Verizon Communications Inc.

Good morning, and welcome to the Verizon Third 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 touchtone 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 third 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 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 uncertainties. Discussions 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 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. As a reminder, we've entered the quiet period for Spectrum Auction 107, so we will not be able to comment on our current mid-band spectrum holdings or strategies. Additionally, please remember to join us on November 11th for our fall sell-side meeting from 4.30 p.m. to 6.00 p.m. Eastern Standard Time. We will be streaming this event live via BlueJeans for everyone that can attend virtually. You can find details on our investor relations website. Now let's take a look at consolidated earnings for the third quarter. In the third quarter, we reported earnings of $1.05 per share on a gap basis. Reported results include a net pre-tax charge of approximately $1.1 billion related to a mark-to-market adjustment for our pension liabilities. Excluding the effect of this special item, adjusted earnings per share was $1.25 in the third quarter compared to $1.25 a year ago. Let's now move to slide four and take a closer look at our third 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 ASC 606 for revenue recognition in 2018. 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. We realized a lesser benefit from the adoption of ASC 606 during the third 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 two cents for the quarter and seven cents year-to-date. For full year 2020, we continue to expect the headwinds from the deferral of commission expense to be approximately nine cents. Matt will go through the COVID impacts that we experienced across the business in more detail. Overall, we estimate that there was a five cent headwind included in the reported and adjusted EPS from COVID during the quarter. While adjusted EPS was flat in the third quarter, including 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 thanks for everyone joining this third quarter earnings release from Verizon. I would like to start to reflect over the current situation we have. Of course, I mentioned several times before, we are in multiple crises. The pandemic is continuing, the economical downturn and the racial injustice. We as a corporation have continued with our three-pronged governance to see that we're managing this in the best way. Of course, our team is very focused on the crisis of the pandemic and having a team working on that. But the majority of my executive team are working with business as usual to see that we continue to move this company forward. And finally, we're also working a lot with new opportunities that arise from this crisis to see that we are actually coming out as a stronger company and actually serving our customers in an even better way. I would like to say a couple of things on where we are in all this when it comes to our responsible business practices, starting with COVID-19. We have all the time put our focus on our employees' safety and health. That has been so important for us. In this third quarter, we have seen our retail stores coming back to full operations, of course with new procedures and processes. We have also seen our engineers being back in full force in the field to make installations, and you're going to see that later on as we had a really great quarter when it comes to FiOS installations. On the racial injustice and what we're doing here, I just want to highlight one important thing. This quarter we published our 2020 Diversity Representation Report. We disclosed on different levels and different units where we stand on one of our core values, which is diversity and inclusion. I want to highlight the work that our Treasury Department did in the third quarter. They issued the second one billion green bond which was led by minority-owned underwriters, continue our work with the climate change and seeing that we do our contribution. And finally, we also decided in the quarter to provide our employees with paid time off for employees to vote in these times which are unprecedented. Moving on to where we are, and I talked a lot about that as we came into this quarter and this second half of 2020, that this was the year of execution. And I cannot say anything else that our team has been executing just fantastically. And if we talk about our network as a service strategy and our network, starting with the 4G network, what can we say? I mean, the team continues to take all awards. I mean, the root metrics, we are winning the best overall mobile network. And on JD Powers, we were awarded for the 25th consecutive time the best network quality. So the team has continued to augment and improve our 4G network. At the same time, we entered in the CVRS auction, as you know, and we gained some 34 megahertz covering 140 million of the population. And all in all, that is going to help us to augment the capacity in the network, especially on 4G. Another area which we're very proud of that the team has done in the quarter is, of course, continue the relentless execution of our 5G network. And we launched a 5G nationwide last week, and I've said through the whole year that we're going to launch the network when it commercially makes sense. And it made sense last week when the iPhone 12 was launched in the market. So now we have a nationwide covering more than $200 million of the population of the United States, more than 1,800 cities when it comes to our 5G nationwide based on the DSS technology. We also continue our expansion on the ultra-wideband and we took a leapfrog with 19 more cities and we are now 55 cities for mobility with 43 stadiums and 7 airports. Just continue to augment our ultra-wideband network which is just giving a huge new experience when it comes to capabilities, when it comes to speed, latency and of course throughput. We also, in this quarter, launched some home cities when it comes to 5G home, or we added, so we have now eight 5G home cities when it comes to fixed wireless access. And finally, one of the core assets for our network services, of course, are fiber. And the fiber richness of our network is a core element in the Verizon Intelligent Edge network. We're on plan for that in these times. It's just a great work, what the team has done. all the way from the 4G network to the 5G network and the one fiber they're executing tremendously on our commitments for the full year. All that network service strategy is based on us being able to monetize on top of that network and a couple of very important events this quarter and a little bit after is of course setting us up for that monetization, starting with the 5G adoption and the ecosystem that we're creating. We're of course extremely pleased with the launch of the 5G iPhone, the iPhone 12, that came out in four different models, all with ultra-wideband. That is of course setting a precedent how important ultra-wideband is for an unprecedented or unparalleled experience on 5G, bringing out all the currencies or capabilities that were talked about before. Also this quarter, we added now the high power CP for a 5G home, which we've been talking on for quite a while. So now we're on the right track for that as well, continue to be able to monetize on 5G fixed wireless access, which is one of the the different services we believe is going to be important for 5G. And finally, the 5G mobile edge compute, which is the third business case we have on the same infrastructure. We have now five mobile edge compute centers together with Amazon. We also announced that Microsoft is now joining us on the mobile edge compute as well, focused on the private side of the 5G mobile edge compute. So we are actually gathering in some of the most important partners in the ecosystem to see that we can actually monetize this investment we have done in the network service. We also have in the network continued with our mix and match and as we earlier reported Ronan and his team has done mix and match 3.0. Very important in times when there are so many choices. We give our customers the choices to pick their offerings and their way of dealing and getting services from Verizon. Finally on that area, our collaboration within the company is very strong. And as you saw during the iPhone launch, we launched with NFL the Super app or the Super Stadium app, which was created by our Verizon Media Group, which is basically seven concurrent video streams at the same time that you can enjoy either in the stadium, which you cannot be today, or at home if you have a 5G Ultra Wideband. Once again, we are part of a much wider community. ecosystem and to delivering new services. We strengthen the core as well with a couple of new things. First of all, we are now going into the LTE home internet. We are covering 189 markets in 48 states. This is one way for us to continue to use our great network to offering new types of services. In the quarter, we also announced our ambition to acquire a track phone that is adding new opportunities for us in the value segment to support that segment of customers. Finally, on the business-to-business applications, which is the growth on top of the 5G mobile edge compute, we now have five mobile edge compute centers. As I said, we are committed to do 10 by year-end, and we both have now Amazon and Microsoft as partners to build that. Finally, we have seen great opportunities based on our investment in universal communication services, where we have added our blue jeans acquisition, especially in health and education. And as you're going to hear from Matt later on, we have a great growth in our public sector very much based on that. I'm really proud of my team that they can deliver this strong financial performance in the third quarter. In these unprecedented times, as well as with a strong execution of our platforms and our strategy. On the consumer side, we added some 142,000 new PostBait for NetAds and continue with a very high loyalty for our customer with a very low churn levels. As I alluded to earlier, we are also very proud of what we achieved in the Fios. In the total Fios, we added 144,000 new internet net additions. That's a five-year high, which is just a great work of our Fios with a mix and match as well as their offering and the quality we have on Fios. Of course, there were some pent-up demand, but all in all, it also showed the support from our customers for our Fios offering. On the business side, we continue to do well on the wireless side, both on the wireless gross ads and net ads. We have still in the business side the secular decline in Y-line. We had a good profitability in the quarter, even though we continue to invest and we're not done with the investment we talked about in the fourth quarter last year. That is so important for us to see that we are really supporting our customers when it comes to new digitalization and new offerings. But all in all, good work by our business group. Finally, the media group had a sequential improvement. They were down 7% in growth in the quarter. They had very good improvements during the quarter when it comes to the growth trajectory. Finally, they continue to add a lot of new opportunities, especially around the owned and operated, where we have good growth in the monthly active users, if that is in use or in finance. We clearly see that our content is really aspiring and doing well with our customers in those areas. And finally, our ad tech, especially the demand platform, is adding quite a lot of new customers in these times, which also shows a proof of all the transformation that we have done in the media group. So looking at the financials, we had growth in our service revenue, wireless service revenue in the third quarter, with 0.3%. We clearly have been very focused on that one, and it exceeded a little bit also what we said when we concluded the second quarter. We also had an improvement and growth on our adjusted EBITDA margin with 100 basis points, and that includes, of course, the COVID impact. So we clearly see that even though we have a decline due to hardware, we are managing our P&L in a good way in all our units. The cash flow continues to be strong. We have continued to add cash flow in the quarter, even though we have the dividend and some outlays for some acquisitions of Spectrum. Finally, we are doing a positive update on the EPS guidance that Matt will talk about later on. So we feel good about going into the fourth quarter with a very solid third quarter when it comes to financial and execution and how we're dealing with the different crises that is happening around us here in the U.S. and the rest of the world. I will then hand it over to Matt to go into more details of the financials.