in terms of enablement.

Speaker 4

Okay. Okay. Thanks, Chris.

Speaker 2

Our next question comes from the line of Michael Rollins with Citi. Please proceed with your question.

Speaker 5

Thanks and good afternoon. Two questions if I could. 1st, Just curious if you can unpack a bit more of the EBITDA pressure in the Q3 relative to revenue, of course, Excluding the divested assets and the transitory items that you highlighted in the slide.

Speaker 6

And then just secondly, just in response to the last We're following up on

Speaker 5

the last couple of questions.

Speaker 6

Is Lumin considering other ways

Speaker 5

to try to fund the business and try to get back some of the CapEx And some of the investment opportunities that you thought would be very productive when you laid out the original Business plan goals of the Analyst Day. Thanks.

Speaker 1

Yes, sure. So I'll address both of those. So Near term, I think we've heard our competition talking about a tough economic environment. There's no question that That's impacting us, although I would say on a relative basis, we're pleased with our performance. And then as I said in my previous response, I think just the amount of noise in the marketplace over whether our turnaround disruption was going to matter because We had this huge 27 tower.

Speaker 1

That had an impact. And it's hard to measure that, but it undoubtedly had an impact. And that's why we're pleased with where we ended up with the proposed transaction today. So I think that clears the way. I'd say the third thing is, again, great things happening inside the company.

Speaker 1

But as we said consistently, it's going to bounce around as we move through the transition and start to scale the things that are working. In my prepared remarks, I did say that we see line of sight to sustained improvement in revenue kind of starting midyear next year, and that remains. So we feel good about that. As it relates to other ways To fund CapEx, so more specifically, the asset based securitization question, yes, that remains an option and we'll continue to do Work around structures like that, to see if there's an opportunity. So those remain, but my comments today Do not assume any additional structures helping us fund CapEx.

Speaker 4

Thanks.

Speaker 2

The next question comes from the line of Batya Levi with UBS. Please proceed with your question.

Speaker 7

Great. Thank you. A follow-up on the new deal. How should we think about the net Proceeds of the new financing that you're announcing. And how what should we think about the Split in terms of how much of it will be used in terms of driving new growth versus debt pay down.

Speaker 7

And through this transformation phase, where do you think your maximum leverage would be? Yes. So I think, And leverage would be?

Speaker 1

Yes. So I think on that last piece, I'd want to circle back with you because again that starts to get into what do we think guidance is for next year. So I don't think I want to go there today. What I would say, Batya, is that so first of all, The incremental raise, I think, was a really strong signal from our credit investors of their belief in our ability to turn the company around. These are our smart, shrewd investors who represent the market and the fact that they are willing to raise an additional $1,200,000,000 I think speaks to their confidence in this management team and our strategy.

Speaker 1

And so I think that's huge. We'll use the funds. It's all really part of restructuring the debt. It's not about using it to necessarily fund a specific piece of CapEx. Our CapEx is part of the thinking obviously, but This is about restructuring, really everything between now and through 2027.

Speaker 1

I guess I will go So far as to say that on our leverage versus where we are today, we would expect through Our turnaround story that leverage will decline. It'll probably stay relatively steady in the near term, But then we would expect it to decline. So I'll go that far. I'll give you that much today.

Speaker 2

The next question comes from the line of David Barden with Bank of America. Please proceed with your question.

Speaker 8

Hey, guys. Thanks so much for taking the questions. And I've got $1,000,000 Chris, but

Speaker 1

You only get 2, I'm sorry.

Speaker 8

I know, I know. Thanks, guys. Yes. So Look, so I'm reading this thing. And so we had this cumulative cash flow expectation from the Analyst Day in June.

Speaker 8

And now we've got this kind of mysterious Tax refund that's showing up. And yes, there's going to be some offsets and maybe it's a net $600,000,000 positive. And we're letting go some people, 4% of the corporation, that's going to be a $300,000,000 benefit. We're going to cut CapEx. And even with all that, We're still at the low end now of the guided outlook from a few months ago.

Speaker 8

And so what we haven't really heard is what is the actual cost, the dollar number That's going to get whatever it is that you've done with the debt structure accomplished. That's my first question. And the second question is with respect to the Q3, specifically as we try to like in the interim kind of model out what we're looking at. What was kind of one time in nature? I know you called out something in the public sector that was In the revenue line, it sounded like it was kind of an equipment type of deal.

Speaker 8

Could you kind of call out all the one timers That affected the Q3 as we think about Q4 and as we try to model out 2024. Thank you.

Speaker 1

Yes. So as it relates to the debt And again, because you're right, I mean, this is a complex transaction, but to get into a lot of modeling on this call is not going to serve anybody well. What I would tell you is that when I said that we needed to cut between $200,000,000 $300,000,000 of CapEx, that really, I think, foretells that higher cost associated with the transaction. So think of it this way. Yes, some near term revenue pressures improving as we get into midyear next year.

Speaker 1

Those revenue pressures are being offset by the cost reduction that we're taking. The tax benefit, which really relates to a lot of hard work around how can we aggressively pull forward NOLs. So a bigger benefit nearer term, less of a benefit longer term. When you incorporate that into The model, which would include all the transaction costs associated with the debt restructuring and whatnot, that's what gets us To the math that says we've got to cut that 200 to 300 a year. So that's I think that answers your question not specifically by year, but that should give you the magnitude.

Speaker 1

And as it relates to the public sector, it really was IT Solutions and Equipment this quarter. And again, it fluctuates around. But yes, we've given you all the key one timers for the quarter. And those things fit in the other bucket, as you know.

Speaker 3

Got it.

Speaker 8

All right. Thanks, Chris.

Speaker 2

Our next question is from the line of Greg Williams with TD Cowen. Please proceed with your question.

Speaker 6

Great. Thanks for taking my questions. They're both focused on fiber to the home and ILEC. I guess you're focused on sales and marketing rather than the enablement for the next couple of years actually. First question is, are you worried about encroachment of 3rd party overbuilders then coming into the space in your footprint If you're not investing in it.

Speaker 6

And second is, if you're not investing heavily in it, in the past you said you didn't expect to do any Further larger ILEC sales or sales of large amount of homes. But now that you're investing into the degree that you said you would, And then we'll say could a sale of a larger portion of the iLEC to be on the table? Thanks.

Speaker 1

Yes. So first of all, again, I want to be really clear on this. We're not walking away from the consumer build. We're saying that we're going to stay Relatively flat to where we are this year. That is still a substantial investment in consumer.

Speaker 1

And I think if you look across The space with rising cost of capital, all of our competition has pulled back. So this move is actually not out of step with what's going on in the broader marketplace. I think there's a real opportunity though to improve returns. And as Kate mentioned, with an increased focus on subscription growth penetration. I mean, we've talked a lot about the fact that Until we got to scale on Enablements and getting that Enablement factory running smoothly, which it now is, Now we can scale marketing.

Speaker 1

So we haven't really started to ramp marketing until recently. And that's a real opportunity for us, and we're going to be very aggressive about that. So I'm not worried about encroachment, because I think the market has already spoken as to its willingness to invest at this point. As it relates to how we think about the business long term, I would say we remain open to Any and all ideas. And again, the goal here is to build 2 great assets, an enterprise business and a consumer business.

Speaker 1

And what happens with those businesses over time, we're very open to considering what that looks like. So we remain Of the belief that consolidation will continue to take place in the consumer space, and we would expect at the right point in time to participate

Speaker 2

Our next question is from the line of Frank Louthan with Raymond James. Please proceed with your question.

Speaker 9

Great. Thank you. So a couple of sort of related questions. Back to lowering the fiber build, why would you choose That as far as a place to say for CapEx given kind of the relatively low risk and success rate of those businesses, why not target other areas of spending? Are you sure you're cutting the right part of the business?

Speaker 9

Because again, to your the previous question We'll invite some kind of competition. And then my second question, assuming you're going to tell me that, yes, it is the right part of the business. What exactly is the opportunity in the other part of the business So why returns higher there and presumably coming in sooner than, say, the fiber build would be?

Speaker 1

Yes. So a good question, Frank. I mean, We've talked quite a bit about how the returns profiles of these two businesses couldn't be more different, right? The consumer business is one of invest a lot in capital And then your payback period is measured in high single digit, low double digit kind of territory, so very long time to return even with great performance. Now that asset, particularly given the quality and the fiber that we're putting in and the scalability of that, It's about as future proof as it gets.

Speaker 1

So the beautiful thing about that business is a very long tail of returns once you get to that payback. The enterprise business is one of higher margins and faster returns where you're measuring Your payback window in lowtomidsingledigit kind of years. And when you look at the disruptive nature of the products and services we're bringing to market around NAS and Exoswitch and our security offerings. That disruption and our ability to not just keep and nurture existing customers, but expand that customer base Has a much greater and faster return. So that's really why we see enterprise in the right place to spend.

Speaker 1

And again, I keep hearing about overbuild activity, overbuild activity, but we're simply not seeing. The higher cost of capital that everybody faces right now is slowing down those builds. So what we're doing by continuing to invest in that 500,000 Kind of enablement range every year is still, I would say, quite robust compared to what we're seeing on the competitive front. So we think overbuild activity is a much lower risk given today's economic environment.

Speaker 5

All

Speaker 9

right. Thank you.

Speaker 1

So, we have time for just one more question.

Speaker 2

Okay. Thank you very much. And our final question comes from the line Of Jonathan Chaplin with New Street Research. Please proceed with your question.

Speaker 10

Thanks a lot. Since I'm last, I'm going to steal 2 if I may. So the I was fascinated, Chris, by your comment that you'd spend a lot of time talking to your creditors and The deal that they struck with you is a vote of confidence in the turnaround strategy. And I'm just Wondering what you shared with them in the context of those negotiations That's sort of incremental to what you've been able to share with The Street. I'd love to get some sort of if you could expand a little bit just on sort of, Yes.

Speaker 10

The what you need to

Speaker 1

go ahead. Yes. That's obviously a very regulated space. And I would say that What we shared with them that was different than Investor Day was what was included in the blowout materials today. So you all have access to that.

Speaker 1

We gave full visibility, for example, around The tax issue that we talked about earlier as well as the fact that near term, we're seeing Some impacts from revenue. I think when I say that they believe in the strategy, they believe in our ability to disrupt telecom. They believe in the innovation. They believe in what we're doing to migrate revenue from legacy services to new. And no one else is doing that.

Speaker 1

No one else is investing in this space, and it's a huge opportunity for us because of our focus. So that's I mean, What we share with them is what we share with you, especially when you consider the blowout information.

Speaker 10

Got it. That helps. And then my second question, I mean, it's really just a continuation of the question that Greg and the question that preceded Frank's question, which is it seems like you've got sort of 2 very different opportunities, 1 in mass markets, 1 in enterprise. They're on very different Return profiles. And in fact, under the sort of the current circumstances, you don't have the resources to pursue both and so you're going after the Return to Enterprise.

Speaker 10

Given your circumstances, that totally makes sense. But isn't the right the sort of right Course of action in a resource constrained environment like you're in to run a process to sell Mass markets to somebody that has the capital to put into it at the moment, take full advantage of the opportunity there, both Sort of organically with the markets that are there plus the big beat opportunity that's coming and all of the rest of it. Wouldn't that just be a lot more valuable in someone else's hands right now?

Speaker 1

Well, look, I would say that that's a consideration we look at regularly. But again, I want to be clear. We're talking these last set of questions. I'm going to challenge all of you kind of in your thinking about it. The questions would suggest that we're stopping our investment in consumer.

Speaker 1

We're continuing to invest at the pace we're investing at this year. We're going to continue to add in the range of 500,000 enablements The year to our 3,500,000 enablements that exist today. We're focusing on penetration and subscriber growth and ARPU and returns. At the same time, we're continuing to build those 500,000 neighborhoods. So very, very clearly, I want everyone to understand we're continuing to invest at a healthy pace in that business, particularly compared to what our competition is doing at this very moment given the high cost of capital.

Speaker 1

So that's an important point. Now the question you raised though is the right question. And I would we have been very public in saying that the consumer space is one that is ripe at some point in time for consolidation. When that happens, we don't know. Our job is to improve the EBITDA and the return profile of the business We have continued to invest in its future.

Speaker 1

And if and when the right time comes, then we'll consider those options. But our focus right now is on continuing the pace of build that we're at today and driving improved returns.

Speaker 10

Got it. Thanks, Chris. I really appreciate it.

Speaker 1

Thanks, Jonathan. And as soon as that, we'll end the call.

Speaker 2

Thank you very much. And we'd like to thank everyone for your participation and for using the Lumin conferencing service today. This does conclude the conference call, and we ask that you please disconnect your lines. Have a great day, everyone.

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