Verizon Communications Inc.

Good morning and welcome to the Verizon Fourth 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 fourth 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 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. As a reminder, we are in the quiet period for Spectrum Auction 107. so we will not be able to comment on our mid-band spectrum holdings or strategy at this time. Now let's take a look at consolidated earnings for the fourth quarter and full year. In the fourth quarter, we reported earnings of $1.11 per share, resulting in full year earnings of $4.30 per share on a GAAP basis. Reported fourth quarter earnings include a pre-tax loss from special items of approximately $523 million, This includes a net charge of $404 million, primarily related to severance, including voluntary separations under our existing plans and the annual mark to market for our pension and OPEB liabilities, as well as a net loss of $119 million, primarily related to the disposition of the HuffPost business. Excluding the effects of these special items, adjusted earnings per share was $1.21 in the fourth quarter, and $4.90 for the full year. Let's now move to slide four and take a closer look at our fourth quarter earnings profile. The impact to earnings from the adoption of accounting standards ASC 606 for revenue recognition is illustrated for comparability purposes and reflects a reduction in the benefit realized due to the deferral of commission expense versus the prior year. We also continue to monitor the ongoing impacts of COVID on our business. the year over year impacts of both ASC 606 and COVID were not significant in the fourth quarter. The full year 2020 impacts from ASC 606 and COVID were nine cents and 21 cents respectively on both a reported and adjusted earnings per share basis. We do not expect the adoption of ASC 606 to have a significant impact on the comparability of 2021 results to 2020. Full-year adjusted EPS growth of 1.9%, illustrated on the earnings waterfall slide, reflects the strong underlying performance of the business. With that, I'll now turn the call over to Hans to take you through a recap of 2020.

Thank you, Brady, and Happy New Year to all of you. First of all, 2020. It was a challenging year, and I can only say that I'm super proud how Verizon responded to the changing environment during 2020. And we supported our customers, our employees, and the society in a way that I've never seen before. So all in all, a great year. At the same time, we executed well on our strategy and saw that we had really good financial performance as well. When it comes to our 2020 strategic priorities, let me just walk through the execution of them. First of all, strengthening and grow the core business. I'm really proud to announce that we continue to have the best network in the nation. We just got for the 15th time the overall best network with RootMetrics on all seven different categories. That includes 5G, which is so important to us that we continue to have that lead. I'm also happy to announce that we won for the 26th consecutive time the J.D. Powers Award. It tells a lot about our network and technology team, how they have been building a network, and how we continue to lead this market. When it comes to the customer innovation, you have seen us working with our customers to give them richer offering and also even better performance of the network. This year with Disney+, Discovery+, Also adding in the iPhone 5 from Apple has, of course, supported a lot of our innovation that we're doing in the Verizon Consumer Group. And we see a great migration of our customers to unlimited and to the premium unlimited. Finally, you can see also that Verizon Business Group has a year of investments to see that we are putting a foundation to be even stronger for the future, had good growth in the wireless and also in some areas like the public sector, very good performance and also adding a lot of new customers on the enterprise side. When it comes to us leveraging the assets to drive new growth, The commitments we did in February 2020 when it comes to 5G were all met or exceeded. I'm extremely happy with that. We now have 64 ultra-wideband cities. We have more than 10 cities on our home 5G ultra-wideband. We have 10 mobile edge compute centers public with Amazon. All in all, we deployed more than five times more ultra-wideband sites. doing 2020, and we launched the nationwide 5G that now is covering 230 million POPs in 2,700 cities. On the financial side, a strong year ended where we had more than 2% growth in the wireless service revenue. We also have growth on our EPS in the fourth quarter, over 7%. We had an operational cash flow full year of $41.8 billion, which is a growth of 17%. A very strong year that put us in a good position when we go into 2021. And finally, we have a really large focus on how to include all our four stakeholders in the work we're doing. And I'm really proud of the Citizen Verizon that we launched during last year. which is a great way for us to see that the society aspect is part of our strategy, where, of course, our focus on being carbon neutral is very important. And the second green bond was launched at the second half of 2020. So all in all, I have to say, it was a very different year, but a great execution where we hit all our strategic milestones at the same time as we pivoted and supported all our stakeholders. At the November sell-side event, I presented the five vectors of growth. Those are the vectors that is based on our strategy of network and service. Those are also the enablers for us to get to GDP+. We have great traction on them, and we also have done quite a lot in 2020, all the way from the five-year adoption to the customer differentiation that I talked a lot about, the new markets that we're addressing, still pending the acquisition of TracFone, but we have other segments we are addressing, as well as the next-generation business-to-business application based on our unique mobile edge compute offering that we have with Amazon, also now with Microsoft, and many other partners. And finally, the network monetization with our MVNO partners, which are enjoying the best network that we have and we're building. All in all, this is built on the Verizon Intelligent Edge network that we outlined some three years ago, and they're giving us the opportunity to have great execution in the future. With that, I would like to hand over to Matt to go through the financials in a little bit more detail.

Thank you, Hans, and good morning, everyone. I would like to start by saying how proud I am of the Verizon team and the results we delivered in 2020. In the fourth quarter, consolidated operating revenue was $34.7 billion, down 0.2%. Total wireless service revenue growth and strong results in Verizon Media Group were offset by lower wireless equipment revenue and ongoing declines in legacy wireline products. Adjusted EBITDA for the quarter was $11.7 billion as compared to $11.1 billion last year, a 5.3% increase driven by service and other revenue growth and disciplined spending. Fall year consolidated adjusted EBITDA totaled $47.1 billion, and adjusted EBITDA margin was 36.7%, 90 basis points higher than last year, including headwinds of approximately 40 basis points from the deferral of commission expense. Our continued focus on our business excellence program has resulted in realized cumulative cash savings of $9.5 billion, and we are well positioned to achieve our $10 billion goal ahead of our year-end 2021 target. COVID has brought about new ways of working, and we believe some of these will be long-term in nature. This will create additional savings opportunities beyond the current program. As Brady mentioned, adjusted EPS for the fourth quarter was $1.21, up 7.1% from $1.13 a year ago. We are pleased to report 1.9% growth for four-year adjusted EPS at the high end of our revised guidance, demonstrating the strength and resilience of our business. Let's now turn to cash flow results on slide eight. Our cash generation was exceptionally strong in 2020, reflecting our subscription-based business model and the quality of our customer base. This enabled us to continue to execute in our capital allocation model, investing in our business, increasing our dividend for the 14th straight year, and strengthening our balance sheet. Cash flow from operating activities totaled $41.8 billion for the year, an increase of $6 billion from the prior year, driven by continued performance and strength in the business, lower tax payments due to a one-time cash tax benefit received earlier in the year, and reductions in working capital, primarily due to lower wireless volumes. Capital spending in 2020 totaled $18.2 billion, as we continue to support traffic growth on our 4G LTE network while expanding the reach and capacity of our 5G ultra-wideband network and launching our nationwide 5G network. As a result, free cash flow for the year was $23.6 billion, up 32.4% year over year. Throughout the year, we opportunistically diversified our debt portfolio to optimize our cost of borrowing and retained a higher level of cash as a result of the pandemic. We exited the quarter with net unsecured debt of $96.3 billion and our net unsecured debt to adjusted EBITDA ratio was approximately 2.0 times versus our targeted range of 1.75 to 2.0 times. We remain committed to our capital allocation model. Now let's review our operating segment results, starting with consumer on slide nine. Our competitive position is based on compelling unlimited plans that provide choice to consumers paired with the best devices and attractive promotions all built on the country's best network. This quarter we launched our nationwide 5G service to coincide with the release of the iPhone 12 lineup, which fully supports our ultra-wideband offering, enabling Verizon customers to utilize the full range of connectivity provided by this iconic device. Partnerships remain a critical component of our value proposition. We recently added Discovery to our list of existing successful partnerships, which includes Apple and Disney. As the early cohort of Disney Plus customers have come off of the initial free 12-month period, more than two-thirds have maintained their subscription, either through their Verizon direct billing relationship or by opting into one of our newest mix-and-match plans with the Disney bundle included. Volume activity in the quarter was tempered by consumer behavior, given rising COVID cases and elevated store closures that limited foot traffic, in addition to the retention offers in the markets. As a result, the pool of consumers switching carriers was lower than a year ago. Fourth quarter phone gross ads were down approximately 24% year-over-year, relatively consistent with declines experienced in the third quarter. We are pleased with the quality of the additions we are attracting, as over 90% of new accounts came in on an unlimited plan, and over 55% of these accounts opted for premium unlimited service. At quarter end, over 60% of our base was on an unlimited plan, with more than 20% of our base taking a premium plan. Our customer retention remains high, with phone churn of 0.76% for the quarter, down seven basis points from a year ago, contributing to postpaid phone net ads of 163,000. Disconnects related to customers in our Stay Connected program totaled more than 135,000 phones in the quarter. Our Stay Connected program continued to see great results, with approximately 95% of customers making a payment since entering the program, and collection cure rates are in line with our expectations. More than 50% of all customers on the program are current on their payments. December was the final month of service billings for the program, and payment activity remained stable, though we will continue to closely monitor payment trends in 2021. Turning to Fios, we continue to build on our strong third quarter with consumer Fios internet net additions of 92,000, more than double the fourth quarter of 2019. Total Fios internet net additions of 95,000 was the best fourth quarter we have had since 2014 and reflected strong demand for our gigabit offering as consumers continue to work and learn from home. Cord cutting trends continued. resulting in consumer files video net losses for the quarter of 72,000. Now let's move to slide 10 to discuss the consumer financial performance. Consumer operating revenues for the fourth quarter were $23.9 billion, down 1.2%. This was primarily driven by a 3.8% decline in wireless equipment revenue due to softer volumes in the quarter. For the full year, total consumer revenue decreased 2.8%. the $88.5 billion driven by the decline in wireless equipment revenue. Consumer wireless service revenue for the quarter was $13.6 billion, a 1.2% increase. The results reflect the resilience of our business as we recovered from a 2.7% decrease in the second quarter. In the fourth quarter, we delivered ARPA growth of 1.8% year over year, even as travel paths and other usage fees remain at subdued levels. demonstrated that our tiered approach to unlimited provides a strong foundation for delivering revenue growth. For the fall year, consumer wireless service revenue was $53.6 billion, relatively flat from 2019 levels. Consumer FIOS revenue totaled $2.8 billion, a 2.5% decline from a year ago. Customer credits related to regional sports networks negatively impacted FIOS revenue by 4.2% in the quarter, and also reduced our content expense. We expect FIOS revenue to benefit as growth in the broadband base offsets the impact of the shift from the triple play bundle to standalone service. Consumer segment EBITDA grew 2.9% to $9.9 billion. Margins were 41.5% in the quarter, up 160 basis points from last year, including headwinds of approximately 30 basis points from the deferral of commission expense. For the fall year, EBITDA margins were 45.5%, an increase of 120 basis points from the prior year, including an impact of approximately 50 basis points from the deferral of commission expense. Now, let's move to our business segment on slide 11. Business wireless trends remained resilient throughout the year, and the fourth quarter was no different. Public sector demand remained strong on the success of our distance learning program and support for increased needs of state and local government agencies. Small and medium business trends improved sequentially while we experienced modest pressures in enterprise. Business segment phone gross ads for the quarter were down 11% from the prior year due to store closures and continued economic weakness. Segment postpaid phone churn was 0.98% in the quarter, which was down two basis points over the prior year. As a result, post-fade phone net ads were 116,000. Let's now move to slide 12 to review the business financial performance. Operating revenues for the business segment were $8.1 billion in the fourth quarter, down slightly year over year. Four-year operating revenues of $31 billion represented a decline of 1.5% from the prior year. Wireless service revenue in the quarter accelerated to 7.1% year over year from 4.9% in the third quarter, which was more than offset by reductions in wireless equipment volumes and secular pressure on legacy wireline products. Looking at wireless service revenue, public sector had a particularly strong quarter and small and medium business growth improved for the second straight quarter, although it was still below pre-pandemic growth rates. Legacy wireline product trends appear to be normalizing after initially benefiting from the transition to a work-from-home economy. the growth in advanced communication services continues to drive opportunities for the segment. While we are pleased with the revenue performance of the business segment and exit 2020 with momentum, there are uncertainties around how businesses will perform in 2021 given the challenges within the macro environment. The elevated demand experienced in public sector and parts of enterprise throughout 2020 could potentially create headwinds to growth in the business segment. particularly in the back half of 2021. Business segment EBITDA margin was 24.6% in the quarter, up 390 basis points from the year-ago period, reflecting the strength in wireless service revenue and the benefits of our transformation initiatives, including back office digitalization and optimization. All-year margins of 25.4% were up slightly versus last year. Now let's move on to slide 13, to discuss Verizon Media Group. We are very pleased with Verizon Media Group performance. Total revenue for the quarter was $2.3 billion, up approximately 11% from a year ago, the first quarter of year-over-year growth since the Yahoo acquisition. Growth in the quarter was fueled by strong advertising trends, with demand-side platform revenue growing 41% compared to the prior year. Advertising strength came from political, consumer products, technology, and retail among other verticals. The fourth quarter also saw continued high consumer engagement in commerce as offline to online shopping behaviors continued through the holiday season on our owned and operated properties. In particular, male e-commerce revenue growth was seven times that of the prior year and we saw continued strength in finance and use as daily active users grew 52% and 11% respectively. Let's now move on to slide 14 for a quick look at overall wireless performance. Key metrics and financial data of the combined wireless products and services from the consumer and business segments are illustrated on this slide. Total wireless service revenue is up 2.2% year-over-year in the fourth quarter and up 0.7% for the full year. Additional details are provided in the financial and operating information and the supplemental earnings reschedules on our website. Now let's focus on our outlook for 2021 on slide 15. We are excited to deliver 2021 expectations that include accelerating revenue and earnings growth driven by our five growth vectors as wireless service strengthens and 5G continues to scale. This year we are providing an outlook for service and other revenue, which includes revenues from across all of our businesses but excludes wireless equipment revenue given its variability, especially in the current environment. For 2021, we expect service and other revenue growth of at least 2%, reflecting an acceleration of total wireless service and FIOS revenue growth, as well as continued momentum in Verizon Media, partially offset by ongoing legacy wireline product declines. Included in this outlook is total wireless service revenue growth of at least 3%, driven by our tiered unlimited plans, new customer contributions, and ongoing strength in business. For the fall year, we expect to see adjusted earnings per share of $5 to $5.15, driven by recurring service and other revenue growth, as well as ongoing cost initiatives. We assume no significant year-over-year impact from below-the-line items based on the 2021 opening balance sheet. the adjusted effective tax rate is expected to be in the range of 23 to 25%. Our consolidated capital spend for full year 2021 is expected to be between $17.5 and $18.5 billion, consistent with the prior year and within our normal capital intensity range. Our focus of the year includes further expansion of our 5G ultra-wideband network in new and existing markets densification of our network to manage future traffic demands, and continued deployment of our fiber infrastructure. Our cash flows in 2021 are expected to be driven by higher operating incomes offset by taxes and working capital. We anticipate that our cash taxes in 2021 will be higher than in 2020, given expectations for higher pre-tax income this year and a one-time $2.2 billion cash tax benefit received in the second quarter of 2020. Working capital was a tailwind in 2020 due to the lower equipment volumes, which we do not expect to repeat in 2021. With that, I will turn the call back over to Hans to discuss our 2021 priorities.

Thank you, Matt. Let me review the 2021 priorities based on the four pillars of strategic priorities, starting with the core business. And as you heard Matt talking about accelerating the service revenue, I'm pleased that we're guiding for a plus 3% wireless service revenue growth in 2021. That's based on that we will continue to differentiate our value proposition for customers. We also will continue to invest in our Verizon Business Group to capture that potential we see in the business segment with a new platform that we are developing together with our customers. When it comes to our 5G and investing in our business, we have a big year in front of us in 2021. Again, we're going to almost double the amount of 5G ultra-wideband sites. We're going to have 14,000 new sites coming in during 2021. That will enable us to continue to increase with plus 20 cities when it comes to 5G ultra-wideband. And we're also going to add some plus 20 5G home cities. At the same time, focusing very much on the 5G mobile edge compute with 10 more sites when it comes to the public side. And then on the private side, we will scale that network together with the demand that has come as we now are ready. All underpinned with the Verizon Intelligent Edge Network and the fiber that we are deploying. When it comes to the financial, Matt talked about that we continue to focus on accelerating the earnings per share growth. now with a guidance of 5 to 5.15 earnings per share. The year 2020 solidified our balance sheet, and we will be continued focused on the cash flow generation. And finally, when it comes to our culture and our purpose, we have very much focused on the customer centricity and the brand strength that we have built in the market. That will continue. as well as we will have also the citizen Verizon totally included in an overall strategy to see that we are managing all the four stakeholders that is making the success for Verizon in the future. So very clear, a year of execution. We have progress one more year on the Verizon 2.0. We're in a great position. I'm really excited to go into 2021. I'm pleased to announce that we will have our normal investor day in the early part of 2021. We will come back with the exact date in due time. And by that, I would like to hand over to Brady for Q&A.

Thanks, Hans. Brad, we're now ready to take the 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 for the first question. Your first question comes from Phil Cusip of JPMorgan. Your line is open.

Hey, guys. Thanks. Two, if I can. First, Hans, can you talk about the strategy of revenue growth from here, given the higher promotional environment? Is it important that you grow accounts, or can you make the revenue growth on the existing base? And clearly you're looking for customers to move up to premium unlimited. Where is that next now? And then second, where are we on the fiber build, and how should that start to come through in revenue and expense management this year? Thank you.

Thank you, Phil. Let me start by the subscribers, Dan. I mean, first of all, we came into the third quarter already. I mean, we have our model with the migration of customers, giving them a better network and a better experience. And that is really how we are managing our base. And we came with a good momentum into the third quarter. And as you saw in the fourth quarter, we had service revenue growing more than 2%, as we said, also in the guidance area. That's so important for us because we have a model where our net addition is part of our strategy, how we move them up. And as Matt said, we have now more than 60% of our customers on unlimited. But more important, I mean, if you look in the fourth quarter, 90% of the net ads took unlimited, and out of those, 55 took premium. And the premium is, of course, where we are adding in the 5G, we're adding in Discovery+, Disney+, the way that that Ronan and his team have worked with these migration patterns. We believe, and as you heard in the guidance that Matt talked about, we believe that we can continue that work with organic service, wider service revenue growth with the model we now have. And we have proven the model over the years. And let's also remember the business side has performed very well when it comes to the wireless account. I mean, we are so strong with the public sector, with the large enterprises on the wireless side. So that is giving us a lot of positivism going into 2021 with the guidance we have of continued service revenue growth. on the wireless side. And we will constantly measure what actions we're taking, but we feel good about it. When it comes to the fiber question, yeah, we continue to roll out fiber. We're probably in the year three or four right now. I would say the majority or vast majority of all the 5G sites, they have our own fiber. We are migrating 4G sites where it's a good return on investment to our own fiber. And over time, we will also open up opportunities for resale to our enterprise customers and wholesale. So I think that we are seeing that benefit already on the 5G bill because we are using our own fiber to get the full impact. We also have a couple of years left in order to have it in all the areas. But we are coming far away on the 5G bill, and we will continue to do it where it where it makes sense from a return on investment. So we feel really good about that, and that's part of our Verizon Intelligent Edge network. Thanks, Phil.

Brad, we'll answer the next question.

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

Thanks for taking the question. I believe you called out in the release that COVID ended up being a two-cent benefit in the quarter. I imagine that was probably a mix of things that were good and bad. I was hoping you maybe could give us a little bit of insight into that. And then the EPS guidance that you gave for this year, what are you assuming about the COVID impacts over the course of this year, if you could give us any insight on how that breaks out? And then also one last question on guidance. Does that factor in any potential future spectrum purposes, or does it just reflect the portfolio spectrum you have today? Thanks.

I can start with the latter question, and Matt can come back to the first. So when it comes to our guidance for EPS in 2021, of course there are uncertainties of the pandemic and so on, but some things we know. I mean, the roaming charges will continue to be a headwind. We also think that as the pandemic and the common economic recoveries is coming back, probably latter part of 21, the public sector will not have an equally strong year as they had in 2020. We also believe the SMB will continue to be subdued and have a challenge in 21. And as we saw during the full year, the switch pool has been lower due to the traffic in the stores, etc. So that we have factored in. But on the other hand, we have line of sight of what we're doing because we're executing on a strategy when it comes to migration of our customers, what we're doing in Verizon Business Group. And also Verizon Media Group, as Matt said, they were now for the first time ever have a year-on-year growth of 11%. All in all, that is giving us the confidence that we can live up to this guidance. But there are some uncertainties and there are some headwinds from COVID. But we think that with those assumptions we have, we can actually do this. And this is a continued work with the EPS growth and acceleration that we have talked about. for so many years right now, and we continue to show that we can do it with the assets we have and how we're executing. Matt.

Yeah, thanks, Hans. So, Brett, just in summary on the COVID assumption and the EPS guidance, I think I'd say, well, certainly some level of pressures will continue to exist on the business throughout the year. I would say we're not overly pessimistic, but we're not overly optimistic either. We assume some level of pressures, but you saw from the second half of the year our ability to still execute within that type of environment. In terms of the fourth quarter, as you say, there was actually the COVID impact was actually a two cent benefit. And what you saw there was there was a couple of one timers, but primarily it was a case of the revenue pressures we saw declining versus what we'd seen in 2Q and 3Q. You think media as an example, which had been significantly hit by COVID impacts earlier in the pandemic, but certainly no impact in 4Q as we recorded that 11% revenue growth there. So those revenue, some of the revenue headwinds moderated in the fourth quarter, the expense benefits continued. That's why you saw the two cent net benefit, which actually completely offsets the two cent headwind from 606. So if you kind of think about in the fourth quarter, 606 and COVID having no net impact on the results, and that $1.21 stands on its own, the 7% increase on a year-over-year basis. Thank you.

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

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

Thank you. Good morning. Hans, I wonder if you could talk about 5G monetization in 2021. You mentioned the expansion of the network, the ultra-wideband network, more 5G home locations, more mobile edge compute. So can you just take us through both on the consumer side, particularly 5G home, and on the B2B side, what we should be looking for and what you're kind of including in your forecast for 2021?

Yeah, absolutely. No, we're excited about the 5G in 2021. I mean, on the mobility side, we're already seeing monetization happening. I mean, in the fourth quarter, with so many customers taking the premium and going for unlimited, that's sort of where we have our sweet spot with the 5G. And, of course, with the Apple iPhone right now on 5G, that has now kicked off that. So that you will see through the year when it comes to our or mobility case. When it comes to 5G home, we have very solid progress in 2020, came out with this new CP, we added some 12 cities now with 5G home with NR technology, and our plan is doing 20 plus markets more in 2021. So now we're starting to get a solid foundation for the 5G home. And as you heard in my remarks, I mean, we're doubling the amount of sites almost in 2021. So we're now getting to a very, very solid positioning there. But I said before, on the Alta Weidmann build, we're building it mainly in the very dense urban areas and then in stadiums, et cetera, in the beginning. So we cover less of houses or residentials in the beginning. But as this continues right now, we're capturing more and more. So I'm really... Excited. We also know that the CP is really good and the self-install is working well. So we're looking forward to seeing that happening over the year more and more. On the 5G Mobile Edge Compute, we have a great funnel of customers on the business side. And we're not expecting that will be any significant revenues in the 21. But you're going to see a lot of customers signing up for the 5G Mobile Edge Compute, both the private and the public. in 2021 in order for us to have a very solid base going into 2022. So a lot of excitement around 5G. I think we have built it absolutely right. We have an opportunity in front of us that we have been working on for a couple of years right now. So I'm happy with my sales team. I'm happy with the technology team. And we have a big year in front of us.

Great. Thank you.

Yeah, thanks, Simon.

Brad, we're ready for the next question.

Thank you. The next question is from John Hudlick of UBS. Sir, your line is open.

Great. Thanks, guys. I've got three quick ones. First, in terms of the 3% plus service revenue growth, can you give us a sense in terms of whether that's weighted more towards subs or ARPA improvement? Obviously, you guys in your commentary talked about some of the headwinds to the sub growth. I'm just wondering if you guys think you can maintain sub growth as you look through the year. That's number one. Number two... Just any thoughts on the ability to continue to drive margin improvement in the business, considering you're close to achieving the $10 billion in savings. And then lastly, sort of a follow-up to Brett's question, is the CapEx guide that we've heard, is that something that could be revised during the year if the circumstances change? Thanks.

Let me start. I mean, on the 3% growth, I think we have our strategy when it comes to how to grow it with the migration of customers and all of that. And as always, you know, the team is validating how to make offerings, and we should be more aggressive and all, but we always think about doing long-term positive impacts for our shareholders financially. And you have seen us now working for the last two and a half years since we launched Unlimited. We are doing the right things in order to make a long-term impact positively for shareholders and for our customers. And so especially Ronan and the team, they have quite a lot in the portfolio. But we have now proven that this model is working when it comes to migration of unlimited with the best network and adding in also new value-added services, everything from Disney+. to Discovery+, Apple Music, and it might be more coming up in the year as well. So I'm confident that the guys have that in the portfolio. And as you heard about the Disney+, you know, I think it's just unheard of how we can help direct the consumers. I mean, two-thirds are signing up, more than two-thirds are signing up to continue the service of the one year. I think that is something standing out. On the beta, Matt will come back later on, but I can say that we continued with efficiency, and it's a reason why we are giving a guidance that we will grow the EPS again, and the majority or all of it is basically above the line, as Matt said. So this is operational improvements and improvements as we are growing our top line. Again, we have proven the model, the five vectors of growth, and now we're in the middle of execution. And finally on CAPEX, this is what we need to do right now. The technology team has all the means to have to execute on a strategy with assets we have today. The only thing I can say, you know, as I said, I'm not sure 100 times before, we will only increase CAPEX if we find something that has a really good return on investment, and then we'll come back and talk about it. Right now, we have everything that we need to execute the plans that we have in front of us.

Hey, John. So back to your couple of questions around the guide. As you think about the 3% service revenue, it's really a combination of subs and ARPA. Hans obviously talked through all of the things that will drive the ARPA side of the equation. But we certainly do expect subs growth, account growth, and net act growth is important to our business as well. We will do that in a disciplined way. We're not going to chase unprofitable growth, but you should expect to see volume growth in the business as well as offer growth. And then the margin improvement, cost savings, as you mentioned, we're close to achieving the $10 billion program, well ahead of the end of 2021 timeline that we put in place. But just because we hit that doesn't mean we'll stop. There's significant opportunities to continue to make our business more efficient and The teams are very focused on those. And, you know, the 10 billion goal won't change us, won't slow us down at all from continuing with that. As you think about margin improvement, obviously, revenue will be a big driver of that. And then you combine that with the cost savings. The one thing I would say is, you know, as we have an improvement in EBITDA margin dollars, if we have equipment revenue increase this year, which we would certainly be glad to see an indication of the overall economic activity picking up. You know, you'd see an impact of that in the EBIT margins. So you could have EBIT dollars grow, but margins not grow as much just because of the impact on the numerator and denominator from the equipment revenue. But, you know, we're certainly very much focused on the dollar side of that equation and excited with the guide we have for the year. Great. Thanks, Matt.

Yeah, thanks, John. Hey, 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 so much for taking the questions. Hans, I guess the first question for you just on the strategy side with the sale of the HuffPost, is this the beginning of a dismantling of the Verizon media business? Is it on the block? What is the game plan for that unit as we think longer term for Verizon? And then I guess the second question would be for Matt. Matt, you called out that the 2H21 might have some tough comps for the business side of the business. Could you kind of elaborate a little bit on what that might be and what the numbers might look like? Thank you.

Thank you. On the Verizon Media Group, I just want to remember you that we started this journey somewhere in 2008. 18, you know, resetting the overall strategy of Verizon Media Group. We started with that. We started to take out costs. We changed the product portfolio. We went into a very clear brand value of trust and privacy. The team has just done an outstanding job. I mean, they have been bringing this from sort of going down with a decrease in growth of 50 to 20% per quarter, and now they're turning around with extremely short products, including also consolidating some, I'm not sure if it was 10 or 15 different ad tech platforms to one. I think it's a great, we're putting them in a position that we're really happy with. So I'm looking forward to how these guys will execute, and we are now in the position where I wanted it to be.

And then, David, in your question on the VBG volumes, certainly as you think about what we've seen this year, especially in the public sector part of Verizon Business Group, very, very strong year. Obviously some of that is due to the circumstances that we've seen across the country. So, you know, I would actually be very happy if we saw some pressure on those volumes in the second half of the year. That would mean good things were happening elsewhere that would be – very supportive of our consumer business, very supportive of our SMB businesses as well. So certainly it's part of some of that uncertainty that exists as we think about the year. But just wanted to call out the fact that if we see the improvements we expect, we may see some impact there on the public sector side of our Verizon Business Group volumes. But as I say, I think that would be more than offset by other parts of the business. So What you've seen and what we expect in 21 is a continuation of what you saw in 2020, is that as we have so many different parts of the business, irrespective of how the macro environment plays out, we can put together very strong consolidated results.

Thanks, guys.

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

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

Yeah, hi. I wonder if we could just talk about the competitive environment in wireless for a moment. Your gross additions remain, especially in consumer, but across consumer and business, way down. Your churn rate remains very good, and your ARPU shows signs of improving. That's sort of a different story than what we've seen for the last few years, which it sort of speaks to – perhaps a moderation of competitive intensity, but clearly a weakening of your ability to acquire new subscribers. I wonder if you could just talk about that for a bit and talk about how you see that evolving in the 5G era, particularly now that more and more of the handsets that are being sold are 5G handsets.

Thank you. First of all, I think the competitive landscape is always there and competition is always equal. I think that we just have a little bit different strategy. I mean, first of all, quality net ads is for us very, very important. And as you can see, we're adding these very important net ads. We want quality customers that likes our network, that likes our offerings and our experience. And if you look at what we have done the last two and a half year with our migration story, that's exactly what we've done. And that's what you see in impact in the fourth quarter. We're growing our service revenue as well as the guidance for next year. So we are confident with the strategy we have, and that might not be the same strategy that others have, that we can grow. And that's part of the five growth vectors we have to get to GDP plus. And with the guidance that Matt gave with or we gave with the plus 3% on the wireless service revenue. I think we have all the confidence in the model we have and how we'll work with. But it's also true that the switcher pool during 2020 in the fourth quarter was lower due to COVID, less traffic and all of that. But all in all, we are very pleased with the high quality net additions that we are getting and that we can create growth with that and continue so on. Matt?

Yeah, thanks, Hans. Craig, I think the retention side of the business is performing very, very well, and we're doing that through the quality of the network, the quality of the customer experience, and not having to do anything additional to drive that type of retention numbers that you see. So it's been a very strong story there, and we would expect that to continue.

Thanks. And if I could just squeeze in one more question, if I could, and sorry to change topics, but your video strategy seems to be now quite different in wireline and wireless. You're clearly with Disney and Discovery. You're sort of playing the Switzerland neutral arms dealer. I wonder if it raises any questions about Fort Fios. Does it make sense to stay in the video business as you currently have it where you're still selling a direct package, or would it make sense to move to a similar strategy for the wireline side where you sort of offer more third-party aggregators, if you will, across your network?

Thank you, Craig. No, first of all, you're absolutely right. On the wireless side, our D2C strategy is great. We have a platform that nobody else, when it comes to distribution, brand, and network, and we can cope with this. We're not going to have 100 different types of offerings, but, you know, the Discovery+, the Disney+, they are sort of super A brands that we want to work with, or Apple Music. We will look for more of these to see that they're fitting into our customer base. that they like it and are willing both to upgrade and migrate. So we'll continue with that. On the Fios side, of course, we will continue with the video right now, but you have seen us also starting with mix and match, starting to shop up this, because ultimately I want our customers to have choices, and I want them to choose. If they want the DTC solution or if they want linear or they want over-the-top, They should be able to choose it. And look at the numbers in the fourth quarter again. We continue to grow our Fios Internet customers, and we have a decline in the video customers. That's good for us financially, but ultimately it is to meet the customers' needs. And I think the whole setup that we did in Verizon 2.0 is just catered for us to do things that we never thought about before. We have a consumer division thinking about how are we now – delivering to consumers and and that's what you see in the numbers that's what you see in the numbers that we have we have the same in verizon business group they're thinking totally different we have done before and we still have more to do with platforms and things to be even more scalable and be able to bring more to the bottom line but i have to say i'm pleased and i hope that you guys what you see are pleased as well i mean the strategy is working we have the five vectors of growth We're going into 2021. We have proof points on all those five, including the video strategy you asked about.

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

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

Thanks, and good morning. Two questions, if I could. First, if you look at the improvement in post-paid churn year over year, Can you unpack what portion of that might be coming from the pandemic and the lower switcher pool versus what's coming from the Verizon initiatives on the network strategy, the tiering and content bundling that you're doing, or any other factors that you think may be improving retention? And then, you know, secondly, on the wireline business, is there at some point down the road a step function opportunity for to take margins up, especially as you've continued to fiberize the local footprint.

Thanks. Thank you. I will start, and I will let Matt make some comments as well. But on the post-paid churn, I think that we are just having a great moment with our customers. They love our network and the performance we have and the additions we're doing with 5G. and fire the ultra-wideband. At the same time, our offerings are so distinct and different than anybody else in the market, where they can go to the unlimited premium together with Discovery Plus or Disney Plus or Disney Plus Plus Plus. We have ESPN and Hulu included. I think nobody else has those type of things in the market, and our partners, at least if you ask them, I think you should, are very happy and pleased in how we can deal with this. We are happy with it, both from a retention, but also from a bottom line side. We were making money on this, which is the whole idea with the network of service that we're building on the Verizon Intelligent Edge network. On the Y-line side, I think the whole idea of the Verizon business group is really to see that we are working these three over here. This is nothing that you fix in a month or a quarter or two. This is things that we need to invest in a billing system, direct-to-consumer, call centers, everything being set up to deliver scalable platforms for our customer in the business side. That will, over time, improve our margins. in the Verizon business group. And I think that if you look at 2020, I mean, it was a good performance of them, still doing investments in order to get where we want to get over time. And then we add to that new opportunities like 5G mobile edge compute. Matt?

Yeah, so just back on the post-pay churn, Mike, for a second. Certainly there is a pandemic situation but as Hans mentioned, a lot of Verizon-specific pieces too. I'd also point out that the fourth quarter churn number included the impact. If you think about the stay-connected customers, there was a delay in those customers going all the way through a collections process and so on, and so you had a positive benefit from that in Q2 and 3Q, a little bit of a catch-up in 4Q, but even with that, a very strong churn number included And, you know, it's just based off of the best network experience, as you saw confirmed again by RootMetrics yesterday. When you put that together with everything else we do, customers who get on the Verizon network want to stay on the Verizon network.

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

Thank you. The next question comes from Doug Mitchelson of Credit Suisse. Your line is open.

Oh, thanks so much. You know, Hans, I just wanted, I was hoping you reflect back on the arrival of 5G in the United States, and the prompt is, I think a lot of people thought the iPhone 12, you know, being 5G and having all your bands in it would start a bit of a super cycle, or not a bit of one, but a super cycle for consumers adopting 5G in the United States. I'm just curious how much of it sort of not happening in that way is due to the pandemic and the lack of getting people to retail versus the lack of applications that would really just, you know, sort of, you know, delight consumers and get them to upgrade, and how you think that's going to evolve over the next, you know, year or two or three. Is it going to be sort of a slow walk, or is there something exciting around the quarter? And then, you know, for Matt, I'm just curious, beyond working capital, any other free cash flow swing factors for 2021, and is there any way to size or quantify, you know, working capital? It's kind of hard to tell looking historically what normal might be. Thank you.

When we talk about devices and what's happening with the upgrades and so on, I mean, remember also that the Apple 5G phone came out, I would say, late in the fourth quarter. That's when this all started at the same time as we had the pandemic. Still, I would say we are very pleased with what we have seen with our customer migrating to 5G. Remember, we have a fair share or a big share of Apple users in our industry. in our base. So I think that this is a pretty normal, maybe some little bit subdued, but it's a very normal upgrade cycle that we'll see. And 5G will just getting better and better. I mean, that's what's happening. I mean, we are fortifying our network. We're improving the performance constantly. I remember when I talked about ultra-wideband, reaching maybe one gigabit per second now we're up to four or five you know so there's so much more to do and the same goes for our nationwide improving all the time performance better so i think that is coming together as the accessibility to phones are coming out much more and and all the main brands have a 5g phone and all of them without the wide band so i think that we will see that continuing into 21 and 22 but there are longer cycles today when it comes to customers migrating to a new phone they're very attached to it but i think this is no different than 4g cycle i think we actually are this is going faster than the 4g cycle it's just that our memories are so short so we don't remember that but clearly this is equal to better than what we saw on the 4G cycle that happened some 10 years ago, which I refer to myself when I talk about my memory. So nobody else. Okay, Matt.

Thanks, Hans. So on the cash flow question, Doug, so when you talk about the swing factors, obviously it starts with higher earnings for the year. Above-the-line earnings will be obviously the largest driver in the cash flow for 2021. In terms of things that potentially go the other way from a cash flow standpoint, we would expect obviously higher earnings will lead to higher cash taxes. But in addition to that, we have the $2.2 billion one-time cash tax benefit in the second quarter last year that obviously won't repeat. So that will be a year-over-year difference in the cash flow. And then working capital, as you say, the biggest item working capital is going to be in in the receivable side, predominantly on the handsets. Obviously, as volumes go down, the amount of device payment contracts with customers we're doing goes down as well. So even if we don't see an uptick in volumes this year, if they're just flat year over year, you have the removal of that tailwind from last year. So all in all, you're going to see the increase from higher earnings with some offsets and cash taxes and hopefully on the equipment receivable side are going to be the key factors in there.

All right. Thank you both. Yeah, thanks, Doug. Hey, Brad, we're ready for the next question.

Thank you. The next question comes from Peter Cepino of Bernstein. Your line is open.

Hey, good morning. I wondered if you could discuss the service revenue outlook and specifically the within consumer the incremental margin characteristics of the service revenue growth that you expect. Do you expect that revenue to be any more or less profitable than a normal level of service revenue?

I think that was outlined the guidance for 2021. We are looking for profitable growth, and that is how Verizon has worked recently. as long as I recall. Now I haven't been here in all my life. But we work with profitable growth, and that is in the consumer group as well. We will see that we have the best offers for our customers, and we will manage our P&L at the same time, and we will be aggressive if it's needed to get long-term effects. But as you can see from the guidance, it's a profitable growth we're looking for. We should be able to both grow as well as making that a profitable growth. And that's in the guidance.

Yeah. So, Peter, I think that's exactly it. If, you know, the 3 plus percent service revenue guide is going to drive in the EPS growth that's in the guide as well. So certainly it's profitable growth. In terms of comparing it to historical incremental revenue, I think there is obviously different components all the time. But Absolutely everything that we're doing to step customers up from a revenue standpoint also creates incremental lifetime value with those customers. So you should expect that to be a continuation of how we approach the marketplace that we bring customers on and we do it in a way that creates significant economic value for us over the long term as we provide best in class experiences for those customers. Nothing changes there in our mindset.

That's a great explanation. Thanks.

Yeah, thanks, Peter. Hey, Brad, we've got time for one more question. Let's do one more if we have somebody on the line.

Thank you, sir. The last question comes from Colby Sinasel of Cowan. Your line is open.

Great. Thank you. Just want to circle back on CapEx for a moment. I feel like messaging earlier in the year was that CapEx in 2021 was would be up. And if you look at street expectations, you know, they were indeed expecting, you know, CapEx to be up in 21 versus 20. So I'm just trying to get a sense what might have changed to have the CapEx guidance flat year over year. Secondly, Biden's proposing increasing the corporate tax rate to 28%. I'm curious how you think about that and whether that would have a huge impact on free cash flow and dividend coverage, or if you think that there would be offsets that you'd be able to kind of absorb. much of that increase. And then just as a housekeeping, is TracFone included in your 2021 guidance? Thank you.

Yes, so thanks, Colby. Maybe I'll go in reverse order there. While we expect TracFone to close in the second half of the year, our guidance doesn't assume any significant impact on the EPS during the year, but we'll update that if necessary during the year. Corporate tax is our assumption, as you heard in the guide, 23% to 25%. That's where we've been the last few years. Obviously, we do our outlook based off of what is on the legislative books, and so we do it based on what's there right now. We look forward to seeing how the new administration works on a number of different issues, and if that changes the way we look at the business going forward, we'll obviously talk about that at the appropriate time. but we're very confident in the business. Look, we had good dividend coverage when we had a much higher tax rate not too many years ago. So while we certainly believe that the current rate has been very helpful in job creation and economic growth creation, we're certainly very comfortable with how our business is set up as the administration is looking at different things. And in terms of CapEx, I think what you're seeing is a very efficient, capital deployment model within the company. That's why you see a guide that's in line year over year as we continue to do all of the things that we've done, whether that be on LTE, the 5G build. You heard Hans talk about our goals for the ultra wideband build this year, continuing the fiber build out. And so I think the team has got a very good momentum going there. As they've got more into those things, the efficiencies continue. That's why you see the guide where it is. Great. Thank you.

Yeah, thanks, Colby. Let me hand it back over to you, Brad, and we'll close up the call.

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.