Verizon Communications Inc.

Good morning and welcome to the Verizon second quarter 2019 earnings conference call. At this time all participants have been placed in a listen only mode and the floor will be open for questions following the presentation. To ask a question press star 1 on your touch tone phone. If at any point your question has been answered you may remove yourself by pressing star 2. Today's conference is being recorded. If you have any objections you may disconnect at this time. It is now my pleasure to turn the call over to your host, Mr. Brady Conner, Senior Vice President, Investor Relations.

Thanks, Brad. Good morning, and welcome to our second quarter earnings conference call. This is Brady Conner, and I'm here with Hans Vestberg, our Chairman and Chief Executive Officer, and Matt Ellis, our Chief Financial Officer. As a reminder, our earnings release, financial and operating information, and the presentation slides are available on our Investor Relations website. A replay and transcript of this call will also be made available on our website. Before I get started, I'd like to draw your attention to our safe harbor statement on slide two. Information in this presentation contains statements about expected future events and financial results that are forward-looking and subject to risks and uncertainties. Discussion of factors that may affect future results is contained in Verizon's filings with the SEC, which are available on our website. This presentation contains certain non-GAAP financial measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are included in the financial materials on our website. The quarterly growth rates disclosed in our presentation slides and during our formal remarks are on a year-over-year basis unless otherwise noted as sequential. Now let's take a look at consolidated earnings for the period. For the second quarter of 2019, we reported earnings of $0.95 per share on a GAAP basis. These reported results include a pre-tax charge of approximately $1.5 billion related to early debt redemption costs. The impact after tax was approximately $1.1 billion or $0.28 per share, resulting in adjusted earnings per share of $1.23. This represents growth of 2.5% on an adjusted basis compared to $1.20 a year ago. Let's now move to slide four and take a closer look at our earnings profile for the second quarter. Consistent with the approach we discussed last quarter, we have illustrated the ongoing impacts to earnings from the adoption of accounting standard ASC 606 for revenue recognition, as well as the adoption of ASC 842 for leases. As we pointed out last quarter, we expect a smaller benefit in 2019 than we realized last year from the adoption of ASC 606, primarily due to the deferral of commission expense. The reduction in benefit creates a year-over-year headwind to both reported earnings per share and adjusted earnings per share. The impact was a $0.03 headwind in the quarter and $0.06 year-to-date. As a reminder, this headwind is expected to continue until the end of 2020. At the beginning of this year, we adopted accounting standard ASC 842 for leases, which resulted in a gross up on the balance sheet for all operating leases. In addition, the lease standard affects our earnings per share primarily due to the expensing of certain lease costs. As highlighted previously, we expect this to result in a one to two cent per quarter headwind on earnings per share throughout 2019. For the second quarter, this headwind was one cent on earnings per share. As you can see on the slide, the 2.5% growth in adjusted EPS includes both the impacts from the deferral of commission expense related to the revenue recognition standard and the adoption of the leasing standard. This highlights the strong underlying performance of the business. Matt will take you through the details and key drivers later in the call. With that, I'll now turn the call over to Hans.

Thanks, Brady, and thanks, everybody, for joining this second quarter earnings call. We had a strong second quarter. It was fueled by a very good wireless service revenue growth as well as a strong EPS, adjusted EPS growth as well. So I think the team had a good quarter with a lot of focus on execution. At the same time, our operational metrics was good with net additions on the wireless side as well as a very low churn. That, in combination with a very solid capital allocation, as well as efficiency coming out from our capital allocation process, all in all also ended up to a very good cash flow. So if I sum it up very quickly, a very good quarter from us financially. Together with our work in the network, which is so important to us when we're building our network as a service, we also won all the top third-party measurements. We won from J.D. Power the 23rd consecutive time. When it comes to root metrics, a 12 straight win there as well. So we are really getting the right feedback from the market and the measurements that is really valuable in this market. At the same time, we won some more spectrum in the millimeter wave. auction which is now adding up to our portfolio which means that we have a portfolio for the 5G era where we can build capacity and we can build coverage which we have said all the time we're going to build a real 5G with all the eight currencies that I've talked about before. We also have launched quite a lot of cities here lately adding up so we are on track for the 30 markets that we have said we will do this year. At the same time we continue to add new devices to the portfolio. The latest one was the Enzigo MiFi 5G device that we launched recently and now four different devices on 5G. We're also very focused on the fiber because ultimately if you're going to do 5G you need fiber and our fiber deployment is now in more than 60 cities And we had 1,400 route miles a month in average in this quarter, which means that we increased from the first quarter, continued this so important build for our overall Intelligent Edge network and for the 5G deployment we're doing. When it comes to Verizon 2.0 and its transformation, one of the proof points is, of course, today that we now are reporting Verizon Consumer Group and Verizon Business Group as segments in the earnings release that we're doing today. I can also say that we get a lot of good traction with our customers, especially with enterprise customers with the new support and the new go-to-market we have where we can show the full portfolio of Verizon and seeing that we have the right support also for the people in the line meeting our customers every day. At the same time, we continue with the network as a service concept where we have now announced our collaboration with YouTube TV where we're going to offer that both to our FIUS customers but also to the wireless customers. Again, working on the model where we outlined earlier this year how we can partner with some of these content players instead of investing ourselves in it and seeing that we can bring a seamless service for our customer but also making it very efficient for ourselves. and for our customers. We also had continued and finalized the voluntary separation program in the quarter and we have done quite a lot of that and that in total now puts us up to have a competitive cost base and actually done quite a lot of these changes recently. So I would say that we are doing this transformation from a position of strength and I'm really proud of the team that have done all of these changes and transformation in the last 12 months and delivering these results at the same time. And it really sets us up to continue to be very competitive in this market and definitely to continue to be the leader in this market. So I'm proud of the team and what we're producing this quarter. By that, I hand it over to Matt to go over the financials more in detail. Thanks, Hans.

And good morning, everyone. Let's start with a recap of our consolidated operating and financial results. On a reported basis, second quarter consolidated revenue was $32.1 billion, which was down slightly as compared to the prior year. Wireless service revenue growth was offset by lower wireless equipment revenue and wireline service revenue. On a year-to-date basis, consolidated revenue was up slightly at 0.4%. We are maintaining our full-year GAAP consolidated revenue guidance of low single-digit percentage growth for 2019. On a consolidated basis, second quarter adjusted EBITDA margin was 37.7%, which was up from 36.8% in the prior year and includes headwinds of approximately 80 basis points from the deferral of commission expense and the impact of the lease accounting standard that Brady mentioned earlier. Adjusted EBITDA increased more than $200 million, or 1.8%, over the prior year due to wireless service revenue performance as well as continued improvement in operational efficiencies across the business. Our business excellence initiatives have realized cumulative cash savings of $4.1 billion since the program started in 2018. We have now completed all three phases of our voluntary separation program and have realized approximately $480 million of expense savings year to date. With the last tranche of employees exiting in late June, we expect additional incremental savings in the third quarter. We remain on track to achieve our goal of $10 billion of cumulative cash savings by 2021. As Brady mentioned, adjusted earnings per share for the quarter were $1.23, up from $1.20 a year ago. The increase in our earnings per share was driven by growth of more than $200 million in adjusted EBITDA, slightly offset by a higher tax rate. The higher tax rate resulted in an approximately one cent headwind to adjusted earnings per share. As a reminder, last year's tax rate included certain one-time benefits related to the Tax Cuts and Jobs Act, which do not repeat this year. For 2019, our adjusted effective tax rate is now expected to come in at the lower end of the 24 to 26% range. Continued wireless service revenue momentum and solid margin performance keep us on track to achieve our guidance of low single digit percentage growth in adjusted EPS, excluding the impact of the new lease accounting standard. Our expectation of the lease accounting headwind remains unchanged at approximately four to eight cents for fall year 2019. Now, let's move on to the review of the new operating segments under Verizon 2.0, starting with consumer on slide seven. As a reminder, our new consumer segment encompasses both wireless and wireline products and services targeting retail customers, as well as our wireless wholesale operations. In the second quarter, total consumer operating revenue was $22.0 billion, which is flat compared to the prior year. These results were primarily driven by continued strong growth in wireless service revenue and file service offerings, offset by declines in wireless equipment and legacy wireline services. Consumer wireless service revenue increased by 2.5%, driven by customer step-ups to unlimited plans and migration within unlimited to higher tiered plans, as well as an increase in connections per account. Less than 50% of our customer account base are on unlimited plans. In the second quarter, consumer wireless equipment revenue decreased 8.2% as lower upgrade rates more than offset an increase in phone gross ads. Consumer files revenue increased by 1.2% due primarily to the demand for our broadband offerings. Consumer EBITDA margin as a percentage of total revenue in the quarter was 46.5%, which was up 80 basis points from the prior year. This includes headwinds of approximately 100 basis points from the deferral of commission expense and the new lease accounting standard as previously mentioned. Let's now turn to slide eight and take a close look at consumer operating metrics. Within consumer, wireless performance is very strong while operating in a highly competitive environment. Phone net additions were 73,000 for the quarter as compared to 17,000 last year, including postpaid smartphone net additions of 209,000, up 17% from the prior year. This was driven by phone gross additions, which are up more than 5% year over year. Postpaid net additions totaled 126,000, including other connected device net additions of 187,000, primarily wearables, offset by tablet net losses of 134,000. Postpaid phone churn of 0.72% improved sequentially due to focused retention efforts around our high-value customer base as well as normal seasonal patterns. This performance was in line with last year's strong results. Our superior network quality and personalized offerings continue to resonate with our customers. Total retail postpaid churn of 0.97% was up compared to 0.93% last year. Total postpaid device activations, of which 81% were phones, were down 7.6%. Our retail postpaid upgrade rate was 4.3%, down from 5.1% a year ago, reflecting the continued elongation of the handset upgrade cycle. In the second quarter, Prepaid net losses were 213,000 compared to a loss of 236,000 last year. We continue to focus on high-value accounts and profitability in our retail prepaid wireless offerings. Fios internet net additions of 28,000 were driven by continued demand for our high-quality fiber broadband products. Fios video losses totaled 52,000 as consumers continue to adopt over-the-top video services to replace traditional linear video offerings. Now, let's move to our business segment on slide nine. Our business segment includes wireless and wireline products and services provided across four customer groups, global enterprise, small and medium business, wholesale, and public sector and other, which includes Verizon Connect. Total operating revenues for the business segment decreased 1.1% in the quarter as growth in wireless services and our high-quality fiber products were offset by ongoing secular pressure from legacy technologies. In the quarter, revenue from our business wireless products grew 5.6%, including 6.1% wireless service revenue growth. This strong performance reflects Verizon's best-in-class network quality, reliability, and solutions-based approach with our business customers. Revenue from our wireline products declined 7.6% in the quarter. From a customer group perspective, global enterprise and wholesale declined 4.8% and 15.1%, respectively, driven primarily by legacy pricing pressure and technology shifts. Small and medium business revenue increased 5.4%, driven by wireless service and files growth partially offset by ongoing declines in traditional data and voice services. Public sector and other revenue increased 3.8% as a result of growth in wireless and wireline products and services. Business segment EBITDA margin for the quarter was 27.3%, which was down 20 basis points compared to the prior year, driven by declines in legacy wireline product revenues. This includes headwinds of approximately 10 basis points from the deferral of commission expense and the new lease accounting standard as previously mentioned. Now let's move on to slide 10 to discuss business operating metrics. Business wireless trends remain consistent and strong. Postpaid net ads were 325,000, which includes 172,000 phones, 90,000 tablets, and 63,000 other connected devices. Phone churn of 0.97% improved sequentially, while total post-paid churn of 1.21% increased five basis points compared to the prior year. Total post-paid device activations were up slightly at 0.6%, while our retail post-paid upgrade rate was 4.2%, down from 4.6% in the prior year. Let's now move on to slide 11 to discuss Verizon Media Group. For the second quarter, Verizon Media Group revenue was $1.8 billion, which was down 2.9% versus the prior year, a significant improvement from the 7.2% year-over-year decline reported in the first quarter. Gains in native and mobile advertising continue to be offset by declines in desktop advertising, though the business continues to build on positive momentum in key areas. We are continuing to migrate customers to our recently integrated advertising platforms, simplifying interactions with partners and driving synergies within the business. We remain focused on growing our audience, engagement, and monetization across our super channels, which include sports, finance, news, entertainment, home, and mail. During the quarter, we launched Yahoo Finance Premium and HuffPost Plus, which are subscription services that enhance the experience of two of our most popular media assets. Let's now move to slide 12, which reconciles Verizon 2.0 results to our legacy Verizon 1.0 results. As we mentioned during our Verizon 2.0 segment reporting webcast in mid-June, we will be providing overall wireless and wireline results for the remainder of this year. You can find these results in our supplemental information included on our website. Slide 12 shows a reconciliation from Verizon 2.0 to Verizon 1.0 for both consumer and business revenue. The waterfall charts show the bridge from consumer revenue to wireless and from business revenue to wireline. The top chart shows consumer, which had $22.0 billion of revenue in the quarter. The subtraction of consumer wireline removes $3.1 billion, and the addition of business wireless brings in $3.8 billion resulting in total wireless revenues of $22.7 billion. The bottom chart shows a similar reconciliation from business to wireline revenue. We start with business revenue of $7.8 billion, subtract $3.8 billion of business wireless and $0.2 billion of Verizon Connect, and then add $3.1 billion of consumer wireline to ultimately arrive at total wireline revenue of $7.1 billion in the quarter. Total wireline operating revenues in the quarter declined 4.5%, while wireline margins were 19.3%. Let's move to slide 13, which highlights our overall legacy wireless results. Looking at overall wireless results, which includes both consumer and business wireless, total wireless operating revenue increased 1.0% to $22.7 billion in the second quarter, primarily driven by a 3.1% increase in service revenue. For the remainder of the year, we continue to expect overall wireless service revenue growth to be within the mid 2 to 3% range. Total wireless EBITDA margin as a percentage of total revenue in the quarter was 48.2%. This includes headwinds of approximately 100 basis points, primarily from the deferral of commission expense and the new lease accounting standard as previously mentioned. Excluding the impact from the accounting standards, second quarter EBITDA margin was 49.2%, up 140 basis points year over year. Total postpaid net ads were 451,000 in the quarter. This includes phone net ads of 245,000, which were up from 199,000 a year ago. Postpaid smartphone net additions in the quarter were 420,000. Postpaid phone churn of 0.76% was similar to last year, while total retail postpaid churn of 1.02% was up five basis points year over year. For the quarter, we increased customer accounts by 8,000 as compared to a loss of 24,000 in the second quarter of last year. Total postpaid device activations were down 5.7%. This was driven by an increase in postpaid gross additions to 3.9 million from $3.8 million in the prior year, offset by a decrease in our retail postpaid upgrade rate to 4.3% from 5.0% a year ago. Let's now focus on our consolidated cash flow results and the balance sheet on slide 14. Year-to-date cash flow from operating activities totaled $15.8 billion, down from $16.4 billion during the prior year. Benefits from operational improvements were offset by higher cash tax payments and payments related to the voluntary separation program. The one-time benefits realized last year related to tax reform were primarily recognized in the first half of 2018. Capital spending for the first half of the year was $8.0 billion, which is up slightly from the prior year. Our capital expenditures continue to support the growth in data and video traffic on our industry-leading 4G LTE network, the launch and continued build-out of our 5G ultra-wideband network, the upgrade to our intelligent edge network architecture, and significant fiber deployment in 60-plus markets outside our ILEC footprint. We maintain our fall year 2019 capex guidance range of $17.0 to $18.0 billion. The net result of cash flow from operations and capital spending is free cash flow for the first half of the year of $7.9 billion. We ended the quarter with $113.4 billion of total gross debt, which is $1.3 billion lower than the prior year. The unsecured debt balance was $102.1 billion, which is lower year over year by $3.9 billion and lower sequentially by $1.2 billion. Our net unsecured debt to adjusted EBITDA ratio at the end of the quarter was 2.1 times versus our targeted range of 1.75 to 2.0 times, and is down from 2.3 times last year, reflecting the continued strength of our balance sheet. We continue to actively manage our debt portfolio to minimize near-term maturities, optimize our overall funding footprint, and lower our cost of capital. During the quarter, we tendered $4.5 billion of notes that resulted in the pre-tax charge of $1.5 billion that Brady mentioned earlier. The charge was predominantly non-cash. Our balance sheet strengths provide us with financial flexibility to execute on our strategy. We continue to maintain near-term maturities at low levels, giving us confidence to operate and invest throughout the business cycle. So in summary, Second quarter saw a continuation of our strong performance while we made the transition to Verizon 2.0. We grew customer relationships and increased service revenues. The growth in our earnings was driven by operational performance from the business, which also led to strong cash flow results for the quarter. We continue to be disciplined in our approach to capital allocation, and we remain committed to strengthening our balance sheet. With that, I'll turn the call over to Brady so we can get to your questions.

Thanks, Matt. Brad, we're now ready to take questions.

Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star 1. Please unmute your phone and record your name clearly when prompted. Your name is required to introduce your question. To withdraw your request, please press star 2. One moment, please, for the first question. The first question comes from Philip Cusick. of JP Morgan. Your line is open.

Thanks, guys. One short-term and one long-term, if I may. First, your 2.5% to 3% service revenue growth guide seems very conservative at this point versus 3.7% in the first half. Are there headwinds in the back half that we should think will get the average down below 3%? And second, Hans, can you dig more into the 60 market fiber build and help us understand any early progress on insourcing backhaul as well as when you will start marketing that to consumer or business out of region. Thank you.

Thank you. Let me start with the wireless service growth, and Matt will come back on that. But I think that the team has shown really good work here in the last couple of quarters since I would say we have this new structure. So I'm confident we have a good momentum in our business. Ronan and the team probably have some more cards up their sleeves, thinking how they will continue to compete in this market. So we think it's our, at least I have a lot of confidence in the team of Ronan and continue to progress on the service revenue growth that we have done so far. On the fiber bill, yeah, that's a very important bill for us. And, you know, we have been on to that for quite a while right now. And the speed in this quarter was 1,400 right miles per month in average in the quarter. And remember, in the first quarter, we talked about 1,000. So definitely we're coming up here. Right now, the majority of the fiber is going to our own sites, to be honest, if I may say. But over time, of course, when we roll in later in part of this year and next year, we're also going to be able to offer that to our enterprise customers and wholesale, et cetera. So that's how we're working right now, and we're building it in 60 markets. And it is just so essential for the whole Intelligent Edge network. It's so essential for us. uh the whole uh 5g play that we have to have these fibers so uh we have a good speed now the team has been there on for quite a while and um so it will take a little bit longer before we can offer it to to all our customers but mainly i would say well right now we're taking to our own sites which is a very important improvement for our efficiency matt yeah so uh good morning phil so on the service revenue certainly uh

Pleased with the results we've seen in the first half of the year, 3.1% in second quarter, driven by over 6% in the business segment. So great momentum in the wireless products and services across both segments as we head into the second half of the year. We like the momentum we have as we jump off into second half, and we'll wait and see how the back half of the year plays out. in terms of the total service revenue growth, but we certainly see a continued path to continue on the service revenue growth that we've had for over a year or so now.

Thanks. And Hans, if I can follow up, the insourcing of your backhaul as you take fiber to your sites, has that really begun to start lowering costs, or are you not starting to light that up yet?

We have been starting, but of course today on the total cost we have, it's not significant yet, but this is all part of the Intelligent Edge network, the multi-purpose network we're building, and that's what you have seen in our Capex, the last two years, the efficiencies. And as you remember, Kyle talked about that the intelligent edge network built is going a couple of years more. So we, of course, believe that we have more efficiencies to come out with. And one of them is definitely the fiber, which we are now building, that definitely should get us a better owner economics long term. And also remember that this is a growth opportunity for us as well in certain areas.

Thanks, Phil. Hey, Brad, we're ready for the next question.

Thank you. The next question will come from Brett Feldman of Goldman Sachs. Your line is open.

Thanks for taking the question. This one's for Matt. As you show in slide 14, you're getting very close to achieving the net unsecured leverage target you outlined at your analyst meeting a couple of months ago. And so the question is, as you sort of get down two turns of leverage and below, how do you think about prioritizing the incremental capital you'll be generating at that point? Should we think about that as, you know, drive powder for Spectrum, which you maybe look to flex up on CapEx a bit, or are we actually getting closer to a point where share repurchases become a higher and more immediate priority? Thank you.

So let me start just because this is, of course, something that me and Matt is working with constantly. Remember how what we outlined in February were very clear and disciplined priorities way of our capital allocation. Number one, into the business, the CAPEX. You have seen what we have done with the CAPEX in the last couple of years. We do everything we need, and we are on historical levels, and we will continue to be very disciplined there. Secondly, we want to put our board in the position to make the dividends that we have been working. And lastly, we work with our debt. That's how we have worked all the time. So it's business, dividend, and debt. We just want to continue this commitment that we made to get into this range. And remember, that was a commitment long before me. But as you know, we are a company that always delivers on the commitments. So that's why it's important. And ultimately, when we get there, we will get optionality to our board to have a great conversation, what we're going to do with it. That's how I see it. And then, of course, Matt is working with us daily to see that we have the right balance sheet structure and the capital allocation of the company. Matt?

Yeah, Arne. Thanks for those points. And just building on maybe on the back end of that. So as you said, Brett, we are as close as we've been to that range in the past five plus years. And so we're making good progress to get there. And that comes from having strong results that drive good cash flow. And you see the progress we've been able to make. But just a couple of add-on points to what Hans said. It's a range that we say we want to be in for the long term. That means we don't want to go past the 1.75 end of that range either. And so, you know, get into the range and then be in the range. And then we also don't expect to build up cash on the balance sheet beyond our normal operating levels. So as we get into the range, we look at the opportunities of our priority number one, which is to invest in the business and the rest of the items you heard Hans talk about. We'll then decide the... the most appropriate use of cash that we may have to drive long-term value for our shareholders.

Thank you.

All right. Thanks, Brad. Hey, Brad, we're ready for the next question.

Thank you. The next question comes from Simon Flannery of Morgan Stanley. Your line is open.

Thanks a lot. Good morning. Hans, I wonder if you could update us a little bit more on your 5G. You talked a bit about opening up the new mobile broadband markets. Perhaps you can talk about your learning so far and where we stand on expanding 5G home. I think you talked before about new markets later this year and dynamic spectrum sharing. How is that panning out and when do we expect to see that hitting the Verizon network? Thanks.

Thanks. Great question. On the 5G, you have seen our progress in the quarter. We have basically now launched nine markets on the way to get to the 30 that we have talked about for the full year. You can also see on the 5G mobility how the improvement has gone extremely fast. I mean, take a couple of the cities where basically have doubled the footprint since we launched the markets. And that's the pace we're on to. At the same time, we've gone from roughly having 600 megabits in speed on the handsets. Now we're doing easily 1.3, 1.5 in averaging up to 2 gig. What I want to tell you is that the development we're doing on technology is actually extremely fast compared to what I saw in 4G. And remember, I was part of 4G as well. We are just a quarter into all these nine markets we've launched. We've launched with all the three infrastructure vendors we have, which means that we're coming out from sort of just scaling in the beginning, getting all the technology to work, and now can start scaling. At the same time, we have now three handsets, and we have the NCE Google MiFi that we launched, which is sort of a business proposition as well for 5G. So I think that that's what you see. We see a great improvement, but still it's a lot of the intelligent antenna sort of technology that we're developing. The team is out in the field every day. So I'm confident that we will continue to do well here. And remember now, in the 5G ultra-wideband that we're doing right now, we're doing that in the most dense populated areas where really 5G is coming to its rights, you know, with a fantastic sort of performance there. So that's it. When we then talk about... the 5G home. You're absolutely right when I said that later this year we're going to launch 5G or 5G home with the NR chipset. So that will come back, so there's no changes to those plans. Ultimately, your question about DSS, which is dynamic spectrum sharing, which is an important piece for anyone that wants to do coverage on 5G. That is still coming in the first half of next year. but in our case, what I said before, the most important is to get our customers the best experience. We have the best experience on 4G right now. We are just giving them an extraordinary experience on the ultra-wideband. We're going to be in the position to give optionality when we turn that off on, when we're going to turn it on with coverage and capacity when we see it's a benefit for our customers. But I would say the activity level in the engineering team, the team working on the ground in every city, doing the fiber, it's extremely high in Verizon right now. So I think our focus is absolutely in the right place to see that our network is the number one. And remember also what I said previously, the 4G network now continues to win all the third-party awards. I mean, Root Metrics, J.D. Power in this quarter. So we're not neglecting that part of it neither. So you need to think about that when you have a customer in front of

Great. Thanks a lot.

Thanks, Simon. Brad, we're ready for the next question.

Thank you. The next question comes from David Barton of Bank of America. Your line is open.

Hey, guys. Thanks for taking the questions. I guess two if I could. One for Matt. If we're guiding for the low end of the tax rate for 2019, should we be then thinking that we're kind of steering our earnings per share growth up Or are there other things in the mix that we shouldn't be kind of taking that improvement right to the bottom line? And then the second question would be, just with respect to the legacy 1.0 reporting for the business segment, I think one of the surprises that came out of the AT&T result was the strength that they showed relative to history in their enterprise business. And they talked about Price stability and other things, I think Randall said that it was as good at Outlook as he had for that unit for some time. I think that the performance at Verizon didn't seem to kind of reflect the same strength, but I'm wondering if it had something to do with the reorganization in the quarter and we should start to see some improvement there. I wonder if you could kind of elaborate a little bit on that. Thank you.

Yeah. I can start with the last question there about the business side of it. And I think that when it comes to what you call the Y-line business, I mean, it was a little bit blended, a little bit tougher on the enterprise side. But on the other hand, the governmental business and the smaller medium had a good growth for us. So I think we see a very good possibility to continue to uh see that with the accelerate sort of the decline in in in in enterprise we have a great funnel in the enterprise business as well uh and remember i mean there's no impact of the of the the reorganization we've done i mean i would go the opposite yeah i would say that hey the the changes we have done the last 12 months compared to what we've done the last five to ten years and we delivered these results in all the units i think it's a really strength of the company that we are doing a transformation from from a positional strength and which will just set us up to be even stronger going forward. And of course, Tam and her team are working daily with our customers. And as I said, also in my previously, I mean, the excitement from our enterprise customers when we come with a full portfolio, so be it fiber or UCAS or if it's coming with a 4G or 5G solution, mobile edge compute, I think we have a good and compelling story to continue to work harder. That's how I see the business. Then, of course, we still have some legacy business declining in the enterprise side, which we have had for a couple of quarters right now. Our work is to see that we deaccelerate that over time.

Matt? Yeah, so, David, on the ETR, so as I look at that, remind you that on a year-over-year basis, the adjusted ETR is actually is up. as I mentioned in the prepared remarks, and largely that's because of the one-time impacts a year ago from the adoption of the tax reform. So we do see that continuing to be higher year-over-year. But despite that, the EPS in the quarter was up three cents, even with some headwind from the ETR on a year-over-year basis, and also approximately four cents of headwinds from the accounting standards. So kind of similar to the first quarter, So good EPS performance year over year in both first quarter and second quarter. Strong momentum, therefore, as we jump off into the second half of the year. And so feel good about where we are so far this year, and we'll see how the back end plays out. But certainly a very strong platform to be building from. Thanks, guys.

Yeah, thanks, Dave. Hey, Brad, we're ready for the next question.

Thank you. The next question comes from John Hudlick of UBS. Your line is open.

Great, thanks. Two questions. First on the 5G home. Hans, how should we think about the expansion of the 5G home footprint once you get the standards-based equipment? And anything you could tell us on sort of growth in the target market or how you expect that subscriber base to grow? And then the second question is on spectrum. Obviously, you guys control less spectrum than your current competitors, and with the T-Mobile Sprint deal, we're looking at the creation of a company with over 300 megahertz of spectrum. Is that a competitive disadvantage for you at this point, and would that situation worsen with a competitor out there with that much spectrum, certainly relative to its smaller subscriber base? Thanks.

Okay, on the 5G home... I think what we're – remember, we have the limited sort of 5G home in four markets right now, and we kept both the development on our software as well on how many CPs we had as we did the proprietary solution. The only thing I can say, our wind share is really good in those markets. It seems to be a good appetite for 5G home. We have a good performance of it. uh and then we're going for the the the second half of this year or this this part of the year we're going to come back with an nr sort of five-year home cp equipment and i think that what we're going to do we need a certain size size of market that so it makes sense for us so i think as we said before i mean this is a 2021 when it's going to have a significant a significant impact on our revenue. So 2020 is going to be an important year for us. And, of course, coming out now in the latter part of this year and starting adding markets over time will be very important. On the spectrum side, I mean, I think that we always had the headwind that people don't think we have enough spectrum and all of that. I mean, what this organization and this engineering team is doing with Spectrum is, I would say, is magnificent. Remember, sometimes when we talk about Spectrum, it's so much more. It's the software, how you plan, how you build a network, how you get utilization out of it. And I think that the team has done very good all the time. As I said previously, we have a very compelling position when it comes to millimeter wave for Alta Wideband. but we also have spectrum where we can deploy 5G in the other bands. Ultimately, 5G is going to be on all bands, and I have high confidence that my team is going to be doing that well, continue to have the leadership in the market when it comes to network performance. There might also come up opportunities over time where it could be added spectrum, but right now to launch both capacity and coverage, we feel confident on the assets we have.

Great, thanks.

Thanks, John. Hey, Brad, we're ready for the next question.

Thank you. The next question comes from Jennifer Fritchie of Wells Fargo. Your line is open.

Great. Thank you for taking the question. If I may, I just wanted to revisit on the fiber activity. I think you said you're now adding 1,400 miles of fiber root miles every month versus 1,000. Some power companies have cited some issues with municipalities and power companies and utilities. Are you finding that easier lately or harder? Because that just seems like a 40% increase monthly is a big jump.

Thank you for the question. I would say this is not an easy work. But this is really what Verizon is great at. I mean, we have people all the way from working with the municipalities, working with engineering, planning, working with third parties. And remember, in the In the couple of years since we decided to invest together with Corning in the fiber factor, we have come to actually running 1,400 route miles a month. So, yes, you're right. We are scaling right now, and the team is really, really responding to the demands we have on them. We're always going to have even higher internal demands on them, but as you can see, we definitely have a good role right now. But that doesn't mean that it's easy to do it. But I think we have put the machine in place with a team that I have a lot of confidence in to do it.

And Hans, if I may, should we continue to see that number increase throughout the year as you gain more scale?

Not so much. I think we're starting to get on the volumes we are, and that's really important to understand, because there have been questions on the market, you know, the CAPEX will go up and all of that. Remember, we are almost on the highest sort of volume where we believe we need to be in order to serve these markets, because there are, of course, technicalities for doing it. So I think we have a machine right now that is actually executing very well on the high volume. There might be some increases, but maybe not so much more. I think now it's more about the broad deployment in all these markets where we are right now deploying fiber.

Terrific. Thank you.

Yep. Thanks, Jennifer. Hey, Brad, we're ready for the next question.

Thank you. The next question comes from Michael Rollins of Citi. Your line is open.

Hi. Thanks. A couple questions. First, have there been any recent changes to the cable MVNO deal? And how do you see your role continuing to evolve as a wholesaler of capacity in the industry? And then secondly, is there an update on any of the potential strategic moves you could make on the wireline side, whether it's asset optimization or trying to figure out maybe how to proceed in the video business with the current size that you have? Thanks.

Okay, thank you. On the MVNO side, there are no major differences, but the importance is that we believe it's a good model. Remember, we outlined our network as a service strategy, where sometimes we're doing the connectivity, and then we have others being on top of this in MVNO. Sometimes we do the connectivity, we do platforms, and in some cases we do the whole strategy. So I think that continues to be important for us, and we're happy with our partnership with the cable MVNOs, which is part of how we are actually doing a multi-usage of our assets, getting maximum utilization of the investments we're doing. So for us, this is playing straight into the long-term goals as a company. On the Y-line optimization, we I would say that the biggest assets we have here is, of course, all the infrastructure we have, but also the customer relations we have and we are working. Of course, we are looking into all the areas we need to fortify or the areas we should drop, which of course the market is not demanding it. And I think that's a very normal way of reviewing the strategy all the time. And Tammy and her team that now has been in place for this quarter, they are constantly talking to the customer what we need to do and where we need to fortify and some areas where the products maybe aren't hitting. But it's no major. It's just a daily grinding that you do in order to optimize how you work with your customers and how you optimize your capital and efficiency. And I can also add, of course, that In this quarter, we announced then that we're going to work with YouTube TV when it comes to sort of the linear TV, both for the Fios optionality as well as for the wireless customer. So again, working with the model that we're outlining in February and just continue with that.

Thank you.

Thanks, Mike. Thanks, Mike. Hey, Brad, ready for the next question.

Thank you. The next question comes from Craig Moffitt of Moffitt Nathanson. Your line is open.

Yeah, hi. Hans, I wonder if we could go back to the spectrum question for a second. I understand that the longer-term spectrum position for 5G, you have a lot of spectrum bands outside of millimeter waves. But there's been a lot of concern in the market of late that for the near term, your coverage map may be more limited than your competitors until you can start peeling away some of your LTE and 3G committed spectrum bands and dedicate them. Can you just talk about that issue and how you think about the coverage layer of 5G over the next few years as you make the transition?

No, that's a great question. I think, first of all, DSS, which is dynamic spectrum sharing, is the same for all. And that's a standard solution coming out in the market as software. So I think that we're not disadvantaged by anyone if you want to deploy your coverage. And I think that's how one, at the same time, you also want to see that there's enough uh handsets and things out in the market when you start turning on 5g so you get because we want to do a transformative feeling of what 5g is we don't want to just rebrand and say it's 5g and you don't feel a difference we already have the best 4d network and for us the customer is the most important uh so you're right i mean i i i see that we will have a a coverage map uh whenever it's going to be needed for our customers and it's going to be enough handsets in the market and not disadvantage for anything. So I think that historically we have had those feedbacks that we are not in the right position with Spectrum, etc. I come from the outside, you know, and worked and seen what Verizon has done with Spectrum and with new softwares and with optimizing how you build the networks, and I'm confident that we have a good path here, and I'm not feeling that we're disadvantaged. I feel that we are executing right now. We're launching markets where others are doing other things.

Is there any concern that even from a marketing messaging perspective, though, that your competitors will have more ink on the map, so to speak, early on in 5G, even if the experience in 5G may not be all that much better than your 4G networks?

Let's see how that turns out. Because, again, as a lot of promises, I think that Verizon has had, and I actually inherited a fantastic experience sort of DNA in this company, that we first do the things and then we start marketing it, and I think that's what we'll continue to do. Others might have other strategies. So I'm not going into that contest about who is talking most right now. I'm working with the technology team myself weekly to see that we are doing this right for our customers, and that's a consumer, it's an enterprise customer, it's a governmental customer, it's an IoT customer. We think it through, and that's why we build it. the intelligent edge network already started two years ago. And I think that the significance of understanding how important that is for the success for Verizon, I think, has not really been understood yet. And we will just continue to execute on that. But there's going to be a lot of message in the market, and you know it as well. Just be confident that our Our company, Verizon, will continue to execute on the real 5G with eight currencies and seeing that we can actually give the right sort of performance to all our customers in the right moment.

Thanks, Hans. Yeah, thanks, Craig. Thank you. Hey, Brad, we're ready for the next question.

Thank you. The next question comes from Colby Sinasel of Cowan & Company. Your line is open.

Great. Two questions, if I may. First, for Matt, I was hoping you could quantify... the cost of the VSP plan that was implemented in the second quarter, since that didn't seem to have an impact on free cash flow. And then secondly, if you're able to just kind of quantify the savings we could expect from that as we go into the third quarter. And then my second question has to do with the fiber route miles that you're referencing on the call. I just wanted to separate the conversation between the route miles and small cells. So I appreciate you're adding about 1,400 miles route miles per month in the second quarter. But are you seeing the same momentum in terms of actually getting the small cells put up as well? I feel like you could still be adding the fiber route miles, but not necessarily getting the actual small cells up. And it seems like those two things would have to go hand in hand. And that might explain why some of the other companies that are out there doing the same thing might be seeing delays on the small cell side. Thank you.

I can start with the fiber, and Matt will respond on the other one. So the fiber, remember, it's a multi-use fiber, and I have several different customers. I have the network guys that need it for 4G and 5G. I have the enterprise, the small and medium, and I have wholesale. And that's, of course, very important when we build that we can have owner economics on fiber, and we can build it as we have all those customers. But of course, initially, quite a lot of the fiber is coming and going to the small cells. And that's why we are able to turn up the nine cities we have done so far. But again, the question earlier was about how much are we now actually gaining on it. I think this is an early indicator about how we're building the network, because you need to start with the fiber and getting the permits in the cities before you can deploy the 5G. So this is early indication that we have a high speed in the organization to be prepared for the 5G and whatever other use cases we have for fiber.

Matt. Yes, a call beyond the voluntary separation. Yeah, obviously the income statement charges we took in the fourth quarter of last year from a cash flow standpoint, we took probably the largest piece was in the first quarter and then some in 2Q and 3Q. Certainly, you know, I think that there's good savings in the first half of the year from what we mentioned, like $480 million of positive impact in the first half of the year. And we'll have another step up in 3Q as the final tranche of employees came off payroll at the end of June. So for the fall year, I expect that to be north of a billion dollar of impact. And that benefit on a year-over-year basis will carry over into the first half of next year until we get to a full run rate by June of next year. So certainly being a positive thing. It's part of our overall focus on... on improving the cost efficiency of the business, and we will continue to focus on that. We're well on track to more than meet the $10 billion commitment we made, and the VSP was a big component of that.

Thank you. Yeah, thanks, Colby. Hey, Brad, we're ready for the next question.

Thank you. The next question comes from Mike McCormick of Guggenheim Partners. Your line is open.

Hey, thanks, guys. Hans, maybe just a quick comment on what you're seeing at robust subscriber ads in the business segment for wireless. What you're seeing from a competitive standpoint in the B2B marketplace, I know one of your competitors is pretty loud about getting bigger there. Just thinking about the ARPA drivers going forward, what do you see there? Obviously, you have more room to move to unlimited. Any other puts and takes on ARPA we should be thinking about for the back half? Thanks.

Yeah, on the business side, when it comes to wireless, we're taking care. We feel really good about it. I think that Tam and the team are doing a great job with the relationship we have. And of course, with the network quality we have, it's very important for businesses. I mean, there's no doubt about that. Coverage and capacity becomes even more important. And there's no enterprise company. There's not any digital transformation. So I'm pleased with that. We're going to do even more. So yeah. The second question was about the ARPA, and I will hand it over to Matt, but I can also say that the team with Ronan, especially on the consumer side, has been, since the Unlimited was launched, continued to lean forward with new offerings, with new ways of dealing with the market, segmenting it up, and actually continue to have a good service revenue growth. And I think that's what I'm pleased with, and I look at the team, I know that they have more card up the sleeves, as I say, and what Matt and I have been doing together, we're transforming the company to have a disciplined approach to that, to be prepared for that marketplace to continue to do well. So I feel good about Ronan and what his team is doing.

Matt. Thanks, Hans. So, Mike, as you think about wireless as a whole and the ARPA trajectory, it's coming from the overall growth of the business. Just a few things to, you know, point out that's really driving both ARPA and obviously the total service revenue, whether that be in the B2B space, which had very strong results in the quarter, or the consumer space, which also performed well. You know, net account growth positive in second quarter of this year. That's up year over year, so good growth there. We continue to lead the industry in phone gross ads, yet again, a number of quarters in a row that we've done that. And in addition to leading the industry in gross ads, growing year over year, and that's something that not all industry participants can say that they did. So leading the industry in gross ads, also leading the industry in phone churn, yet again, The net result there is, you know, phone net ads of 245,000, a nice increase over the 199,000 last year. So as I think about the business in the first half of the year, had nice strong performance that went from the operational side onto the financials as well, puts us in a great place as we jump off into the second half of the year to continue that momentum and, you know, feel good about where we are at this point in time.

Great. Thanks, guys. Yeah, thanks, Mike. Yeah, hey, Brad, we have time for one last question.

Thank you. Your last question will come from Doug Mitchelson of Credit Suisse. Your line is open.

Oh, thanks so much. Just a couple on wireless competition. So Hans, you know, obviously a strong wireless core. I'm curious if you're seeing any competitive impact from the FirstNet initiative at AT&T. I know, I think you recently signed a deal with the Massachusetts First Responders. I'm not sure if that's sort of a sign of competition going back and forth. And then I was just hoping to revisit bundling and the importance of video to wireless with AT&T planning to bundle HBO Max when they launch it next spring with wireless services. Is bundling video with wireless, does it lower churn, or is it just necessary to compete on a promotional basis with others that are offering video? I'm just sort of curious how that informs your video strategy. Thanks.

Yeah, so you need to split a little bit when we talk about consumer and business. But let me just say that if I look in the second quarter, it was a little bit more competitive than the first quarter when it comes to competition in the market. And that tells a lot about our performance then, that we gained all those net additions. At the same time, we had a low churn. I think that on the business side, as I said before, we're doing well on the business side, and again, I think that the wireless part of the business side is important, and the network performance there is of critical essence, the coverage and the performance, but of course there's competition for those deals as well. I think we're doing well in that area, and we will continue to do well. We have new offerings coming out, and we continue to build the network even more robust and getting more more quality on it so again I think the team is there Matt and I are working with the transformation of the company to enable us to continue to compete and do well in the market and giving both Tammy I would say and Ronan the sort of the tools to work in the market and that's what we're doing and I think we've done it well in this quarter and preparing for the rest of the year

Just one follow-up on the video question there. Look, we're very confident that the most important thing to customers in wireless is the quality of the network experience. And so for the past couple of years now, we've seen competitors bundle video offerings in with wireless, and we continue to lead the industry in phone gross ads, and we continue to lead the industry in churn. So I think that demonstrates the most important thing to customers customers the quality of that connection, the reliability of that connection, and that when you have the best network, you don't need to bundle other things in there in the same way. And we'll continue to be focused on providing the best quality network out there.

Great. Thank you. Yeah, thanks, Doug. Hey, Brad, that's all the time we have right now. Before we end the call, I'd like to hand it over to Hans for some closing comments.

Thank you. I think we've covered quite a lot of ground in this call because basically the question has range for all our business. But just a couple of things. First of all, I'm really proud of the team, what they've achieved. And remember, we have changed the structure. We have changed how we build the network. We have done a large voluntary program. We're reporting in new structure. We're put into new structure. And the team is executing well. I think that's the way we want to work here, continue to lead the market and continue to transform to be a strong company with a strategy we set out in February. So then it comes back to execution of fundamentals. That's what we're doing, and we'll continue to do so, to be disciplined on our capital, also continue to lead the market. And then, of course, I think a lot of questions are circulating around the 5G. What we laid out in the February Capital Markets Day is still valid, and that's what we're aiming for and we're executing on, and I think that the team is doing a great job there. So I think that sums it up. I'm proud of the quarter and the changes we're doing at the same time delivering this quarter and financial earnings. So thank you very much for attending this call, and I guess I'll see you out there soon.

Ladies and gentlemen, this does conclude the conference call for today. Thank you for your participation and for using Verizon Conference Services. You may now disconnect.