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Greetings and welcome to the Lumen Technologies First 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. [Operator Instructions] As a reminder, this conference is being recorded Tuesday, May 2, 2023. I would now like to turn the conference over to Mike McCormack, Senior Vice President, Investor Relations. Please go ahead.

Thanks, Darcy. Good afternoon, everyone, and thank you for joining Lumen Technologies first quarter 2023 earnings call. On the call today are Kate Johnson, President and Chief Executive Officer; and Chris Stansbury, 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 first 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 will 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 for special items as detailed in our earnings materials, which can be found on the Investor Relations section of Lumen's website. With that, I'll turn the call over to Kate.

Thanks, Mike. Good afternoon, everyone, and thanks for joining us today. Before I turn the call over to Chris to discuss our first quarter results, I want to give you an update on our company's turnaround plans. As I shared on our last call, we've established a new mission for Lumen to digitally connect people, data, and applications quickly, securely, and effortlessly. We assembled a new executive leadership team and created five core priorities for the company. We then set financial expectations that included the funding of a portfolio of change programs to deliver on our revenue and EBITDA stability goals. It's still early days in our transformation journey. We're staffing up the change programs with the right talent. We're standing up an agile project framework to standardize how work gets done, and we're implementing business analytics across the company to help drive execution rigor. These things have the basic scaffolding needed to support our transformation efforts. Now that said, in addition to an improved revenue story this quarter, we're seeing green shoots of progress in several areas. I'll share some of the leading indicators with you now aligned to our core priorities. I'll start with the first two priorities, to develop company-wide customer obsession and to invest and innovate for growth. Obviously, these priorities go hand in hand. We're immersing ourselves in our customer challenges and using that proximity to guide our innovation investment decisions, it's helping us pivot to an outside-in mindset and accelerating our speed to market. We already have an in-market example of high-value innovation using this new approach. On April 20, we launched Lumen SASE with Rapid Threat Defense, our company's proprietary threat detection and remediation platform powered by our very own Black Lotus Labs. Now, you might be asking why is this innovation example interesting? Because we sat side-by-side with customers and heard their feedback loudly and clearly. They have enough threat detection reports. What they want, what they need is an automated threat detection and remediation capability. So with Lumen's intellectual property, we co-innovated with our partner, Fortinet to leapfrog traditional threat protection offerings. And from concept to commercialization, it took just a few short months. And enterprise customers like Huitt-

Thanks. Kate, and good afternoon, everyone. As Kate described, this is a year of rapid change in Lumen. We are aggressively upgrading systems, processes, and our culture as we seek to modernize Lumen to win in the marketplace and return Lumen to growth. While it's early in our journey, we are pleased with the improvements we're starting to see. A specific call out as a significant improvement we're seeing in our Mass Markets execution for our Quantum reassessment period allowed us to adjust our plan and as we move forward is proving to have been an excellent decision. As Kate said, we're back and running fast. Before moving on to our first quarter results, I'd like to discuss a few actions we've taken to strengthen our balance sheet to position our company to return to growth. In mid-March, we announced an exchange offer for Lumen's senior notes. This deleveraging action was a win-win. During Q1, we reduced our principal debt balance by $620 million and Lumen senior noteholders that participated in the exchange received a higher coupon, as well as secured debt in the Level 3 silo. In the first quarter exchange transactions, we issued $915 million a Level 3 secured bonds and Lumen's annual interest expense remains relatively unchanged. This exchange combined with the expected proceeds from the EMEA transaction, will allow us to focus on executing against our two-year turnaround plan, which we expect will return Lumen to growth. We will continue to pursue additional opportunities to enhance our capital structure to support our long-term plan, which we expect will provide strong returns for our stakeholders. With that, I'll discuss the financial summary of our first quarter. This quarter we have expanded our reporting to include Grow, Nurture, Harvest, and other by business channel. This structure includes a subtotal with Grow, Nurture, and Harvest giving visibility to our primary focus within the business channel results, excluding other. As a reminder, the Other category revenue includes equipment and IT solutions, which tend to experience fluctuations due to the variable nature of these products. Additionally, beginning this quarter, and to better align with recent updates to the SEC's Reg G Compliance and Disclosure Interpretations, we will no longer report revenue, adjusted EBITDA, adjusted EBITDA margin, or CapEx on a modified basis, which excludes the impacts of our divested businesses, as well as CAF II within historical periods. Instead, we will provide supplemental information on these discrete impacts as footnotes where applicable in our earnings presentation and a separate page in our Financial Trending Schedule. Accordingly, on this call, I will reference our financial performance primarily on a sequential basis for better comparability and to provide color on the impact that CAF II, the divestitures, and commercial agreements had on select year-over-year results. It's important to note that excluding the impacts we have provided our year-over-year growth rates are substantially better than the reported rates and are showing improvement in key areas. Our first quarter total revenue declined 1.6% on a sequential basis to $3.738 billion. Adjusted EBITDA was $1.251 billion in the first quarter with a 33.5% margin. Free cash flow was negative $75 million in the first quarter, including $90 million of taxes paid related to our two divestitures in 2022. We now expect total transaction-related taxes of around $1 billion with the majority of the balance being paid in the second quarter of this year from cash on hand. We reduced net debt by $582 million during the first quarter next. Next, I'll review our detailed revenue results for the quarter. Reported revenue was down 20.1% with the impact of CAF II, the divestitures, and commercial agreements, representing approximately 80% of the reported decline. Within our two key segments, business revenue declined 1.6% sequentially to $2.956 billion. Mass Markets revenue also declined 1.6% sequentially to $782 million. Business revenue declined 13.1% on a year-over-year basis with the impact of the divestitures and commercial agreements, representing approximately three-quarters of the reported decline. Mass Markets revenue declined 38.7% on a year-over-year basis with the impact of CAF II and the divestiture impact representing approximately 86% of the reported decline. Within our Enterprise Channels, which is our business segment, excluding wholesale, revenue declined 1.4% sequentially. Our exposure to legacy voice revenue continues to improve and is now approximately 11% of Enterprise Channel revenue and is down approximately 50 basis points sequentially. Large Enterprise revenue declined 1.9% sequentially in the first quarter. Large Enterprise revenue trends improved year-over-year, excluding the impact of divested businesses, driven primarily by IP and co-location. Public sector revenue declined 0.2% sequentially. Excluding the impacts of our divested businesses, public sector improved significantly from the year-over-year decline last quarter on the same basis. As you know, we've had major wins in this channel over the last two years and those wins are ramping up in revenue. You may have also seen a recent U.S. Defense Information Systems $223 million contract win for providing modern hybrid cloud voice and conferencing services. Our partnership with the public sector is strong, and we appreciate the confidence these entities have in Lumen and our significant capabilities to deliver these mission-critical solutions. Mid-market revenue declined 1.3% sequentially. Excluding the impacts of our divested businesses, there was a similar level of year-over-year decline compared to last quarter. Strength in IP and UC&C was offset by declines in other product categories. Wholesale revenue declined 2.2% sequentially. This is the channel that will continue to decline over time and when we manage for cash. Moving to our business product lifecycle reporting, Grow products revenue grew 3.4% sequentially. Importantly, if we exclude the impacts of our divested businesses, this quarter's results showed significant improvement in year-over-year growth at close to double the quarterly sequential growth rate. While this level of improvement may not be linear as we move forward, we expect continued strength in this area as we execute on our overall pivot to growth. The Grow category now represents approximately 38% of our business segment and carried an approximate 83% direct margin this quarter. For added color, Grow products represented 58% of our enterprise sales in the first quarter, an improvement from 4Q '22. Getting the Grow product category to grow faster is a key focus of our strategy, and we're pleased with these early results. Nurture products revenue declined 3.1% sequentially, driven by VPN and Ethernet. We will likely face headwinds within both Nurture and Harvest product categories as we actively work to maintain customer relationships and maximize customer lifetime value by migrating customers to newer technology solutions. Nurture now represents about 31% of our business segment and carried an approximately -- approximate 65% direct margin this quarter. Harvest products revenue declined 4.9% sequentially. As with Nurture, we will see headwinds in this category as we pivot customers to newer technologies with a significant focus on voice migration. Our Harvest team continues to manage these products, both by extending the life of some products, while also managing customers back to Grow products. Recall that Harvest is an important part of our business and generates cash to fuel our growth initiatives. Harvest now represents approximately 25% of our business segment and carried in approximate 78% direct margin this quarter. Other product revenue declined 9.4% sequentially. As I mentioned earlier, our other product revenue tends to experience fluctuations due to the variable nature of these products. Moving on to Mass Markets, revenue declined 1.6% sequentially. Our Mass Market's fiber broadband revenue grew 2.7% sequentially and represented approximately 29% of Mass Market's broadband revenue. Also, note that our exposure to legacy voice and other services revenue continues to improve with a nearly 60 basis point reduction sequentially. During the quarter, total fiber broadband enablements were approximately 120,000, bringing the total fiber-enabled locations to approximately 3.3 million as of March 31. We had a strong ramp in fiber enablements during the quarter, and as Kate mentioned, we are confident in our ability to meet or exceed our 500,000 new enabled locations target for 2023. We expect to continue ramping this build pace in 2024 and look forward to sharing a longer-term view at our Investor Day on June 5. In the first quarter, we added 24,000 Quantum Fiber customers. This brings our total Quantum Fiber subscribers to 856,000. As Kate noted, we are ramping quickly with enablement and subscriber momentum building. Our installs of fiber broadband customers exceeded our copper installs, a trend that we expect to continue to widen going forward. Fiber ARPU was approximately $60 in the first quarter and we see ARPU expansion opportunities with the adoption of in-home Wi-Fi solutions up tiering Enterprise-grade security solutions and our recently launched Multi-Gig offerings, delivering up to 8-gig symmetric services. The plant we are building is capable of further cost-effective multi-gig speed enhancements going forward. As of March 31, our penetration of legacy copper broadband was less than 12%, highlighting the significant share-taking opportunity as we accelerate the Quantum Fiber build. Our Quantum Fiber penetration stood at approximately 26% and as we expand our footprint, we expect penetration to fall as we increase our addressable market at a higher rate when new customers are added. Many investors have asked about competing fiber activity. What we're typically seeing is activity on the distant fringes of our core growth markets. Our six core metros are hard markets to build out.

[Operator Instructions] And our first question comes in the line of Simon Flannery with Morgan Stanley. Please proceed with your question.

Great, thank you very much. Good evening. Kate, I wonder if you could talk a little bit about your conversations with the customers and how that's changed over the last few months since you've taken over and perhaps how they're thinking about optimizing their spend in light of the uncertain macro environment, it sounded like payment patterns on the consumer side were okay, but any color you could provide on what you're hearing from the CIOs? And then maybe, Chris, just an update on the EMEA deal, what's the latest timing, is that still kind of right at the end of the year, the start of next year, and any updates on any other potential transactions? Thanks.

Hi, Simon. Thanks for the question. So with respect to what CIOs are saying, it is a complicated environment for sure, but that represents a huge opportunity, particularly when you're sort of sitting down side-by-side with customers to innovate to solve their greatest business challenges. So they want us to help them deliver cost-effective, reliable core operations. They want us to help them secure their data and applications. They want us to help them innovate and the way to do that is to bring our capabilities in partnership with other great companies to chase after -- I think where the real business opportunities are. Obviously, there is a big story forming in AI and machine learning. There is an enormous set of opportunities in the metaverse, where people are sort of doing this 3D rendering and it consumes a huge amount of data and requires no zero latency. All of the companies that we're talking with are thinking like that. And with these ecosystem partnerships that combine our capabilities with the depth and breadth of other software companies that I think is really resonating. Most importantly, we're showing up and we're asking them to co-create a partner and that's new and it's received with a giant smile year-to-year. So, Chris, do you want to -- do you want to dig in?

Yes, so on the EMEA transaction, Simon, everything's on schedule as anticipated. No speed bumps and we still expect that to close late this year or early next year. And just as a reminder, we will use the proceeds from that transaction to reduce debt.

And then anything else that you're looking at real estate sales or anything else that might be --

Yes, we continue to prune the portfolio. We're prudent. We've embraced the hybrid work environment and have announced that we are selling our Broomfield campus. It's underutilized even if everybody showed up that was -- that was assigned to this facility. So like a lot of other companies, we're going to monetize that. There's other real estate that will be closing on later this year as well. That has been in the work for a few years. As it relates to other business lines, we continue to look at options as to whether we harvest or resell, but don't expect big moves from those kinds of things, that's more of a pruning exercise, and then any kind of a major restructuring of any kind.

Great. And just one follow-up, Kate, on your comments. In the past, management talked about delayed decision making, have you noted any changes in the kind of time it takes from customers to actually get a contract signed?

There hasn't been a material change and I think what we're really thinking about is how do we show the value, how do we position our capabilities such that it cuts through any additional approval processes that the global macroeconomic environment might have been pushing on over the past 18 months to two years.

Great, very helpful. Thank you.

Thanks, Simon. Next question, please.

Our next question comes from the line of Michael Rollins with Citi. You may proceed.

Thanks, and good afternoon. Two topics if I could. First on the sales front, just curious with all the locations that you pass and that your fiber is near, is there a quantification of the low-hanging fruit of customer opportunities in terms of size or revenue opportunity? And then secondly, as you look at the EBITDA performance for the quarter versus the year, can you frame the potential costs or the revenue dilution over the next few quarters that there's one quarter or two quarters in particular that takes the annualized number for 1Q and puts you back into the range for the full year guidance. Thanks.

Michael, I'll take the first one on sales, and I'll let Chris hit the second one. From a sales productivity perspective, putting the right field force in the right locations is obviously incredibly important and what we're doing is over time, we're sort of thinking through what business outcomes to customers want to chase aligned to their particular industry or vertical and that's really I think where the story is. It's like, okay, how can we stitch together our unique capabilities across networking, edge cloud, and security to show up in solutions that matter most to customers depending on not just where they're located, but that obviously is deeply connected to our edge capabilities, but that covers 98% of businesses. So I think we've got ubiquity there, it's really about the outcomes aligned to their business models. Chris?

Yes, and on the just the OpEx trend through the year, I mean obviously as we entered the year, we gave the guidance, when we talked about the investments that we're going to be making to position Lumen for success. We weren't at run rate when we came into the year, so that will be building as we go through the year and that's why that spend level was a little lower in Q1.

Thank you.

Thanks, Mike. Next question please.

Our next question comes from the line of Philip Cusick with JPMorgan. Please proceed with your question.

Hi, guys. Thank you. A couple if I can. I appreciate the details, Chris, on the Grow, Nurture, Harvest buckets in the commentary and on Page 7, I will go back and read it a few times, so I understand it. In the meantime, what can you add on recent trends in sales and funnel and things like that? And when do you expect will see these improvements to come through in the net revenue trends? And then secondly, if you could just talk about any further debt swaps from here or are you sort of done with that would be helpful. Thank you.

Yes, I mean, as I mentioned in my prepared remarks, we're pleased with what we're seeing in the Grow category. There's obviously a lot of work around how we migrate customers from legacy technologies to newer technologies, but I do think -- feel that things will ebb and flow as it relates to additional metrics behind it we're not prepared to really talk about that yet today. We will at our Investor Day talk about operational metrics that we can provide on an ongoing basis to give you guys better visibility to where we are on this journey. But again, so far so good. As it relates to the capital structure side of things, there's a lot of options, and we continue to evaluate those, and obviously, is a dynamic environment externally, and so we're certainly not finished, but there's nothing that's firm right now, and obviously, as we firm those things up, we'll keep everybody apprised.

Maybe if I can ask the first one a little bit the different way, the Grow bucket, 3.4% growth in the first quarter, quarter-to-quarter in the Grow bucket, how much of that do you think is attributable to new efforts or new products that are being pushed, is this sort of a revitalized sales effort, I don't know if this is sort of a seasonal impact, it's typical anyway? Thank you.

Okay. So I'll take that one. Basically, as I said in my opening remarks, we have a ton of work to do to galvanize our Enterprise selling machine. That's everything from sales running this program, digital marketing campaigns, making sure that we're driving analytics and sort of like what's the next best thing to do on our sales platform and it's upskilling our talent across the field organization. If you think about that we've already started doing that and we're seeing improvements in, and I talked about some mid-market green shoots that talked about some Enterprise -- large Enterprise green shoots where we're seeing more funnel, we're seeing bigger deal sizes, et cetera, but we're not where we need to be. And if I anchored ourselves in the goal, it would be -- to be executing at or better than market in every one of the product categories.

Thanks very much.

Thanks, Phil. [Darcey], next question please.

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

Hi, guys. Thanks so much for taking the questions. I guess, first, Kate, are you kind of start tackling this opportunity to pursue solutions and be a partner for your customers, the ways that you accomplish that, presuming that there weren't just things on the shelf you weren't already selling, you've got to add arrows to the quiver. And one way is to develop applications internally. Another way is to buy companies with those capabilities or hire people with those capabilities and other ways to wholesale those opportunities. But all of those come with higher expense and complications and their own complexity. So I was wondering if you could kind of elaborate a little bit about how you go from the company that this was a year ago or even six months ago to the company that you want it to be? And how does it look and how does that incremental revenue dollar from solving people's problems come in at some healthy incremental margin? And then along those lines, if I could, Chris, just on this margin -- direct margin breakdown that you've shared, in the Harvest bucket, it seems that if you're losing predominantly is the voice dollar, that seems like it'd be going away at 100% margin. But if you -- I think you were saying 58% of the new sales are coming in the growth bucket. The growth bucket is to my -- the question I'm asking, Kate, it's coming with a lot more baggage and stuff that goes along with it, which seems to be a lot lower margin at the increment. So for every $1 Harvest you lose, how many growth dollars do we need to kind of fill that EBITDA bucket? Thank you.

Okay. Let me start with your question, and I'm going to -- there was a lot to it, David, so I'd like to just sort of give you my simple answer, which is we have a three-pronged strategy. Number one, we're going to stem organic decline. That's like VPN, SASE and voice migration efforts. And I can talk a little bit more about what that looks like under the hood in just a second. Number two, we're going to better execute against the core, and that's where we're going to hit or exceed market growth rates and things like IP waves on the Ethernet, et cetera, in the Grow bucket. And then we're going to innovate for growth. And that's both commercializing the things that are on the truck today, which we are undercommercialized, period. We just don't flex our muscles in a way that we can and should, and you'll see us doing that more and more. We're also going to collaborate with partners and customers to create net new capabilities, obviously leveraging our proprietary gifts and security in the edge and the network. And then there's the third thing that is basically the main lever for creating operating leverage, which is network-as-a-service or NaaS, which is where we digitize everything, okay? So three legs of the stool, stem organic decline, better execute on the core and innovate for growth. When you talk about sitting with customers and reshaping the company to actually follow the dollars, which tend to stem out of complex business problems that our customers are trying to solve, they need the capabilities that we have and their need to consume data is just going to increase. The more we can digitize our physical assets and bring those capabilities to bear in all of the existing and net new business problems, the more you'll see Lumen being recognized as not just customer-obsessed but a very innovative company. How we afford that? All the things I said, we're simplifying. We're driving a digital enterprise. We're getting rid of the stuff that doesn't make sense. We're optimizing not just for efficiency, we're optimizing for growth, right? So let's talk about your question to Chris, and then Chris, I'll ask you to add comments. If we're cannibalizing ourselves, which I think is what you're asking about, in the Harvest bucket, we've got cash coming off of those products. Why would you actually go after those customers? And I come from tech, right? I'm new to telecom, so this is sort of mind-blowing for me to think about this notion of not touching anything. Because the whole idea of customer life cycle management is how you increase the value of a customer relationship over the lifetime of that customer. And so if we do nothing, those customers will churn. So we go from 100 pennies to 0. We could go after them and do a one-for-one product swap. And yes, some of the newer technologies might result in less margin, but that's not how we're thinking about it. We go after them to get them to net new technologies to modernize their businesses. And we think about it from the perspective of maintaining the customer relationship and maintaining the customer data, understanding how they behave and upselling them in our IP and third-party IP. And net-net, I think what we're finding, and it's extremely early in this process so we don't have all of the tricks yet, but what we're finding is that there's an opportunity up here to increase all of those revenue and EBITDA flows. Chris, do you have anything to add?

No. I think Kate explained that as well as it could be explained, David. I think the key thing is, and I've been asked this question a lot, obviously, at conferences, it's not an either/or scenario. It's not as either/or a scenario of you either get to keep the legacy voice customer and milk it for as long as you can, and then the alternative is just a low-margin replacement. It really is this bundle. And oh, by the way, then there's a tomorrow with a customer and the day after that and the day after that. And it's a very different way of thinking about the space than what I think people are normally accustomed to out of telecom. So that's what we're trying to do here.

All right. Great. Thank you so much Kate. Thanks Chris.

Thanks David. Darcey, next question please.

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

Thanks. Just a follow-up on that point. Actually, can you talk a little bit more about why the growth bucket direct margins are above Harvest where you're running it for cash? And what's driving that upside? And also maybe a little bit more specific for the quarter, but what drove the pickup in the growth bucket in the quarter? Are there any sort of shift from the Nurture bucket that we should think about as clients take hybrid products? And if you could elaborate a bit on the pricing in the segment, and any change in who you compete with as you change the approach in this category? Thank you.

Yes. I would say -- thanks, Batya. I would say that I mean, let's start with something we talked about last quarter, which is we've changed our incentive structure with the sales team so that they are incented to drive more growth product and become less dependent on legacy revenues that we know will churn, as Kate just said. So that's something that's going to continue, I think, to put the focus where the focus needs to be. When you look at the margins, yes, legacy voice, obviously very high margin. Also, there's a lot of cost in that, right? You've got some heavy around maintenance and whatnot. And when you think about newer technologies like IP and waves, once you put the capital on the ground, those are extremely, extremely efficient to run. And then on top of that, obviously, as we sell security services, namely, as Kate mentioned in her prepared remarks with some of the Lumen IP sprinkled on top, that allows us to drive margin as well. So high level, that's the response. But specifically, as it relates to products in the quarter, we said IP and colocation where that is.

Okay. Thank you.

Thanks Batya. Darcey, next question please.

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

Hi. Thanks for taking my questions. Kate, you noted some really encouraging new logo in revenue per customer data in Q1 versus Q4. I assume you're looking at sequential trends to kind of strip out the noise from the divestitures. And I'd still be interested if you're able to bring those metrics in sort of a broader historical context. Or even if you can't quantify it, can you say those sorts of changes in logos and revenues per customer kind of well outside of the bands of what was historically typical?

I mean, I want to go back to our philosophy of customer lifetime value, and the choice between not chasing the customer and allowing for churn versus moving to a modern platform where you can upsell them on your first-party technology and security and the like versus third party. I think going after the organic decline strategically is going to pay off in a material way. And it's so early right now, Nick, that it's really hard to characterize. And also, I'm going to be very honest and tell you that the data that we have about our sales efforts and our customers, we've put all new analytics in place, and we have transparency all the way down to the rep level that we never had before. So it's extremely hard for me to give you the sort of comparison that you're looking for. I think it's sort of a new set of efforts and we're excited by the early results.

Okay, okay. Understandable. And I guess, you're obviously doing a lot of prep work for some of the systems changes you've talked about. I guess, any early developments or learnings there, whether encouraging or challenging that you think was calling out as we think about the work you have to undertake over the next couple of years?

I think when you think about a telecom company that is a collection of companies, you need to assume that we have an antiquated IT backbone that's extremely complex, and there's a lot of work to do in order to simplify it. So this is unfortunately not something that we can just snap our fingers and correct quickly or easily or cheaply. It takes investment. But something that I think is new is our ability to fund our future. And funding our future includes making these systemic changes to enable better coverage of the market, better customer experience, a streamlined operations capability. And so lots more there on story. I think we can share more on the fifth, on June 5, but a huge amount of work to do and an enormous opportunity for this company.

Okay, okay. Just one last one if I can. Chris, are you able to share the level of growth and optimization spend in the quarter?

No, we're not disclosing that. But again, if you took our annual guidance and divided it by four, we were less than that in the quarter, as I said, because we're obviously ramping those efforts. So you'll see a little more spend later in the year than you did at the beginning of the year.

Okay. Got it. Thank you, both.

Thanks Nick. Darcey, next question please.

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

Great. Thanks for taking my questions. A few questions on Quantum Fiber. You noted that the factory is back, so to speak. So can you help us with the fiber subscriber build cadence from here? Typically, the second quarter is a little weaker in broadband, but with this engine up and running, could we expect sequential growth in fiber sub adds? And then the second is just on the increased cost of home passed. I know you guess to get up to $1,200 a home passed. But as I think about labor, it could be in short supply, right, when you're trying to accelerate later this year in 2024 as money chases the same labor pool. Just curious to hear your thoughts and expectations on comfort levels there. Thanks.

I'll hit the first one. I'll give you the second one, Chris. So if you think about the factory, we've got the enablement piece up and running, and we're really excited about sort of the breakthroughs that we've made. We aligned the team. We streamlined operations. We've got advisory services in helping us to do better engineering assessments for how to tackle all the enablements. And what's the first thing that you need in order to get a subscriber? You need an enablement. And what do you need in between those two outcomes? You need a marketing engine. So now that we've got the enablement, really, really high-quality ones up and running, you're going to see us putting gas in the marketing campaigns, digital marketing campaigns to really, I think, turn the needle on subscriber growth.

Yes. And on the cost side, I mean, the good news is, is that we feel good about the guidance that we gave at the beginning of the year. And we also -- and I think this is more important, we talked about the fact that we feel that there's ARPU upside here, and that's something that we'll be looking at going forward. That's the long way of saying that if we do experience movement in the cost, that's a far less impactful metric in terms of the long-term return than the ARPU. So we continue to watch it. We're not seeing any pressure there today, I want to be very clear about that. The team continues to look for efficiencies, and in some cases, has been able to find efficiency and do the build at a more cost-effective rate than what was initially designed. So we'll continue to press that. But again, I'm less concerned about that number as it relates to the overall return. It really is about penetration and ARPU, and we feel good about both of those.

Got it. Thank you.

Thanks Greg. Next question, Darcey.

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

Great. Thank you. One of your peers is looking to pursue exiting some copper locations as they're sort of way under their collar obligations. Are there any opportunities there for you as you look forward? And then secondly, when you run fiber into an area, how long is it before you can retire the copper there and not have to support two networks? Thanks.

Yes, I'll take that, Frank. So on kind of opportunities for additional copper consolidation, I'd say just simply that's not our focus, right? We've got to pivot to the new. It's where the future is for us and that's what we're 100% focused on. As it relates to the copper, I don't have an exact answer for you, but what I can tell you is it -- in a way, our job on that front is easy because we're starting from such a lousy place in terms of copper penetration, right? It's at 12% when we go into a market and we can really blast it with fiber, there's really not any major issues in terms of turning copper down. So the team's all over that and they make those decisions on a market-to-market basis.

All right. Great. Thank you very much.

Thanks Frank. Darcey, next question please.

Our next question is from the line of Eric Luebchow with Wells Fargo. Please proceed with your question.

Thanks for taking the question. In your earlier remarks, you talked about retiring more than 60% of your enterprise SKUs, primarily from legacy products. So wondering, has that had any impact on revenue contribution? And maybe you can provide some early color on what those SKUs were, what type of success you've seen thus far migrating those customers up the stack? And then secondly, one for Chris, given your desire to invest more in Quantum Fiber, any way to break down enterprise CapEx? And if we see any more market dislocation, how much of that is success-based CapEx that you could potentially adjust to help keep leverage in line?

Yes. Regarding the portfolio simplification, the reduction of 60% of the SKUs was nonrevenue impacting. What it did was basically clean up the database of product capabilities that we offer today and seek revenue on, which enables a simplification from ordering all the way down through billing. So it was the first step. Now we've got to take the next couple of steps, which is, A, further simplification. And then B, as we look to upgrade our ERP and do all the complicated work of reducing our application portfolio, we'll probably have some harder decisions to make but that's the next tranche of work.

Yes. And as it relates to the CapEx, again, there's a lot of math that we've shared on this. But I would say simply and directionally, high level, we've said that of our roughly $3 billion in CapEx guidance for the year, it was split roughly two-thirds enterprise business, I should say, one-third Mass Markets with about $250 million in each of those for maintenance. And so Quantum had about $600 million, and then there's the CapEx that goes into in-home enablements and turnups. So that's the $1 million for consumer. On the enterprise side, after maintenance, you got $1.75 billion left. And we've said that the enterprise business is really going to be the beneficiary of a lot of the optimization investments we're doing on the CapEx side, which left about $1.25 billion for success-based. Entering the year on success-based, we probably have visibility to where about 30% of that is going because of contracts that were sold last year that will be turned up this year. The rest of it is based off of what we sell this year. So there's enormous flexibility as we go through the year. If enterprise goes through a period of significant softness, we'll spend less. There's a natural governor and correlation between those two numbers. But as we go through this year, we're confident that we can stay within our guidance, given what the Mass Markets team is seeing. And as we look to future years, we'll talk more about that on June 5.

Okay. Thank you, both.

Thanks Eric. Darcey, we have time for just one last question.

Certainly. Our last question comes from the line of Jonathan Chaplin with New Street Research. Please proceed with your question.

Thanks. Two quick easy ones, if I may. First, I'm wondering if you have a sense of what the BEAD opportunity is within your footprint. How many locations might be BEAD-eligible amongst the portion that you don't upgrade to fiber? And then a bit of a technical question for Chris. On the proceeds from the EMEA transaction, I understand that those are going to pay down debt. Do they -- can you tell us which silo specifically they go towards? Do the proceeds stay within the Level 3 silo paying down debt there? Or can they go anywhere across the capital structure?

Sure. I'll take the first one, I'll let Chris do the second one. With respect to BEAD, so all of our numbers that we've shared with you, the 8 million to 10 million that we've talked about a couple of different times, that's without BEAD funding at all. So anything from BEAD would be a net positive add to the story. And it's early days yet. We're not exactly sure how it's flowing down so we can't give you that kind of transparency or precision yet. But we look at it as a potential upside for sure.

Yes. And on the EMEA proceeds, we'll get more specific about where those proceeds go as time goes on, but we do have a certain amount of flexibility. The biggest thing is, obviously, we've got to be thoughtful about where we are on covenants. And that's part of what goes into our decision-making on all that.

Great. Thank you very much.

Thanks Jonathan.

Thank you. So thanks, everybody. That concludes our call today. I appreciate your time and look forward to seeing you or hearing from you on June 5. Have a great day.