Lumen Technologies (LUMN) Q4 2020 Earnings Call Transcript

Lumen Technologies (LUMN -5.15%)
Q4 2020 Earnings Call
Feb 10, 2021, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to Lumen Technologies' fourth-quarter 2020 earnings conference call. [Operator instructions] As a reminder, this conference is being recorded today, Wednesday, February 10, 2021. It is now my pleasure to turn the conference over to Valerie Finberg, vice president, investor relations. Please go ahead, Valerie.

Valerie Finberg -- Vice President, Investor Relations

Thank you, France. Good afternoon, everyone and thank you for joining us for the Lumen Technologies' fourth-quarter 2020 earnings call. Joining me on the call today are Jeff Storey, president and chief executive officer; and Neel Dev, executive vice president and chief financial officer. Before we begin, I need to call your attention to our safe harbor statement on Slide 2 of our 4Q '20 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 that can be found in our earnings press release. In addition, certain metrics discussed today exclude transformation costs and other special items as detailed in our earnings materials, all of which can be found on the investor relations section of the Lumen website. Finally, we are announcing changes to our reporting categories, beginning with first-quarter 2021 reporting.

These changes can be found in our earnings presentation and press release with additional details and pro forma reporting for prior periods in the earnings supplement on our IR website. With that, I'll turn the call over to Jeff.

Jeff Storey -- President and Chief Executive Officer

Thanks, Valerie, and thank you, everyone, for joining us today. On today's call, I'll provide a summary of 2020 and an overview of our growth priorities for 2021. Neel will then review our fourth-quarter financial results, guide you through our new reporting structure and provide our outlook for 2021. After that, we will take your questions.

We delivered solid execution in 2020 as our employees quickly pivoted to a new operating environment and empowered our customers to meet their own rapidly changing environments. It was a challenging year for our customers and our employees, but 2020 also highlighted the power, flexibility and scalability of our fiber-based offerings and the agility of our employees. I'm exceptionally proud of the team's performance during difficult times. I'd like to cover a few highlights from the year, and this is on Slide 4 in the presentation.

For the last three years, you've heard me talk about the integration of Level 3 and the digital transformation of our company. Many of our efforts have culminated last fall with the introduction of the Lumen platform. I'll discuss the details in a moment. But for now, let's say that we see the launch of the platform as a key milestone, and I'm excited about the growth it can enable.

The primary purpose of digital transformation is to improve the customer experience. But when done right, improving customer experience also enables cost savings. Our results reflect the dual benefit of our transformation efforts. In 2019, we announced $800 million to $1 billion in cost improvement associated with our transformation initiatives.

Through a combination of digitalization, simplification and other transformation programs, we achieved $830 million in savings as of the fourth quarter of 2020, a year ahead of our original schedule. The benefits of that work are seen in the fact that we grew both adjusted EBITDA and adjusted EBITDA margin in the fourth quarter. These efforts, to enable more efficient digital interactions, also drove improvement in our Net Promoter Scores particularly in those areas where we've invested for growth in fiber-based services for enterprise and consumers. You can also see the benefit of the better customer experience in our improving revenue trajectory which is up 150 basis points compared to 2019.

While I know we have more to do, I'm encouraged by that improvement. We are turning to growth in those parts of the business in which we are investing and are managing our declining businesses with disciplined focused on preserving the free cash flow they generate. Our foundation for future growth comes from our investments in the Lumen edge cloud infrastructure, expanding fiber for enterprises and deploying new in-building technology for greater security, service resilience and speed of delivery and increasing the number of gigabit-enabled consumer customers. In 2020, we added 400,000 homes passed to our fiber to the home footprint.

We now reach more than 2.4 million homes and are very excited about the digital customer experience we are providing through our Quantum Fiber brand. We also continue to pay down debt and refinance maturities, reducing interest expense and strengthening our balance sheet. Lastly, we've expanded our commitment to ESG initiatives and recently issued our first sustainability-linked bond. Additionally, over the last year, we increased our focus on diversity and inclusion, adding a number of new programs, naming a chief diversity officer to spearhead our efforts and expanding the leadership team's accountability and engagement in our diversity and inclusion goals.

We remain committed to continually improving our approach to ESG, and I encourage you to review our annual ESG report. Looking forward, we believe the launch of the Lumen platform sets a strong foundation for growth. Slide 5 gives you a sense of how we view the progression of the business. Over the last several years, we've been focused on integrating, transforming and operationalizing the capabilities we bring to market.

With much of that work behind us, 2021 is about revenue growth and expanding adoption of our platform. More customers in more areas accessing more services in a seamless, automated and real-time basis is the vision for the Lumen platform. Of course, given the pandemic and macroeconomic implications, uncertainties remain in 2021. And we're keeping an eye on that, but we are excited about the coming year.

We feel good about our sales funnel and customer engagement for both IGAM and enterprise, but we do see lengthening sales cycles as companies continue to evaluate their new infrastructure needs. Turning to Slide 6. The onset of the fourth industrial revolution creates market demands for more capacity, more distributed computing resources, lower latency and higher resilience than ever before. Lumen and the Lumen platform are purpose-built to meet those needs.

I'll start at the bottom of the slide with the physical infrastructure layer. The physical infrastructure is obviously the foundational requirement for everything driving our economy today. I believe Lumen has the best local and long-haul fiber infrastructure in the world. Let me touch on a few points as to what that means for our customers.

First of all, we connect customers in more than 180,000 on-net buildings directly to our infrastructure with secure and reliable fiber. We have deep and robust interconnection and peering facilities to the world's eyeball networks and ISPs, acquiring and distributing traffic to and from millions of end points. We have direct fiber connectivity to cloud service providers, hyperscalers and more than 2,200 global data centers with tremendously scalable capacity. Over our global fiber network, we operate one of the world's largest Internet backbones and carry a significant portion of the Earth's Internet traffic each and every day.

The role we play in enabling the global Internet uniquely positions our Black Lotus Labs team to quickly gain visibility and insight into emerging cyber threats which we then use to secure and protect our customers' networks and applications. As the team likes to say, we see more, so we can stop more. In a nutshell, the Lumen platform has the scale, security, ubiquity and resilience necessary to meet the needs of the Fourth Industrial Revolution. Moving up one layer in the slide, Lumen dynamic connections is the result of recognizing that our customers needed software-based agility to consume and interact with our infrastructure.

We meet this need by utilizing software-defined networking to allow customers to consume on the fly everything from basic network connectivity to more advanced services like SD-WAN, Hyper WAN and Hyper DDoS. With this network as a service approach, our customers can add capacity and reconfigure destinations for that capacity as needed, enabling instantaneous consumption of additional network services. This contrast with the old model of interacting with a salesperson scheduling the service delivery time line and rolling trucks. Our platform approach not only improves the velocity with which customers can respond to their application need but also the velocity we experience in capturing and converting opportunity to revenue.

Moving beyond the dynamic network, the next layer highlights the capabilities of the Lumen hybrid cloud. Access to multiple clouds over an agile, seamless and secure communications fabric is as critical to our customers as the physical layer network connectivity. They operate in dynamic environments that requires the ability to adapt to the daily minute-by-minute or even second-by-second shifting of their workloads from one compute resource to another. The Lumen hybrid cloud, combined with our dynamic connections capability, allows customers to locate compute resources in their on-premises data centers, Lumen private and public cloud offerings or within one of the major cloud service providers, all with full control.

The thousands of SaaS providers are a specific use case. The Lumen hybrid cloud capabilities allow them to leverage our peering networks and our own ISP to enhance their application performance by locating compute resources in our edge cloud facilities and bypassing much of the best of Internet. You saw an example of this with our recent SAP announcement. SAP is working with Lumen to take advantage of these capabilities and other aspects of our platform to improve their customer experience, reduce their cost and enhance their service offerings.

I've discussed the Lumen edge initiatives on previous calls. As of today, we have fully enabled edge facilities covering roughly 60% of U.S. enterprise locations within 5 milliseconds of latency. Combining our unique fiber capabilities with our widespread edge infrastructure, by year-end, we expect to have more than 95% of U.S.

enterprises within that same latency performance. We believe the Lumen edge cloud offers a compelling solution for many of our customers' latency-sensitive applications and are encouraged that it will contribute to our improving revenue trends as it is more fully deployed and adopted. The final layer, the Lumen orchestrator, is a set of software tools that orchestrate all of these capabilities to give our customers greater control, a simpler operating model and a lower cost of ownership in an increasingly complex environment. We recently announced a partnership with VMware which combines their orchestration capabilities and secure work-from-anywhere solutions with an increasingly dynamic, robust and automated Lumen platform.

We're excited about this partnership and expect to work with VMware to bring new services to market through our joint innovation lab initiatives. Both SAP and VMware are tremendous companies. We look forward to these relationships and believe they can be an important part of driving growth for Lumen. We expect to announce additional strategic relationships in the coming months.

I'll now take a moment to walk you through our 2021 priorities outlined on Slide 8. The first priority is to drive growth over the Lumen platform. Simply put, the Lumen platform combines the control flexibility, latency and performance of on-premises solutions with the efficiency, economics and simplicity of cloud-based solutions. We will continue to expand the digital marketplace we've developed and the products and services available to customers.

To that end, we anticipate new products like Lumen edge bare metal, Lumen edge private cloud, Lumen edge VM and an expansion of locations where customers can leverage the Lumen capabilities to enhance their applications with low latency. Together, these capabilities are unique to Lumen and would be difficult to replicate. Let me give you a couple of examples to tie this all together. We're working with a major auto company on their autonomous vehicle program, helping them train their machine learning systems by building an accelerated data access network that decreases data transfer times between the metro areas they are testing with their headquarters.

We're also working with a financial services company to update their computing architecture to meet exacting specifications for performance with financial counterparties around the world. We're managing the computing and storage infrastructure along with the network connectivity to their broad digital distribution footprint for market data. The benefit to the customer is the standardization of centralized computing for efficiency and flexibility, and simplifying their long-term digital distribution across the software-defined network. Our second priority is to improve the penetration of our robust product portfolio on our existing assets.

Over the last few years, we have invested in adding new on-net buildings, deploying the latest in fiber technology in our long-haul network and expanding our fiber to the home footprint. We have begun to grow where those investments have been made, but we believe we can do better. In short, as customers return a portion of their workforce to the office, we are well positioned to provide their work-from-anywhere solutions. As employees and students continue to work and learn remotely, we are excited about our symmetrical broadband solutions for the home.

Increasing our customer base and gaining wallet share with existing customers is a key priority for 2021. Our third priority is our ongoing transformation to make it easier and easier for customers to consume our services and for our employees to support them. Expanding our digital marketplace and increasing the number of digital interactions are key goals. We believe this allows Lumen to continue to improve the velocity at which we move from opportunity to revenue and further enables our ability to improve customer experience and reduce operating costs.

Fourth is the continuation of our balanced approach to capital allocation, we remain committed to our capital allocation strategy to create shareholder value through investment in growth, returning value to shareholders through our dividend and reducing debt. Neel will provide the details, but we believe the changes we are making in our reporting categories properly reflect the evolution of our products and services and our focus on growth. We hope these changes will provide better visibility into how we are performing where we are investing for growth as well as how we're doing in managing voice and other declining businesses for cash. I'll wrap up by saying that I'm encouraged by the progress we've made and fully focused on the work that lies ahead.

We leave 2020 with improving revenue trends, better EBITDA margins and a strengthened balance sheet. I believe we have demonstrated that we can take out costs to meet the pressure of legacy revenue loss. Going forward, we will continue to implement customer-centric operational improvements, but our future isn't about EBITDA stability through cost management. Rather, it is about EBITDA growth driven by revenue growth.

I believe the Lumen platform is the right solution for our customers and will help us drive revenue, customer experience and ongoing operating efficiencies. We are excited about the opportunities ahead, but an earnings call doesn't allow us enough time to discuss the numerous programs we have under way. We intend to host a virtual analyst day in late spring. During that event, we will share in greater depth our go-to-market strategies, exciting alliances and new solutions we bring to the market.

Stay tuned for the detailed information about this event, and I look forward to providing you additional insight on our road map to future growth. With that, I'll turn it over to Neel.

Neel Dev -- Executive Vice President and Chief Financial Officer

Thank you, Jeff, and good afternoon, everyone. We have a lot to cover, so I'll start with a few highlights. Turning to Slide 10. Despite the macro environment, we delivered solid results.

For the full year, we improved the total revenue trajectory by 150 basis points, generated $8.9 billion in adjusted EBITDA, expanded our adjusted EBITDA margins and generated $3.1 billion of free cash flow. We continued to invest in the business with capital expenditures of $3.7 billion. Over the course of 2020, we reduced net debt by approximately $1.6 billion and refinanced approximately $13 billion in long-term debt, further reducing interest expense, extending maturities and strengthening our balance sheet. Finally, as of the end of 2020, we achieved approximately $830 million of annualized run rate adjusted EBITDA cost transformation savings, reaching our targeted savings range more than a year ahead of our expected time line.

Moving to revenue. For the full-year 2020, total revenue declined 3.5% to $20.712 billion. As I mentioned in our highlights, this is a 150-basis-point improvement from the 5% year-over-year decline in total revenue from 2018 to 2019. Turning to Slide 11.

Total revenue in the fourth quarter declined 3.4% to $5.125 billion. Moving now to our business segment. On a year-over-year basis, International and Global Accounts or IGAM, revenue decreased 1.6% or 0.7% on a constant currency basis. Moving to our Enterprise segment.

On a year-over-year basis, revenue decreased 0.3%. We continue to feel good about our growth prospects in IGAM and Enterprise, but during the quarter, we did see some lengthening of sales cycles. SMB revenue decreased 7.1% year over year. As a reminder, during the third quarter of 2020, we sold a significant portion of our legacy correctional facility communications business.

The sale of this business impacted revenue by about $15 million in the fourth quarter on a year-over-year basis. Excluding this business from prior results, year-over-year revenue would have declined 4.9%. Wholesale revenue decreased 6.2% year over year. In summary, for the full-year 2020, IGAM and Enterprise which on a combined basis represents 59% of business revenue, grew slightly on a constant currency basis.

In a year of macro uncertainty facing most enterprise customers, this highlights the relevance of the products and services we offer. Our turnaround plans for SMB were impacted by the pandemic, but relatively low churn and improving macro conditions gives us confidence that SMB represents a growth opportunity for us over the long term. Wholesale will continue to decline. Overall, we remain focused on improving the revenue trajectory across all channels.

Turning to consumer on Slide 12. For the fourth-quarter 2020, revenue declined 4.1% year over year. Broadband revenue for the fourth quarter of 2020 grew 1.8% year over year. The revenue performance has been driven by our micro-targeting efforts, our ongoing focus to improve customer experience and driving up penetration of our competitive assets.

For the fourth quarter, in speeds of 100 meg and above, we added 54,000 subs. From a mix perspective, 14% of our total broadband subs now have greater than 100-meg speeds compared to 5% at the beginning of last year. Ending the year, we now have approximately 2.4 million homes passed with fiber compared to about 2 million at year-end 2019. Turning to adjusted EBITDA on Slide 13.

For the full-year 2020, adjusted EBITDA was $8.888 billion which compares to $9.070 billion for 2019. For the fourth-quarter 2020, adjusted EBITDA was $2.281 billion compared to $2.278 billion from the year-ago quarter. Given the difficult macro conditions, we are pleased with the year-over-year EBITDA growth in the fourth quarter, along with the sequential improvement in adjusted EBITDA in both third and fourth quarter of 2020. We expanded our full-year adjusted EBITDA margin to 42.9% compared to 42.3% for the full-year 2019.

For 2020, capital expenditures were $3.729 billion. And for the fourth-quarter 2020, capital expenditures were $758 million. We continue to lean in and invest in the products and services that support the Lumen platform. We also continue to invest in expanding our fiber footprint and our digital customer and employee experience.

For the full-year 2020, we generated free cash flow of $3.131 billion and $1.004 billion for the fourth-quarter 2020. For the full year, we reduced net debt by approximately $1.6 billion and refinanced more than $13 billion. For the fourth-quarter 2020, we reduced net debt by more than $650 million and refinanced $1 billion of debt at lower rates. We exited 2020, having materially improved our maturity profile, further strengthening our balance sheet, lowering our cost of debt, enhancing our ability to invest in the business, our net debt to adjusted EBITDA leverage ratio is now at 3.6 times.

As of the end of the fourth quarter, we have achieved approximately $830 million of annualized run rate adjusted EBITDA transformation savings, putting us in our targeted range a year earlier than planned. We will continue to lean into transformation efforts in the future. But it is becoming increasingly difficult to separate cost transformation initiatives with most of our initiatives now focused on improving revenue performance while delivering significant cost savings. As such, we will not report transformation savings in 2021.

However, we do have line of sight and expect significant cost savings for the next several years. Transitioning to 2021 reporting on Slide 15. The changes we're making better reflect our go-to-market strategy and where we are investing for growth. Our two segments going forward are business and mass markets.

I'll focus on business segment first. We will continue to serve our business customers through four customer-facing sales channels: IGAM, large enterprise, mid-market and wholesale. IGAM is now our largest business sales channel. For the global accounts or GAM, portion of this channel, we evaluated customer buying behavior and expanded the customer list with customers that we deem as high potential.

As a result, some customers that have been in the enterprise channel have now moved into IGAM. Our enterprise channel narrows its focus and becomes large enterprise, and we now have a sales channel focused specifically on midsized customers which we are calling the mid-market channel. Based on buying patterns and support requirements, some smaller customers previously included in the enterprise channel have moved to our mid-market channel. Within our wholesale channel, changes were limited to realignment of a few customer accounts.

Slide 16 describes the segment changes in more detail. Over the long term, we are optimistic about the growth potential for IGAM, large enterprise and mid-markets. Moving now to Slide 17 in our product categories by business segment. Compute and application services includes many of the solutions that Jeff referenced in his remarks.

In addition, products like edge cloud services, CDN, data center and security are an integral part of our success with the Lumen edge. This category will also include revenue from our increased focus on ecosystem partnerships, leveraging the Lumen platform. IP and data services include products that are core to providing enterprises with hybrid networking capabilities and include products like high-speed IP, VPN, SD-WAN and our dynamic connections capabilities. Fiber infrastructure service is largely our dark fiber and optical services business.

Our voice and other category represents the bulk of our legacy and primarily TDM services. We continue to invest and expect growth from compute and application, IP and data and fiber infrastructure services. Together, these three categories represent over 70% of business revenue. As you think about the intersection of channels and products for our business segment excluding wholesale, these three product categories in aggregate grew slightly year over year on a constant currency basis for the fourth quarter.

Mid-market which currently is a headwind, represents a turnaround and eventually, a growth opportunity. Turning to Slide 18. The mass markets segment is a combination of the consumer customers plus the addition of small business customers we had in the former SMB channel. We are now calling these customers the small business group or SBG.

As we looked at the buying patterns, support model and product needs for both our SBG and residential customers, we believe that combining the go-to-market approach provides efficiencies and potentially, improvements in revenue trajectory. Within the mass markets segment, we will report revenue in four categories: consumer broadband, SBG broadband, voice and other and CAF II revenue. Additionally, we are updating our product reporting and enhancing our disclosure around our Quantum Fiber business and brand. In addition to fiber-enabled locations, we are now reporting fiber subs and ARPU.

Quantum Fiber represents a growth opportunity for us along several fronts. Fiber-enabled homes are less than 15% of our footprint, and we continue to invest with our micro-targeting strategy. Given that a significant number of enabled units were added in the past couple of years, driving up penetration represents a near-term addressable market opportunity. Moreover, we have deemphasized low-speed offerings over fiber, and our typical new sales ARPU now is generally higher than our base, representing another potential opportunity to improve the business.

Finally, we are breaking out SBG broadband which until now hasn't been a large focus for us, and we expect to improve the trajectory like we have for consumer broadband. I'd like to take a moment to summarize the transition from CAF II to the Rural Digital Opportunity Fund or RDOF. As most of you are aware, our subsidy revenue will step down from about $500 million a year to roughly $26 million in 2022. These changes do not impact 2021 results.

We took a very disciplined and ROI-based approach to RDOF. In fact, even after factoring in the subsidy, we see better returns from the fiber to the home investments we are making with our micro-targeting strategy. As we wrap up CAF II, we intend to further accelerate that strategy by shifting resources and organizational capabilities now focused on CAF II. Moving to Slide 19.

As I mentioned earlier, we are no longer reporting transformation costs. However, we will continue to transform the business going forward and expect similar levels of expense which are incorporated into our 2021 guidance. We will continue to report special items which include expenses such as severance, material legal settlements or other unforeseen material expenses that are onetime or unusual in nature. With this adjustment, full-year 2020 adjusted EBITDA would have been $8.664 billion and free cash flow would have been $2.979 billion.

So turning to Slide 20 and an overview of our financial outlook. We expect adjusted EBITDA to be in the range of $8.4 billion to $8.6 billion for 2021 compared to $8.664 billion in 2020. As I just mentioned, our EBITDA now includes cost to continue to transform the business. Our guidance also incorporates significant success-based investments focused on continuing to improve our revenue trajectory.

These incremental investments are primarily in the areas of product development, marketing, brand and go-to-market sales initiatives. For the full-year 2021, we expect capital expenditures in the range of $3.5 billion to $3.8 billion. We expect to generate free cash flow in the range of $2.8 billion to $3 billion for the full-year 2021 compared to $2.979 billion in 2020. As you bridge from 2020 to 2021, keep in mind, we had about $175 million working capital benefit from the CARES Act that reverses in 2021 and 2022.

For 2021, we do not have any required contributions to the pension fund, and our free cash flow guidance does not include any discretionary contributions. Given strong market performance, our funding status at the end of the year was 86%. We will continue to monitor and may make contributions in 2021. Also, as a reminder, our first quarter has typically high working capital use driven by timing of bonus payments and other prepaid expenses.

We expect net cash interest expense in the range of $1.525 billion to $1.575 billion for 2021. The midpoint of guidance represents almost $600 million in lower net cash interest compared to 2018. We are pleased with this outcome enabled by our aggressive delevering plan that we embarked on in 2019. We have significantly strengthened our balance sheet, improved our credit profile and our coverage ratios and remain committed to getting to our 2.75 to 3.25 net debt to adjusted EBITDA leverage target.

Consistent with our execution in 2020, we will continue with a balanced approach to paying down debt and investing in the business focused on improving our revenue trajectory. In summary, despite the uncertainty and challenges faced by our customers and our company, we delivered solid full-year results. With our continued success-based investments in the business, our focus on profitable growth, focus on new and growing addressable markets and ongoing digital transformation initiatives, we are well positioned for 2021. With that, we'll open it up for your questions.

France, would you please explain the process?

Questions & Answers:

Operator

[Operator instructions] And our first question will be from the line of Batya Levi with UBS. Please go ahead.

Batya Levi -- UBS -- Analyst

Great. Thank you. Maybe starting off with your EBITDA guidance for '21. It looks like you're expecting it to be flat to down.

Can you help us maybe quantify how much you're planning to spend on the transformation side of it? And with the outlook for potentially improving revenue trends and continued cost-cutting efforts, why would we still see a decline in EBITDA? And maybe finally, you did mention that your -- one of your focus will remain to lower leverage. I believe with this guidance, you will still be above your leverage target at year-end. Can you help us think about your capital allocation policy going forward? Thank you.

Neel Dev -- Executive Vice President and Chief Financial Officer

Hi, Batya. So I'll start with your question on EBITDA. So on EBITDA, I think there's a page in our earnings presentation that lays out the pro forma view. So from the starting point of $8.664 billion, our guidance is $8.4 billion to $8.6 billion.

Like you alluded to I think the guidance includes the cost to continue to transform the business. So we're not going to be slowing down. So we expect similar amount of cost in 2021 like we did in 2020. So you'll see there excluding severance, in 2020, we had about $224 million in costs.

So we expect about a similar amount of cost in 2021. The other thing impacting EBITDA in 2021 really are the investments we're making in growth and really changing the revenue trajectory of the business. So if you think about all the things that Jeff mentioned, those investments are just not capital. They are both capital and operating expense, so some of the product initiatives we're working on, product development cost.

There is ecosystem initiatives with partners, additional marketing, brand expenses, sales training, sales overlay, IT initiatives from quote-to-cash. So all of those things are incorporated into our EBITDA guidance. So we're really focused on long-term EBITDA growth, and a big part of our focus in 2021 is really improving the revenue trajectory over the long term with all the investments that we're making. So your second question was around leverage, leverage target.

So we're already at 3.6 times. And so if you look at our guidance, we are still committed to paying down debt. And our target ratio is -- our target leverage ratio is still 2.75 to 3.25. We'll likely exit the year somewhere around three and a half or slightly better.

And within a quarter, turn over our target range. So we're committed to it. Like you've seen us do in 2020, we will balance between paying down debt and investing in growth. And so that will be the balanced approach going forward.

Batya Levi -- UBS -- Analyst

Got it. Thank you.

Operator

Our next question, from the line of David Barden with Bank of America. Please go ahead.

David Barden -- Bank of America Merrill Lynch -- Analyst

Hey, guys. Thanks for taking the questions. I guess two. First, for Neel.

Within the capex guidance that you've given, could you kind of carve out how much of that is going to be related to the CAF II commitments such that we would assume that that would then disappear in 2022? And then I guess following up on Batya's question a little bit, Jeff, Slide 5, you've got this kind of aspirational trajectory toward growth. But then on Slide 11, we're looking at declines in almost every business unit. So what are the biggest moving parts, both headwinds and tailwinds, that are going to get us from turning Slide 11 from a lot of negatives to looking more like Slide 5 which is this trajectory toward growth in the Fourth Industrial Revolution? Thanks.

Neel Dev -- Executive Vice President and Chief Financial Officer

Sure. Hi, David. So on capital guidance for CAF II, just to give you a sense of CAF II capital. Over the last three years, we've averaged over $300 million of spending against CAF II.

And this year, we're working on a series of initiatives to actually bring it down. So we don't know exactly where that's going to end up, but it will likely be less. In terms of headwinds and tailwinds, the way I would think about it is if you look at our new reporting, for the business segment, the top three product categories, compute and applications, IP and data and fiber infrastructure, those are the ones that we're really investing for growth and voice and other will really manage for cash. Now when you look at the channel lens, there is some challenge with SMB, and we're working on that turnaround and eventually grow that at some point.

So if you look at it from a product lens, 70-plus percent of the business, we're focused on driving growth for the business segment. And if you look at even from a channel lens perspective excluding wholesale, the business is about 75%. So that just kind of gives you a sense of the part of the business that we're focused on driving growth. And in terms of mass markets, it really is about broadband and our focus on investing in fiber and driving up penetration, and that's what we'll be focused on.

Jeff Storey -- President and Chief Executive Officer

And David, how we accomplish that is by our investments, by our focus. And where we're leaning in over the last couple of years, you've seen us invest heavily in improving our customer experience and our digital interactions with customers and the way that our employees support them. But at the same time, we've been building and investing in the Lumen platform and the capabilities that we want to deliver to the market. Neel talked about the three big product categories that are growing.

But if you look inside some of those, things like edge computing, we announced last year that we were going to invest heavily in edge. Today, we have about 60% of U.S. enterprises within 5 milliseconds. So as you look at the services that we've been developing, Lumen edge cloud, the Lumen edge VM, the Lumen edge bare metal, all of those capabilities we see as growth capabilities.

And we've been investing heavily in them as well as things like hybrid WAN and dynamic connections and UCaaS, unified communications as a service. We continue to invest in the products and services and the capabilities that we need to deliver those. We continue to invest in the infrastructure, making sure that we're expanding fiber to businesses, building out our edge cloud facilities and capabilities. And we've also been investing in our partnerships and making sure that we are partnering with world-class companies that we can take and put on the Lumen platform, companies like Zoom, companies like SAP, companies like VMware, that we can partner with them and provide unique innovative solutions all over the Lumen platform.

And so we'll continue to do that and continue to invest in the opex as well to drive those products and services. So Neel talked about that in his response to Batya's question about EBITDA. So I'd say that what we've been doing for the last couple of years have been investing in those things, but really building the platform at this point. And now it's more about rolling that platform to our customers and expanding the products and services they buy from us.

David Barden -- Bank of America Merrill Lynch -- Analyst

Thank you both.

Neel Dev -- Executive Vice President and Chief Financial Officer

Yes. The one thing I would add, David, is I think we're not pleased with the three and a half percent decline year over year, but we're very pleased with the 150-basis-point improvement from the 5% decline last year. So we're really focused on improving the revenue trajectory. The other thing you can see from our profitability metrics hopefully which is hard to see with the top-line metrics, is that we're making the revenue more profitable and more durable.

David Barden -- Bank of America Merrill Lynch -- Analyst

Got it. Thank you so much, Neel. Thank you, Jeff.

Jeff Storey -- President and Chief Executive Officer

Sure.

Operator

The next question is from the line of Eric Luebchow with Wells Fargo. Please go ahead.

Eric Luebchow -- Wells Fargo-- Analyst

Great. Thanks for taking the question. So Neel, I wanted to follow up on the CAF II roll-off. I think as you said, it sounds like potentially next year, there could be a several hundred million dollar impact to free cash flow and you'd probably reinvest some capex into fiber to the home.

So curious how you think about your dividend payout ratio beyond this year pro forma some of those initiatives and whether that changes your capital allocation initiatives at all. And in addition, if you could maybe frame up the outlook for fiber to the home within your consumer segment. How many homes do you think makes sense to build to? And maybe some more color on that would be helpful. Thanks.

Neel Dev -- Executive Vice President and Chief Financial Officer

Sure, Eric. So if you think about CAF II, like I mentioned, we were -- for the last three years, we averaged more than $300 million of capital. The other thing to keep in mind is that we -- through end of last year, we have enabled about 1.1 million units, and these are really in underserved areas. So we are selling into that, and that revenue and penetration is picking up every quarter.

So there is also cash coming in from the footprint that we have enabled. So when you look at the puts and takes going into next year of the subsidy, the capital going away and cash coming from customers in that footprint, when you add it all up, it is not a material impact to our free cash flow. So it really doesn't change anything from a capital allocation perspective. And in terms of RDOF, like I mentioned in my prepared remarks, we took a very, very disciplined approach.

And so even when you net out the subsidy, our returns that we see on fiber to the home is significantly higher. Just to give you another data point, one of the largest winners of RDOF just announced that it's a $5 billion price tag to build out to about one million homes. If you compare that to the 400,000 homes that we just enabled last year, we certainly didn't spend a couple of billion. And so we have a different profile in terms of where we're investing fiber to the home, and we'll be success-based on that front.

We're not setting any specific targets. In our new disclosure, we're providing the enabled homes and we're giving you penetration so you can see that we have a fair amount of addressable opportunity to sell into. So we'll ramp up on a success-based basis, if that makes sense.

Jeff Storey -- President and Chief Executive Officer

And I'll just add, from a market perspective, we're super excited about our Quantum Fiber brand and the capabilities that we bring to the market. The digital experience is, in my opinion, second to none where our NPS scores reflect a very high satisfaction, the quality of the product, the bidirectional nature of the product and the symmetry of that capacity, the peering networks that we tie that into. We're extremely excited about the capabilities that we give to the customers and their acceptance of it.

Eric Luebchow -- Wells Fargo-- Analyst

OK. Thank you, guys.

Jeff Storey -- President and Chief Executive Officer

Sure.

Operator

Our next question, from the line of Tim Horan with Oppenheimer. Please go ahead.

Tim Horan -- Oppenheimer & Co. Inc. -- Analyst

Thanks, guys. Can you give us a little bit more color around the Lumen platform? How differentiated do you think you are now versus your peers? I know it's not just the platform. It's also your infrastructure. Can you maybe just talk about -- it sounds like you're excited about revenue growth improving.

Just maybe about the flow shares that you're seeing with some of your larger customers out there. And then lastly, where are we with implementation of the platform I guess more -- both from enabling new revenue growth but also lowering your own kind of internal expenses? Thank you.

Jeff Storey -- President and Chief Executive Officer

Sure. So over the last couple of years, you've seen the expense impact of the platform that we've been building. As you think back, and I've referenced this in the prepared remarks, in 2019, we said we were going to save $800 million to $1 billion in transformation expenses. In the quarter -- fourth quarter, we reached $830 million, and so you can see the benefit in our cost structure of the platform.

But let me tell you a little bit more about what the platform is and why it's different than everybody else. First of all, it's built, and I'm kind of referencing Slide 6 in the presentation, it's built on what I consider to be the world's best cyber infrastructure. The ubiquity of our fiber, the density of our fiber, the reach, the span, the quality and the ability to upgrade capacity which we saw in 2020 with COVID, is second to none. And we'll continue to invest in building that infrastructure.

But not only that, we've been able to locate our edge compute nodes with that fiber and with the peering connectivity within 5 milliseconds of the majority of the U.S. enterprises. By the end of the year, we'll be at 95%, 98% of U.S. enterprises.

And so there's that coupling that nobody else has. Nobody else has that ability. But then we also have the again the peering networks, but the connectivity into cloud service providers, the 2,200 data centers on-net. And our dynamic connections capability is really a network as a service where we integrate into our customers' applications, and they get to control that entire footprint, that entire connectivity, all the way from their location to wherever they want to do the computing on it, to wherever they want to distribute it via a software-defined network.

They don't have to call us. We don't have to engineer a solution. They can just have their software, and the message to our software and the network configures the way that they want. When you combine that with our Lumen hybrid cloud and the -- some of the orchestration services that we bring to customers, take connectivity to any major cloud service provider, the connectivity to any hyperscaler, we've got more connectivity, more connectedness than virtually anybody.

And so our customers get to take advantage of that. And so ultimately, the advantage to the customer on the Lumen platform is that they get to acquire, analyze and act on their data better than any other platform and more uniquely because we're more connected, more capable and we give them better orchestration services across it. Now, we've also got great partners, partnering with VMware, partnering with SAP. We think those are great partners for us to continue to roll out these services, partnering with Zoom on our collaboration services.

So we've got great partners that we bring their capabilities, and we've created this digital marketplace that the platform becomes for our customers to access the different types of technology that they need for their specific application.

Tim Horan -- Oppenheimer & Co. Inc. -- Analyst

And how unique is this platform, do you think, versus your competitors?

Jeff Storey -- President and Chief Executive Officer

Well, I'm biased. I don't think anybody is in a position to do what we do. There are certainly some people that have good fiber networks. There are certainly people that have great cloud capabilities.

There are certainly a few people that have some orchestration capabilities. I don't think anybody can bring those things together in the way that we do. But we certainly have very good and strong competitors, but we just think we're unique and we think it'd be hard to replicate for others.

Tim Horan -- Oppenheimer & Co. Inc. -- Analyst

Thank you.

Jeff Storey -- President and Chief Executive Officer

Sure.

Operator

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

Please go ahead with your question, sir.

Frank Louthan -- Raymond James -- Analyst

Sorry. Got to learn the unmute button a little better. So back to the growth issue, just wanted to discuss that a bit. I mean your fiber network and the reach and so forth that you have, I mean, I think most of us are well aware of that and it's not necessarily new.

What tactically from a cash flow perspective or from a sales perspective do you think you're going to be doing differently to be able to monetize that network capability and reach than maybe you have been in the past to be able to achieve that growth that you're calling for?

Jeff Storey -- President and Chief Executive Officer

Well, it is the Lumen platform. It's the combination of all of these things, and it's the intersection with our customers' needs. With the Fourth Industrial Revolution, the need to process massive amounts of data with very low latency is really critical. And so we view our fiber infrastructure, this is another application of how we can utilize the fiber infrastructure to deliver that capability to the customers.

The ubiquity of it and the density of it allows us to give that 5-millisecond performance, gives very low latency to our applications. The global nature of it allows us to carry that traffic to anywhere in the world. The connectivity of it allows us to carry it to any place in the world. So if you want to go to a particular cloud service provider, we can deliver it to that one.

If you want to go to a different cloud service provider, we can deliver to the other one. And so the fiber network is the core foundational piece for the Lumen platform that sits on top of it and then all those other capabilities come in. Now, we continue to do things, Frank, that are intended to increase the value and the usefulness of the fiber network. If you look at our building ads, if you look at our fiber to the home expansions, those are about expanding the footprint.

Last year, we talked about the use of the latest and newest technology and fiber capacity -- or excuse me, fiber technology that we were deploying, building the world's largest deployment of that type of technology. What we leverage there was our existing conduit infrastructure because we can build fiber at a very fast pace and at a low cost because of our conduit infrastructure. But we use that fiber for super high-scale capabilities, capabilities in delivering the world's Internet traffic but also connecting the hyperscalers and cloud service providers and great big software as a service companies, those types of things.

Frank Louthan -- Raymond James -- Analyst

OK, great. Thank you very much.

Jeff Storey -- President and Chief Executive Officer

Sure. Thank you.

Operator

The next question is from the line of Simon Flannery with Morgan Stanley. Please go ahead.

Simon Flannery -- Morgan Stanley -- Analyst

Great. Thanks very much. Jeff, you've talked a lot about broadband today. We've got a new administration, a lot of focus on the digital divide.

There's money set aside for RDOF 2. There's other programs being proposed in Congress, infrastructure build, etc. So what are you hearing from your folks in Washington? What sort of opportunities do you think this might present for Lumen? And then perhaps if you could just expand a little bit on the lengthening sales cycle. We're obviously still in the kind of pandemic.

What -- has anything particularly changed over the last month or 2? Are things gradually getting better or any color there would be great.

Jeff Storey -- President and Chief Executive Officer

Sure. On the -- what do I expect out of Washington or are there any opportunities? I don't really have any particular expectations. I expect something out of Lumen. I expect us to follow a disciplined, financially driven, logical approach to what we serve and what we don't serve.

And as Neel pointed out, we think we have lots of opportunities to put our money to work inside of our existing footprint and outside to some extent, but inside our existing footprint at better returns than some of the RDOF dollars even with the subsidies. And so we'll follow a very disciplined approach to whatever comes out of Washington. And we'll work within the footprints that we have to deliver the best service for our customers with the best digital interactions so that they can overcome the digital divide and have the best capabilities. And that's one of the things that we think we stand out on as more people work from home and educate from home, we think the symmetrical nature of our fiber footprint is a huge advantage for a consumer customer or a small business customer.

And then the second question, sorry, on the sales, the lengthening of the sales cycles. Is there anything different here? Probably not. But what we found is people aren't resolving what is this post-pandemic world look like yet because we're not in a post-pandemic world. We're still in the middle of it.

And so I think that it's not terribly that much different, but we thought it would be getting better by this point. And so we see this lengthening of sales cycles as people are really trying to resolve what does it look like post COVID and how do we think that the world is going to run. Now, I'll tell you my opinion which is we won't go back to the way the world was. And that work from anywhere with reasonable capacities in security and expanding the enterprise edge, not the cloud edge, not the Lumen edge, but expanding the edge of the enterprise to thousands and thousands of different locations is something that's going to create management challenges for customers and security challenges.

Challenges for customers are actually good for Lumen because we can bring solutions to their capacity needs, their security needs, their orchestration needs and their control needs for how to manage these complex networks. And so while we feel -- we see this lengthening in cycles, long term, we think that the -- and I hate to say that the outcome of the pandemic is good. I don't mean that. The outcome of the way we will work after the pandemic is fairly good for Lumen.

Simon Flannery -- Morgan Stanley -- Analyst

OK, thank you.

Jeff Storey -- President and Chief Executive Officer

Sure.

Operator

Our next question, from the line of Nick Del Deo with MoffettNathanson. Please go ahead.

Nick Del Deo -- MoffettNathanson -- Analyst

Hi, thanks for taking my questions. First, you highlighted the improvement in the growth rate this year versus last year. I understand it's hard, maybe impossible, to tease out. But as you look back over 2020, do you think COVID ended up being a net revenue benefit in the year from higher voice and capacity augmentations and so on or a drag or about neutral?

Neel Dev -- Executive Vice President and Chief Financial Officer

Nick, from my perspective, within a segment, it's kind of hard to tell. But overall, I think it was a net negative just because we had fairly robust plans in terms of turning around mid-markets and that got delayed. So it's hard to tell whether it's our execution or the environment. But from that perspective, if I were to handicap it, I'd say, overall, net negative.

Nick Del Deo -- MoffettNathanson -- Analyst

OK.

Jeff Storey -- President and Chief Executive Officer

Nick, can I say the same thing. There are pluses and minuses, probably more minuses than pluses. If you think about some of our international customers where their markets were particularly hit hard, it was a negative. If you think about some of the emergency capacity upgrades we did for people, that was a positive.

Overall, more negative than positive, especially as it affected people's decisions to do something going forward: buy capacity, buy networks, buy solutions. So overall, I'd say it's a net negative.

Nick Del Deo -- MoffettNathanson -- Analyst

OK. That's helpful. And then maybe turning to the outlook for '21. Maybe it's a bit of a loaded question, but how would you characterize the level of conservatism in the outlook given the economic situation and the effect on sales cycles and whatnot or maybe say it differently, how do you think about the different puts and takes and how did you incorporate that into your guide?

Neel Dev -- Executive Vice President and Chief Financial Officer

So one of the things we've seen in 2020, the services we offer are fairly resilient. Obviously, in 2020, we pulled guidance because there was so much uncertainty. But as we went through the year, we saw minimal impact even in some of the industries that were heavily impacted by the pandemic. So on balance, I would say we're fairly comfortable with the range, and we also -- we have robust plans in terms of continuing to take cost out of the business.

And so from an EBITDA and a free cash flow perspective, we feel pretty good about the range.

Jeff Storey -- President and Chief Executive Officer

And I'm going to answer your question slightly a different question than you asked. As I think about the optimism of our investments going forward, I'm very optimistic about our investments. We know what the outcome of the capabilities that people need to look like. Not always sure about the timing.

We can miss on timing a little, but we know where the market is going and what the capabilities are. And so we're optimistic, and we're investing both in opex and in capex with that optimism driving our behavior.

Nick Del Deo -- MoffettNathanson -- Analyst

All right. Thank you, both.

Operator

Our next question, from the line of James Ratcliffe with Evercore ISI. Please go ahead.

James Ratcliffe -- Evercore ISI -- Analyst

Right. Two, if I could. First of all, on the cash interest side, how much room do you think you still have to go on that, you borrowed around $600 million over the last couple of years and how much runway would you still have on that front? And secondly, on the fiber to the home expansion, you added 400,000 homes this year. Can you give us some color about what those homes were previously? Were these new construction or places where you already operate broadband or additions to your wireline footprint? Thanks.

Neel Dev -- Executive Vice President and Chief Financial Officer

So on the cash interest, I would say that from a milestone perspective, we're significantly ahead of what we thought where we're going to be when we kicked off the deleveraging plan. So it really is dependent on market conditions. And so we think there is more opportunity, and we'll continue to focus on it and -- but it really is dependent on market conditions.

Jeff Storey -- President and Chief Executive Officer

Yeah. And just to add on the fiber to the home question, James, you asked, is this new construction? Is it where you already operate? Is it overbuild? The answer is yes. It's all of the above, and I'll give you some examples. We build new homes all the time as a part of our -- as homes grow in a market, we focus on making sure that we're building into those subdivisions with fiber.

It's a big part of our fiber expansion plan, making sure that when it's cheap to build and before homes get there, that we build the right infrastructure and to grow them. Is it in our footprint? Most of the fiber expansion is in our footprint, but not all of it. If you look at MDUs outside of our footprint, we think we have great fiber penetration in markets that we don't have consumer customers today. And so we go to those MDUs though and say we want to serve you in this market.

And then we've actually partnered with some communities like Springfield, Missouri, where we went and overbuilt the two providers that were there in conjunction with the city to expand our capabilities. So it's a little bit of all of the above. All of the above has one characteristic and that is -- maybe two characteristics, that we think we can drive revenue growth at a low cost of capital and a low opex to do it. And so we view every opportunity through that lens: how do we make sure that we use our capital efficiency -- efficiently and how do we make sure that we get the penetration that we want.

Neel touched on that as an opportunity for us. We still have an opportunity to improve our penetration in our fiber markets. But it is a little bit of all of the above, new construction, overbuilds in existing areas and then some expansion outside our traditional footprint.

James Ratcliffe -- Evercore ISI -- Analyst

Great. Thank you.

Jeff Storey -- President and Chief Executive Officer

Sure. Operator, I think this will be our last call -- our last question. So thank you, operator.

Operator

Very good. Our last question then will be from the line of Phil Cusick with J.P. Morgan. Please go ahead.

Phil Cusick -- J.P. Morgan -- Analyst

Saved by the bell. I'm going to ask every question I have left. So just a few housekeeping ones for me. What's the penetration in those CAF areas now? And how much revenue has this contributed?

Neel Dev -- Executive Vice President and Chief Financial Officer

So Phil, I think we don't disclose that, but I would say part of it is it's a moving target. So where we have finished building, we are seeing relatively high penetration. But keep in mind, a lot of the units we're building else every quarter. But we expect fairly good penetration on that, significantly higher than what we're seeing everywhere else.

Phil Cusick -- J.P. Morgan -- Analyst

OK. And as you finish up those builds this year, it sounds like you expect to spend maybe a similar amount on fiber or broadband construction going forward but in -- maybe in higher return sort of micro-targeting areas. Is that the right way to think about it?

Neel Dev -- Executive Vice President and Chief Financial Officer

That's absolutely right, but we're going to be very success-based about it. We're going to calibrate between how our penetration is going up versus how much footprint we're converting to fiber or adding fiber, like Jeff mentioned. So we will continue to have that micro-targeting approach. But the pace at which we go and invest will be -- we'll calibrate that to our execution and driving our penetration.

Jeff Storey -- President and Chief Executive Officer

And while we're more than capable of focusing on two customer sets, at the same time, we've talked a lot on this call about fiber to the home and consumer. I don't want to lose sight of our investments that we're doing for enterprise. That's the vast majority of our investments in fiber and in the Lumen platform. Now we've got great benefits of the Lumen platform that we bring to consumer customers because of our digital interaction approach to working with them.

We see it in our Net Promoter Score surveys. We've got great benefits that we're bringing to small business, mid-market business, enterprise business, IGAM. And we'll continue to leverage all of those investments to drive the trajectory of each of those groups to the best that we can. So thank you all.

Phil Cusick -- J.P. Morgan -- Analyst

So I was going to go there.

Jeff Storey -- President and Chief Executive Officer

Go ahead.

Phil Cusick -- J.P. Morgan -- Analyst

I was just going to say, it sounds like that frees up capital for you to spend, not necessarily on consumer, but maybe on the higher return enterprise fiber opportunities as well?

Neel Dev -- Executive Vice President and Chief Financial Officer

Well, look, the way I would say it is we're not constraining capital today. And so we're going to -- even in a year with a fair amount of uncertainty in 2020, we spent $3.7 billion. And so we're not really constraining capital. We'll be success-based about it.

We don't want a lot of stranded capital. But as we see opportunities, we will lean in and invest, but we'll calibrate it to our execution. And we have a very dynamic process, to Jeff's point. I think we dynamically allocate capital between enterprise and consumer, between edge and fiber to the home.

We'll do that on an ongoing basis to make sure we're getting the right financial outcomes.

Jeff Storey -- President and Chief Executive Officer

Well, thank you all for the engagement and the questions. Before I conclude the call, let me summarize a few thoughts on 2021 and how you should think about our business. In the face of an uncertain environment last year, we made significant progress in evolving the company. We delivered for our customers, improved our revenue performance and continued to pay down debt and improved the balance sheet.

Following several years of work, we launched the Lumen platform and expect to drive long-term growth by meeting the changing needs of the Fourth Industrial Revolution. In 2021, we're fully focused on driving growth through expanding the reach and the capabilities of the Lumen platform, penetrating our existing fiber investments, leveraging our edge strategy and expanding the alliances that we're working on within the industry. As always, we look at growing free cash flow per share as the guiding principle and believe we're doing the things we need to, to drive growth in long-term shareholder value through the growth in free cash flow per share. Thank you, all, for joining us today.

I look forward to connecting with you at our upcoming analyst day. France, thank you very much. That concludes the call.

Operator

[Operator signoff]

Duration: 75 minutes

Call participants:

Valerie Finberg -- Vice President, Investor Relations

Jeff Storey -- President and Chief Executive Officer

Neel Dev -- Executive Vice President and Chief Financial Officer

Batya Levi -- UBS -- Analyst

David Barden -- Bank of America Merrill Lynch -- Analyst

Eric Luebchow -- Wells Fargo-- Analyst

Tim Horan -- Oppenheimer & Co. Inc. -- Analyst

Frank Louthan -- Raymond James -- Analyst

Simon Flannery -- Morgan Stanley -- Analyst

Nick Del Deo -- MoffettNathanson -- Analyst

James Ratcliffe -- Evercore ISI -- Analyst

Phil Cusick -- J.P. Morgan -- Analyst

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