Verizon Communications Inc.

Good morning, and welcome to the Verizon First Quarter 2020 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 first quarter 2020 earnings conference call. This is Brady Conner and I'm here with our Chairman and Chief Executive Officer Hans Vestberg 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 we 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 uncertainty. Discussion of factors that may affect future results is contained in Verizon's filings with the FCC, 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 posted 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 first quarter. In the first quarter, we reported earnings of $1 per share on a GAAP basis. Reported first quarter earnings include a pre-tax loss from special items of approximately $1.4 billion, including a loss on spectrum licenses related to Auction 103 of $1.2 billion and a net charge of $182 million related to a mark-to-mark adjustment for our pension liability. Excluding the effects of these special items, adjusted earnings per share was $1.26 in the first quarter, up 5% compared to $1.20 a year ago. Let's now move to slide four and take a closer look at our first quarter earnings profile. We expect 2020 to be the final year that the adoption of accounting standard ASC 606 for revenue recognition will have a material year-over-year impact on our income statement. As we illustrated in previous quarters, we realized a lesser benefit from the adoption of ASC 606 during the first quarter compared to the prior year, primarily due to the deferral of commission expense. The reduction of the benefit realized creates a year-over-year headwind to both reported and adjusted earnings per share which will continue throughout 2020. The impact was 3 cents for the quarter. For full year 2020, we expect headwinds from the deferral of commission expense to be approximately 9 cents. We estimate there was a negative 4 cent net impact included in the reported and adjusted EPS from COVID during the quarter. Matt will go through this in more detail later. Adjusted EPS growth of 5% over the prior year, illustrated on the earnings waterfall slide, reflects the strong underlying performance of the business partially offset by the impacts of the deferral of commission expense. With that, I'll now turn the call over to Hans to walk you through a recap of the actions we have taken during this unprecedented time.

Thank you, Brady, and most welcome to this earnings call. This is an earnings call that is very different from All previous ones that I have done. I've been in crisis in the telephone crisis beginning of 2000, bank crisis in 2008 and 2009. This is something totally different. It's a health crisis with a pandemic that impacts each and every one of us wherever we are in this world. I'm proud of the team of Verizon, how we have been stacking up in this crisis and how we work together. We decided very early on to split our team in our crisis management team and the leadership team continue to drive our business forward. In the middle of February, we made that split in order to see that we're actually attending all the things that are happening in the company in the size of Verizon. Our COVID-19 response has been based on how we managed our four stakeholders. We have taken decisive action, but they're all balanced and thinking about the long-term and the positive impact for all our stakeholders. Let me quickly go over what we have done in the different areas of stakeholders. On the employee side, the majority of our employees are working from home. We moved quickly to a work-from-home environment. Today we have high productivity in that setup. We have also retrained some 20,000 of our own employees to work with new tasks and work from home, and some additional 1,000 of third parties that is part of our delivery. But we also need to acknowledge we have a lot of our employees in the frontline serving customers, keeping up the networks at the same time as keeping some of our stores open. We have roughly 30% of our stores open, of course, with limited opening times and also only by appointment. But they are playing a vital role to keep up the most important infrastructure in this country right now besides hospitals and first responders. And I'm happy to report the team is doing a great job. And talking about our customers, we have been attending all our customers with new demands during this crisis. At the same time, we are also part of the pledge of Keep Americas Connected, which means that we are waiving late fees or overages for small and medium businesses and residential customers that have been impacted by the coronavirus. Our network has performed well. I will come back to that a little bit later. When it comes to our work in the society, helping communities, that's also extremely important right now. Large corporations need to take the responsibility. We have done some of it, like the Pay It Forward, which is our concert twice. sometimes three times a week, which is gathering concerts or celebrities bringing in people, actually adding to and helping small and medium businesses. We call it Pay It Forward Live. But also we work with WHO and other organizations that need help and ultimately supporting the most vulnerable in our society. Finally, on the education side that we always have been focused on, we're not only supporting the schools that had already had their support for, but we're also adding to get in New York Times, offering all the content from New York Times to all the high school students across the country. So we're proud of what we're doing in that area. And finally, on the financials, we have also worked quite a lot with what we're doing in our cost side. We have taken already cost measurements in the first quarter, everything from third-party spending, seeing, of course, that we're traveling less. But we're doing this prudently as usual. On top of that, we increased the CAPEX guidance in the quarter because we felt that it was a good time for us to continue to see that we have robust networks as we went into the At the moment in time, we don't really know how the network would be used. At the same time, of course, sending a message that we think it's a good return on investment on that incremental CAPEX. At the same time, I think Matt and his team have done a great job of seeing that our balance sheet is in the best shape, added liquidity in the middle of the quarter to very cost-effective bond costs that we have. We are also working with scenario planning. Nobody really knows how this is going to end, but we have several scenarios and actions that we're working with as a leadership team. Let me talk about the network a little bit. We have been reporting every week the development of our network since the outbreak of the pandemic. You have seen some staggering numbers like over 200% up on gaming, 10 times up on collaboration tools, 40% up on video, 800 million calls a day, which is twice the amount of what we have on Mother's Day, which is the biggest day a year. All that we have been managing very well with the network. We have built a robust network and we can deliver high quality. If we then look now week to week, you can see on the slide that we have much less of changes. We feel that we have settled in on the type of usage of the network and where it's used. So it's very small variation. I just want to point out the mobile handoffs, which is basically how our customers are moving between different cells. Down 35% since the outbreak of the COVID-19. And in certain places like North City, it's over 50% reductions on mobile handoff. So how does our network hold up then when it comes to all those changes? This is how we showed during the investor day how our capacity versus our busy hours in the wireless network. As you can see, we continue to keep the same headroom in the network when we come into the COVID-19. And the main reason is that, first of all, we were prepared, we have added capacity, but also the network is used in different timeframes and with different applications. And this excludes any use of the AWS 3 temporary spectrum that FCC so greatly lended to us in the beginning of this crisis. As an insurance, if usage would go somewhere we wouldn't know. But, however, I can report that our technicians and our operations team has done a fantastic job, and the network is keeping up very well with the changes and the enormous usage of the network. Let me just finish up before I hand over to Matt and talk about the progress towards our 2020 commitment. They are intact. We work to see that we can both handle this crisis, which is unprecedented, but also continue to execute on our strategy. When it comes to strengthening our core business and grow our core business, Of course, we right now have more digital sales than we had before, which is, of course, very encouraging. But we also strengthen our core business by adding a very good and nice piece of millimeter-wave spectrum that gives us very good holdings for Fortify's strategy. When it comes to leverage our assets and growing in the future, Our 5G plans and our fiber plans, the build-out of those are on plan. We were also a little bit ahead of plan when we ended the first quarter. And I can report still today, we are on plan with the 5G and fiber. Of course, there are challenges out there when it comes to COVID-19 and so on. But our team are finding new ways and innovative ways to actually do the deployment. There are ways of dealing with approvals from the municipalities in new ways, and we have great collaborations from many of the municipalities to do with. There might be problems going forward, but I am also confident that my team are very innovative in the field and see that we continue to drive hard on this. We also added an acquisition just recently, the BlueJeans acquisition, adding to what Matt and I said in the fourth quarter, talking about the investments we want to do in our Verizon business group, where we see a great opportunity and, of course, been accentuated in this COVID-19, where we now add the BlueJeans capabilities both to our existing distribution, but also for the future of 5G. where we think there are GDU capabilities that's going to be extremely important. On the financial discipline, we continue to drive that. Matt is leading that work, both with planning and what we're doing. And finally, about our purpose within company, which is so important this time to see that you have all your employees with you. We're doing a lot of impact in the society. We have virtual voluntarists right now where a lot of our employees can actually contribute to the society in these tough times. And finally, we also actually communicate with our employees basically every day on a live webcast in order to see that everyone knows what we're doing and where we're going in times of uncertainty. Quickly on the first quarter, Matt will cover it much better. I'm proud of the team delivering a strong growth in wireless service revenue, but also a 5% growth on our adjusted earnings, which includes the impact of COVID-19, and then a strong cash flow up 26% year over year. The segments all have their challenges, but also the strength in this quarter, mainly the challenges from COVID-19. Finally, on the guidance, we decided to continue to do certain guidance, even there are certain unclarities in the market and of the future. We decided that the revenue, we will not guide on the revenue because the hardware is so hard to predict at this moment. But we are still guiding on EPS and continue with all other items as well. And Matt will go through that in detail. But always with the understanding that we don't have all the knowledge of what's going to happen, we need to make assumptions about it. By that, I hand it over to Matt.