Lumen Technologies, Inc. Q3 FY2023 Earnings Call

Greetings, and welcome to the Lumen Technologies Third Quarter 2023 Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. As a reminder, this conference is being recorded Tuesday, October 31, 2023. I would now like to turn the conference over to Mike McCormack, Senior Vice President, Investor Relations. Please go ahead.

Thanks, everyone, and thank you for joining Lumen Technologies third quarter 2023 earnings call. On the call today are Kate Johnson, President and Chief Executive Officer; Chris Stansbury, Executive Vice President and Chief Financial Officer; and Rahul Modi, our Treasurer. Before we begin, I need to call your attention to our safe harbor statement on Slide 2 of our third quarter 2023 presentation, which notes that this conference call may include forward-looking statements subject to certain risks and uncertainties. All forward-looking statements should be considered in conjunction with the cautionary statements on Slide 2 and the risk factors in our SEC filings. We'll be referring to certain non-GAAP financial measures reconciled to the most comparable GAAP measures, which can be found in our earnings press release. In addition, certain metrics discussed today exclude costs or special items as detailed in our earnings materials, which can be found on the Investor Relations section of the Lumen website. With that, I'll turn it over to Kate.

Thanks, Mike. Good afternoon, everyone. I'm excited to summarize the significant progress we've made in repositioning Lumen for growth. I'll begin with some key structural achievements. First, we've simplified Lumen with two divestitures. We anticipate closing the sale of our EMEA business to Colt tomorrow, November 1, ahead of schedule. This sale is expected to generate about $1.5 billion in net after-tax proceeds, which we plan to use for debt reduction. Two weeks ago, we also announced the sale of the majority of our CDN contracts, which will allow us to focus our resources on areas where we can excel in the market. Now, regarding the balance sheet. We have finalized a broad agreement with creditors holding over $7 billion of our outstanding debt. This deal will extend many of our debt maturities and eliminate uncertainties about our compliance with debt covenants. The creditor group is also providing $1.2 billion in new financing, with the completion of this transaction dependent on fulfilling certain conditions, including working with our banks to renew our revolver and term loan A and obtaining approvals from other creditors as necessary. In addition to restructuring the balance sheet, we've made difficult decisions to reshape Lumen for growth, resulting in about 4% fewer employees. This reorganization, along with additional optimization initiatives, is projected to yield annual savings of around $300 million. This was a tough but necessary choice given the revenue pressures from market noise associated with our creditor discussions and broader economic issues. These proactive measures will help decrease distractions, enhance our agility and efficiency, and improve our competitiveness in the markets we serve. Now, let’s discuss some operational improvements in our Business segment. As we've mentioned, we have a three-pronged strategy for transforming this business: securing our base, driving commercial excellence, and innovating for growth. We’re making strides in all three areas. Securing the base involves five key initiatives: reducing disconnects, maximizing installations, increasing usage, renewing customer contracts, and migrating customers to newer technologies. If we succeed in these areas, we will reduce churn. In this quarter, we recorded a 4% decline in disconnects, a 9% rise in installations, a 5% uptick in usage, a 4% increase in VPN customer renewals, and a 21% improvement in voice migration. By leveraging data and analytics to understand customer behavior and adopting an agile approach, we’ve created a successful formula to tackle churn and enhance Business revenue this quarter. As for driving commercial excellence, this focuses on sales execution that generates growth. There are two primary ways to grow: acquiring new customers or selling more to existing ones. We’re making progress in both areas. So far this year, we’ve added over 2,500 new logo customers across large enterprise, mid-markets, and public sector segments despite the challenges we faced. Year-over-year, we’ve seen a 47% increase in products sold to existing customers, or a 16% increase when normalized for a large deal I will mention shortly. Additionally, we achieved a 14% rise in seller productivity year-over-year, which is impressive given the influx of new sellers. A significant aspect of driving commercial excellence involves pursuing new markets. We see enormous potential in the digital inclusion market, allowing Lumen to assist states in providing reliable broadband connectivity to underserved areas. We secured our first substantial multi-year deal in this space, bringing in over $400 million in revenue when the State of California selected Lumen as a key strategic partner. We’re now applying the same framework for public-private partnerships in other states that aim to bridge the digital divide. Now, addressing the third element of our business strategy, innovating for growth is about introducing new capabilities like Network-as-a-Service, or NaaS, into the market to access new profit pools. We have made significant progress with our first NaaS offering called Lumen Internet On-Demand, which is now generally available to 13 industries including healthcare, technology, insurance, retail, manufacturing, and the public sector. We’re also leveraging our partner ecosystem for scale, allowing customers to purchase Lumen Internet On-Demand through 136 enabled data centers across 10 North American markets via partnerships with Digital Realty and Equinix. Our NaaS product roadmap is groundbreaking. We’ll soon add API capabilities for customer integration, along with enhanced security features and dynamic bandwidth options for flexible usage. Together with our Edge Fabric and ExaSwitch, Lumen NaaS is positioning itself to create a new market category for modern communication infrastructure, optimizing application performance across hybrid architectures for on-premises, edge, and multi-cloud environments, while accommodating the rapidly evolving needs of networks as Generative AI becomes more prevalent. We are transforming telecom, and it's set to disrupt the industry, and we are determined to succeed. Turning to Mass Markets, we are experiencing strong growth in Quantum Fiber enablements, with our construction factory functioning well. However, our subscriber additions this quarter fell short of expectations. We took significant steps during the quarter to enhance operations by merging CenturyLink Fiber with Quantum Fiber, consolidating inventory and field tech systems, and significantly improving order-to-install commitments. While we believe these operational improvements, along with a decrease in move activity, impacted subscriber additions this quarter, we recognize the need to enhance sales and increase penetration of existing builds. Consequently, in light of the anticipated tighter capital environment, we’ll focus sales and marketing investments on improving sales rather than solely on enabling growth. While we will still build at a reasonable pace, we expect to see better penetration rates and a higher return on capital spent in Mass Markets. In conclusion, I have often emphasized the importance of rebuilding Lumen, starting with our people. Over the past year, we have worked hard on this front, and I’m proud to announce that during the third quarter, Lumen was recognized by U.S. News & World Report as one of the 2024 Best Places to Work in telecom. This is our first time receiving this recognition, highlighting the strength of creating a culture that fosters change. Transformation is complex, and despite significant challenges, we have made substantial and important organizational changes, along with notable measurable operational improvements. There is still much to do, but we are confident in our strategy to redirect Lumen toward stability and growth. I will now hand the call over to Chris.

Thank you, Kate, and good afternoon, everyone. Kate discussed our progress in transforming and disrupting telecom and our strategy to succeed. She also highlighted our achievement in reaching an agreement with a group of creditors to extend our debt maturities. During our Q2 earnings call, we viewed the formation of the creditor group as a chance to fund our future and tackle our challenging maturities profile. The agreement we announced today fulfills both of these goals and will help us continue our transformation journey and disrupt the telecom industry. Before diving into our third quarter results, I want to take a moment to address several factors that will influence our financial trends moving forward. As Kate mentioned, we finalized the CDN sale earlier this month and expect to complete the sale of our EMEA business tomorrow, November 1. The CDN sale will have a minor impact on our financials, as we estimate these contracts contributed around $20 million in revenue and $10 million in adjusted EBITDA to our third quarter results. It's important to note that these CDN contracts were part of our Harvest portfolio and have seen little capital investment in recent years. The valuation, while not disclosed, reflects the declining revenue from these contracts. We intend to wind down the remaining CDN contracts in 2024. As for the forthcoming divestiture of our EMEA business, our 2023 outlook expected a full fourth quarter contribution of about $140 million in revenue, $50 million in adjusted EBITDA, and $30 million in CapEx. Separately, we anticipate a tax refund of around $900 million, which was not included in our financial outlook. About $200 million of this refund will be used to cover our estimated taxes for 2023, and we're expecting a cash refund of roughly $700 million in the first quarter of next year. Although we expect to see a near-term cash benefit, this results partially from an accelerated use of our NOLs, and some of these benefits will reverse over the next few years. There are balancing impacts related to the CDN contracts and the pending EMEA transactions that give us confidence in maintaining our full-year 2023 free cash flow guidance of zero to $200 million. As Kate mentioned, the macro environment and the uncertainty from our creditor discussions have created revenue challenges, which will affect our results in the upcoming quarters. With the creditor agreement reached today and our ongoing execution of our plan, we anticipate sustained revenue improvement by mid-2024. Furthermore, we expect the cost-saving measures mentioned by Kate to help mitigate short-term pressures on adjusted EBITDA. We've also made it clear that following the transactions of the last year and a half, our organization needs to operate more effectively and manage transaction-related dis-synergies. Now, I'll provide a detailed financial summary of our third quarter. This year, I will primarily focus on our financial performance on a sequential basis for clearer comparison, as the same period last year included impacts from our divested LATAM and ILEC 20 state businesses. It's important to consider that, when excluding the impacts of divestitures and commercial agreements, our year-over-year growth rates appear much stronger. In the third quarter, our total revenue saw a 0.5% decline on a sequential basis, totaling $3.641 billion. The adjusted EBITDA for the quarter was $1.049 billion, yielding a 28.8% margin. Free cash flow stood at $43 million during the third quarter. Next, I'll delve into the detailed revenue results for the quarter. On a year-over-year basis, reported revenue decreased by 17.1%, with divestitures and commercial agreements accounting for roughly 73% of the decline. In our two key segments, Business revenue dipped by 0.1% sequentially to $2.894 billion, while Mass Markets revenue fell by 2.2% sequentially to $747 million. Within our enterprise channels, which exclude wholesale, revenue increased by 1.1% sequentially. Much of this growth comes from other products that tend to fluctuate from quarter to quarter. However, when excluding these products and the impacts from divested businesses, our subtotal of Grow, Nurture, and Harvest revenue has declined at the slowest rate we've observed in years. That said, we continue to expect short-term fluctuations in revenue trends. Our exposure to declining Harvest revenue is now under 18% of enterprise channel revenue and decreased by about 70 basis points sequentially. Large enterprise revenue grew by 0.3% sequentially in the third quarter. Compared to the second quarter year-over-year, large enterprise revenue trends improved when excluding divested businesses, mainly due to strong performance in the Grow product segment resulting from demand for IP, dark fiber, and colocation, and moderated declines in Nurture and Harvest. In the public sector, revenue increased by 7.2% sequentially. When excluding the impacts of divested businesses, public sector trends improved year-over-year, primarily driven by higher other revenue, which includes non-recurring equipment and IT solutions, improvements in Grow revenue, and moderated declines in Nurture and Harvest products during the third quarter. Mid-market revenue saw a sequential decline of 1.8%. After excluding the impacts of divestitures, revenue trends in the third quarter worsened year-over-year. Strength in Grow products was driven largely by IP, UC&C, and enterprise broadband, which was more than offset by lower VPN revenue within Nurture. Wholesale revenue decreased by 3.4% sequentially, and we anticipate that our wholesale channel will likely continue to decline over time, as this is an area we manage for cash. Moving to business product lifecycle reporting, revenue from Grow products decreased by 1.1% sequentially. Excluding the effects of divestitures, this quarter showed moderating year-over-year growth. While results can vary from quarter to quarter, we anticipate sustained strength in this category as we implement our turnaround strategy. Grow continues to represent about 39% of our Business segment and achieved an approximate 82% direct margin this quarter. In Nurture and Harvest, we foresee ongoing challenges as we proactively move customers to newer technologies. This process improves customer experience and raises their lifetime value for Lumen. As Kate mentioned, we continue to observe positive leading indicators that our initiatives are making an impact, though it may take some time to see these changes reflected in our results. Nurture product revenue declined by 0.5% sequentially due to ongoing pressures in VPN and Ethernet services. Nurture constitutes around 30% of our Business segment and recorded an approximate 69% direct margin for this quarter. Revenue from Harvest products fell by 3.8% sequentially. Recall that Harvest is crucial for generating cash to support our growth initiatives, representing about 24% of our Business segment with an approximate 80% direct margin this quarter. Revenue from other products increased by 23.7% sequentially, although these results tend to vary because of the unpredictable nature of these products. Shifting to Mass Markets, revenue declined by 2.2% sequentially, while our fiber broadband revenue grew by 3.2% sequentially and accounted for approximately 32% of Mass Markets broadband revenue. Our exposure to legacy voice and other service revenue continues to improve with a nearly 20 basis point sequential reduction. During the quarter, we enabled a total of 141,000 fiber connections, bringing the total fiber-enabled locations to about 3.5 million as of September 30. In the third quarter, we added 19,000 Quantum Fiber customers. Fiber ARPU remained stable sequentially and rose on a year-over-year basis to around $61 in the third quarter. At the quarter's end, our penetration of legacy copper broadband dropped below 11%, while our Quantum Fiber penetration reached approximately 25%. The agreements with our creditor groups have provided us the opportunity to execute our turnaround plan, but these agreements will also lead to increased interest expenses sooner than we had forecasted. This presents us with a choice between higher enablements or better returns for the Mass Market business, and we are opting for higher returns. We will continue to build at a similar pace to this year, but will intensify our focus on increasing penetration, ARPU, and growth. As I have often stated, our best use of incremental investment is within our Business segment where we anticipate faster and more favorable returns. Regarding adjusted EBITDA, for the third quarter of 2023, it was $1.049 billion compared to $1.688 billion in the same quarter last year. The third quarter of last year included $332 million related to the divested businesses, while this year's third quarter saw a negative impact of $40 million from divestiture-related commercial agreements. These factors account for about 58% of the year-over-year decline. Special items affecting adjusted EBITDA this quarter totaled $33 million. The adjusted EBITDA margin for the third quarter of 2023, excluding special items, stood at 28.8% as we focus on growth and optimization efforts. Capital expenditures for the third quarter of 2023 amounted to $843 million, and the company generated free cash flow of $43 million during this period. As for our outlook, we are reiterating all guidance metrics for 2023. We will provide our outlook for 2024 when we report our fourth quarter results in early February.

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

Okay, great. Good evening. Thanks very much. Chris, I know the 8-K just came out, but it would 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.

Yeah. So, there's obviously a lot of work that needs to continue. 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, 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 nearer in, less further out given the way we modeled higher interest rates at the Investor Day. And the way I'd look at it is we will be cutting back on CapEx in the $200 million to $300 million range over the next few years to compensate for that.

Versus the Analyst Day projections?

Correct.

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

No. I mean, again, I think our feelings on BEAD are 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 is return. So, it doesn't mean we won't participate, but we're going to be selective.

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

Hi. Thanks for taking my questions. First, Chris, I was just scanning the 8-K, 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 million 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.

I want to ensure I'm addressing your question. The only guidance we've provided is for this year, and we are maintaining that guidance range. We anticipated spending a couple of hundred million dollars this year. However, when considering the other expenses from some of the closed transactions, we are still within the guidance range. Please continue.

Sorry, go ahead.

No. I was just say 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.

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

I understand your point. As we analyzed our current performance, which Kate mentioned, it was affected by the surrounding uncertainty regarding our debt structure and our ability to refinance, significantly impacting near-term sales and expected revenue. We plan to mitigate this through the cost reduction program that Kate introduced today. We believe we can remain within the EBITDA guidance range we discussed at the Investor Day. There is still work ahead to confirm this for next year, which explains our recent actions. There's a lot of positive movement within the business in terms of improving revenue trends, which we are enthusiastic about. However, it is clear that these immediate conditions have negatively influenced the revenue trend in the short term.

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 enablements?

Yeah, 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 flat to what we're doing this year in terms of enablements.

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

Thank you, and good afternoon. I have two questions. First, could you provide more details regarding the EBITDA pressure in the third quarter relative to revenue, excluding the divested assets and the transitory items mentioned in the slide? Secondly, following up on previous questions, is Lumen exploring other methods to fund the business and recover some of the CapEx and investment opportunities that were considered highly productive when you initially presented the business plan goals at the Analyst Day? Thank you.

Yeah, 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, 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 a proposed transaction today. So I think that clears the way. I'd say the third thing is, again, great things happening inside the company. But as we've 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 mid-year 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, yeah, 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.

Thanks.

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

Thank you. I have a follow-up on the new deals. How should we consider the net proceeds of the new financing you're announcing? What is the expected distribution in terms of how much will be allocated to driving new growth versus paying down debt? During this transformation phase, what do you anticipate will be your maximum leverage?

I would like to follow up on your last question regarding our guidance for next year, but I prefer not to address that today. However, I want to emphasize that the recent increase in funding is a significant endorsement from our credit investors regarding our potential to turn the company around. These investors are knowledgeable and reflect market sentiment, and their willingness to commit an additional $1.2 billion underscores their trust in our management team and our strategy. This funding will be utilized primarily for restructuring our debt and isn't specifically allocated to any particular capital expenditure. While capital expenditures are part of our overall strategy, the focus here is on restructuring everything from now until 2027. Concerning our leverage, we anticipate that it will decline as we progress through our turnaround plan. Although we expect it to remain stable in the short term, we foresee a reduction in leverage in the future. That's what I can share at this point.

Okay. Thank you.

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

Hey, guys. Thanks so much for taking the questions. And I've got a million, Chris, but...

And you only get two though, David, sorry.

I appreciate it. So, I'm reviewing our cumulative cash flow expectations from the Analyst Day in June, and now we have this unexpected tax refund coming in. There will be some offsets, but it looks like it might net around $600 million positively. We're also reducing our workforce by 4%, which will save us about $300 million. We're cutting capital expenditures as well. However, despite these adjustments, we're still at the lower end of the guidance we provided a few months ago. What we're missing is the actual cost in dollar terms associated with the changes made to the debt structure. That's my first question. Secondly, regarding the third quarter, can you clarify any one-time events that influenced the results? I remember something noteworthy in the public sector related to revenue that seemed like an equipment deal. Could you specify all the one-time factors that impacted the third quarter as we consider the fourth quarter and model for 2024? Thank you.

Regarding the debt, this is a complex transaction, and diving too deeply into modeling during this call wouldn't be helpful for anyone. When I mentioned that we needed to reduce between $200 million and $300 million in capital expenditures, it indicates the higher costs associated with the transaction. In the near term, we are facing revenue pressures, but these will improve as we approach the middle of next year. Those pressures are being balanced out by the cost reductions we are implementing. The tax benefits we are seeing come from our efforts to aggressively utilize net operating losses, which will provide a more significant immediate advantage but a lesser long-term benefit. When you factor all this into the model, including the transaction costs related to the debt restructuring, it leads us to the conclusion that we need to achieve that $200 million to $300 million reduction annually. This addresses your question in terms of magnitude. For the public sector, this quarter was primarily about IT solutions and equipment. There are fluctuations, but I’ve outlined the key one-time factors for the quarter, which fall into the other category.

Got it. All right. Thanks, Chris.

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

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 enablements for the next couple of years, actually. First question, are you worried about the encroachment of third-party overbuilders then coming into the space in your footprint if you're not investing in it? 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 amounts of homes. But now that you're not investing into the degree that you said you would at Analyst Day, could a sale of a larger portion of the ILEC be on the table? Thanks.

Yeah. 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. And I think if you look across the space with rising costs 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 market. 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 two great assets: an enterprise business and a consumer business. 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 in that.

Got it. Thank you.

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

Thank you. I have a couple of related questions. Regarding the decision to reduce the fiber build, can you explain why you've chosen this as a cost-saving measure for capital expenses? Considering the relatively low risk and success rate of those businesses, why not focus on cutting expenses in other areas? How can you be certain that this is the right segment to trim, especially since it could lead to increased competition? Also, assuming you believe this is the right move, what opportunities exist in the other areas of the business? Why do you anticipate returns will be higher and realized sooner in those areas compared to the fiber build?

Yeah. Good question, Frank. I mean we talked quite a bit about how the returns profiles of these two businesses couldn't be more different, right? The consumer business is one invest a lot in capital, and then your payback period is measured in high single-digit, low double-digit kind of territory. So, a very long time to return even with great performance. Now that asset, particularly given the quality of the fiber that we're putting in and the scalability of that, is about as future-proof as it gets. 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 low to mid-single digit kind of years. And when you look at the disruptive nature of the products and services we're bringing to market around NaaS and ExaSwitch and our security offerings, that disruption in 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 as the right place to spend. And again, I keep hearing about overbuild activity, overbuild activity, but we're simply not seeing it. 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 a competitive front. So, we think overbuild activity is a much lower risk given today's economic environment.

All right. Thank you.

Cersei, we have time for just one more question.

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.

Thank you very much. Since I'm the last one, I would like to take two questions if I may. Chris, I was intrigued by your mention of spending considerable time discussing matters with your creditors, and that the agreement they reached with you reflects their confidence in the turnaround strategy. I'm curious about what additional insights you shared with them during those negotiations that you haven't yet shared with the market. I would appreciate it if you could elaborate a bit on this matter.

I understand that this is a highly regulated area. What we provided to them was different from what was presented on Investor Day and is included in the additional materials you all have access to. For instance, we have full visibility on the tax issue we discussed earlier, and we're noticing some short-term impacts on revenue. When I mention their confidence in our strategy, it reflects their belief in our potential to disrupt the telecom sector, our innovation, and our efforts to shift revenue from legacy services to new services. No other company is making such investments in this area, which presents a significant opportunity for us due to our focus. What we communicated with them aligns with what we've shared with you, particularly regarding the additional information provided.

Got it. That helps. My second question is a continuation of the previous questions, which is that it seems you have two very different opportunities, one in Mass Markets and one in enterprise, each with distinct return profiles. Given the current circumstances, it appears you don’t have the resources to pursue both, so you're focusing on the returns from enterprise. This makes sense, but wouldn't the right approach in a resource-constrained environment be to consider selling Mass Markets to a party that has the capital to invest in it now? This would allow them to fully capitalize on the existing opportunities as well as the upcoming BEAD opportunity. Wouldn’t that be more valuable in someone else's hands at this point?

We regularly consider this, but I want to clarify that the questions imply we're halting our investment in the consumer sector. We're not; we are maintaining our current investment pace. We're on track to add approximately 0.5 million enablements each year to our existing 3.5 million. Our emphasis is on increasing penetration, subscriber growth, average revenue per user, and returns, while simultaneously developing those 500,000 enablements. It's crucial to understand that we are still investing robustly in this area, especially in comparison to our competitors, given the high cost of capital. Your question is valid, and we have publicly acknowledged that the consumer space is likely due for consolidation at some point, though we can't predict when that will occur. Our focus is on enhancing the EBITDA and returns of our current business while continuing our investments for the future. If the right time for consolidation arises, we'll consider it, but for now, we are committed to our current build pace and improving returns.

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

Thanks, Jonathan. Cersei, with that, we'll end the call.

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