Verizon Communications Inc.

Good morning and welcome to the Verizon second 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 over the call to your host, Mr. Brady Conner, Senior Vice President, Investor Relations.

Good morning, and welcome to our second quarter 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 relief, 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 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 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 second quarter. In the second quarter, we reported earnings of $1.13 per share on a GAAP basis. Reported results included a pre-tax loss from special items of approximately $255 million, including a net pre-tax loss of $102 million related to early debt redemption costs and a net charge of $153 million related to a mark-to-market adjustment for our pension liabilities. Excluding the effects of these special items, adjusted earnings per share was $1.18 in the second quarter compared to $1.23 a year ago. Let's now move to slide four and take a closer look at our second quarter earnings profile. Consistent with the approach we have shown for several quarters, we have illustrated the ongoing impacts to earnings from the adoption of accounting standard ASC606 for revenue recognition in 2018. As a reminder, we expect 2020 to be the final year that the adoption of this standard will have a material year-over-year impact on our income statement. As we illustrated in previous quarters, we realize the lesser benefit from the adoption of ASD 606 during the second 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 $0.02 for the quarter and $0.05 year-to-date. For full year 2020, we continue to expect the headwinds from the deferral of commission expense to be approximately $0.09. Matt will go through the COVID impacts that we experienced throughout the quarter in detail in his section. Overall, we estimate that there was a 14-cent headwind included in the reported and adjusted EPS from COVID during the quarter. In addition, we recognize an aggregate tax benefit of $156 million in connection with a series of legal entity restructurings related to an internal reorganization, which resulted in a benefit of approximately 4 cents within our reported and adjusted EPS. So adjusted EPS was down 4.1% in the second quarter as a result of the impact of COVID and ASC 606. We continue to see underlying growth in our operations. With that, I'll now turn the call over to Hans.

Thank you, Brady, and thank everyone for joining this earnings call. Let me reiterate what I said after the first quarter. We are in unprecedented times with multiple crises happening. and a business that we need to run at the same time. I can only say to all of you, I'm extremely proud of how Verizon and our employees have responded to all of it. I think of this quarter as a quarter where the stakeholder capitalist strategy of Verizon really bared fruit. I have reported many earnings calls in my life. This quarter, it comes together with a good support to our employees, a great support to our customers when it comes to our network and our flexibility, a big contribution to our society when it comes to how we are acting and supporting the society in these tough times, but also a very good and solid financial result for our shareholders. That's a really good sort of ending of this second quarter or the first half of a very unprecedented year. We have continued as a leadership team to work in a three-pronged governance. Part of our team is working with a daily crisis to see that we are doing the right things and with the right priorities in this pandemic, economical downturn, racial injustice that is ongoing in the country. second part is of course working business as usual and seeing that we continue to lead and deliver results for all our stakeholders and finally in a third prong is to work with what are opportunities created from this pandemic economical downturn so we come out even stronger as a company after this is coming out to a new normal our strategy And our underlying strategy priorities have not changed during this time. They have reconfirmed that we are on the right path with our network and service and our go-to-market. Many of the things that we outline in the Verizon 2.0 are really playing a vital role for us being able to deliver to all our stakeholders, especially to our customers in times like this. One of the transformations was, of course, to have a purpose-driven company where our employees are very engaged and excited of our future, but also seeing that we're doing the right thing for our society. If I look back on the first half and looking back on our response to the COVID-19, I think we have done very well. We have decided to prioritize the healthcare and safety of our employees. Not only that, we have also started to return to office with very safe protocols to see that our employees actually can work in the offices if they want to do. But if you then look at our frontline, which never closed and never worked from home, they have continued to innovate. They innovate with curbside delivery in our stores, fires in the box, et cetera. And as Matt will later on talk about, we have seen a great uptake on those innovations when we look into the latter part on the second quarter. If we then talk about the racial injustice that we've seen in the country the last couple of months, I'm also proud for how we have brought that together with our team to discuss this, having a conversation in the company, but also with our partners and externally. No one can say we have done enough, and we just need to continue to do that. At the same time, we have donated money for some of the most important foundations that can support that transformation. Finally, I am also proud that we have packaged all our activities that we are doing for our social stakeholders in what we call the Sixth December Horizon. I will not dwell on that today, but it's an important piece of our overall strategy. In addition to serving our employees and society, we have of course also been very focused on executing our core business and our core strategies and continue to develop our platform for the network of service. I'm extremely pleased to report that once again, for the 25th time, we are winning the award for the best LTE network from the J.D. Power. I have to say the engineers in Verizon continue to amaze me, and they will continue to do so in the future. Remember, in February, we made some bold statements about our deployment on 5G in 2020, all the way from the mobile edge compute, 5G home cities, five times more small cells on 5G, and some 60 cities on 5G ultra-wideband, as well as a nationwide coverage on 5G with DSS. I'm happy to report we're on track on that, and in some cases, even ahead of the plan. We are continuing to deploy our technology. Our test with ESS is going very well. And as well, we have launched some of the 60 markets when it comes to mobility and some additional markets on 5G home. However, you're going to see that in the second half of this year, we have a lot of new things happening and building on the foundation of the strategy and the strategic priorities that Verizon has outlined the last couple of years. If you then look into the different segments, and first of all, starting Verizon Consumer Group in the second quarter, continue to gain improvements when it comes to the customer loyalty, not only in measurement, but also by creating new services. We saw them coming out with a Verizon credit card in the second quarter, and they continue to gain a lot of accounts based on their mix and match and the way we have developed the ladder with different unlimited offerings. I'm really happy with what Ronan and his team have done, and you're going to see in the financials and operation numbers that even with the challenges we had, they have performed very well. If you look at the Verizon business group that are in the middle of the transformation, and I have to say the way they are now dealing with customers are bearing a lot of fruit. They are progressing well with the transformation. And I'm also happy to report the acquisition we did in the second quarter of BlueJeans are performing well, and the growth both on usage and new customers are continuing going very well. And I was also happy last week to announce a large partnership with Airtel, one of the largest carriers in the world, to use BlueJeans for their corporate customers in India. Finally on the Verizon Business Group, 5G mobile edge compute, an important piece of our growth strategy. We have said that we're going to have 10 5G mobile edge compute sites this year deployed, and now we also start gearing up our partners. We have announced IBM, and we also talked about SAP as two of very important application providers that's going to take part of our deployment and that we're collaborating with right now. So we're creating a lot of excitement around the 5G Mobile Edge compute and a lot more to come in the second half. Finally, Verizon Media Group, of course, being impacted by the advertising market coming down. We see them coming back a little bit in June. But anyhow, they have done also quite a lot of work to see that we continue to create more monthly active users on our own and operated properties. And they also made an agreement with Walmart, which is, of course, one of the largest companies on earth, to see that they are using Yahoo Mail as a grocery and purchasing platform. Finally, our financial team under Matt has continued to do good work on our balance sheet. We are coming out from the quarter with elevated liquidity. But not only that, we have continued to work well on our net debt. And we have reached credit metrics levels similar to pre-votable levels. So that's really good work by the team. If we look into the financials of the second quarter, and Matt will cover that in more length, I only want to say that We had a very good quarter. We showed resilience. Of course, there are challenges in certain customer groups, like Verizon Media Group, small and medium businesses, but many others have actually been performing well. We also need to remember in the quarter we have had not all our stores open when it comes to consumers, as well as limited sort of visiting hours, etc., However, if you see in the momentum we have created on the consumer side, we added 26,000 consumer postpaid accounts this quarter, which is, I would say, good work compared to what we had lost one year ago in the second quarter. We also are on historical lows on our share. And all in all, that is giving us a good beta in the Verizon consumer group. Finally, I would just want to highlight the very strong cash flow. Of course, we have some extraordinary techs. items there but in general it was a strong cash flow quarter and as Matt really talked about you later we have not increased our bad debt reserves in the second quarter and he will also allude to we have good metrics when it comes to what happened in June compared to the rest of the quarter so all in all I think we have executed well for all our four stakeholders in this quarter And by that, I hand it over to Matt to go through the financials in more detail.