Verizon Communications Inc.

Good morning and welcome to the Verizon first quarter 2023 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, everyone, and welcome to our first quarter earnings conference call. I'm Brady Conner, and I'm joined by our Chairman and Chief Executive Officer, Hans Vestberg, as well as our current Chief Financial Officer, Matt Ellis, and Chief Financial Officer Designate, Tony Skiadis. Before we begin, I would like to draw your attention to our Safe Harbor Statement, which can be found on slide two of the presentation. 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. Earlier this morning, we posted to our investor relations website a detailed review of our first quarter results. Please note that during the first quarter, in order to better serve our customers, we reorganized the customer groups within our business segment. We now report the following customer groups, enterprise and public sector, business markets and software as a service, and wholesale. Prior period operating revenue results within the business segment have been recast to reflect these changes. You will find additional details in the earnings materials on our investor relations website. With that, I'll now turn the call over to Hans. Thank you, Brady.

Good morning, everyone, and welcome to our first quarter earnings call 2023. We delivered a solid first quarter marked by strong performance as we continue to execute on our plan to grow the business across mobility, broadband, and private networks. We're making steady progress and expect to keep up the momentum going forward. We remain focused on delivering for our customers and driving service revenue, EBITDA and free cash flow. We grew total postpaid phone growth ads by 5% year-over-year this quarter and achieved 3% wireless service revenue growth, $11.9 billion of adjusted EBITDA, as well as a strong cash flow from operations of $8.3 billion, an increase of $1.5 billion versus the prior year. We're working every day to move the business forward by using the Power of America's most reliable network to deliver the best experience for our customers. During the quarter, we reached more than 200 million pops covered by C-band in just over a year since we lit up the first site. With access to that spectrum and advancing the build-out as quickly as we did, we have enabled new sources of revenue growth and elevated our customers' overall wireless experience. In the first quarter, JD Power recognized us as the most awarded for network quality for the 30th time in a row. We're seeing improvements in already leading network performance, validated by year-to-date root metrics testing, and our customers are taking notice. Where we offer CBAN, we see significant benefits in fixed wireless access, consumer phone growth ads, and retention, as well as premium take rates. We also see 4G customers benefiting as we offload traffic in some markets to our 5G ultra-wideband network. The performance improvements will continue as 5G penetration expands market by market. We're excited about the remaining deployment of C-band spectrum and the potential it will unlock for both our business and consumer performance. Moving on to mobility. On the business side, even in the current economic conditions, my peers across different industries have conveyed confidence that mobility remains a priority in their spending. During the first quarter, Verizon Business continued its run of strong performance, delivering 136,000 postpaid phone net ads. This was accomplished in spite of some pressures around restructurings within the technology sector. On the consumer side, payment trends are at healthy pre-COVID levels and consumers are shopping, evidenced by our increase in consumer postpaid phone gross ads, which were up 11% year-over-year. With the new to Verizon ads leading the way, our gross ad performance is proof that our surgical and segmented approach to the market is working. We're in a much better position than a year ago, entering the second quarter with a sustained momentum around gross ads as well as post-paid churn, where we saw improved performance each month across the first quarter. We remain committed to our strategy, not to compete on who can discount the most, but rather who can offer the most value to customers, the best overall experience, and the best customer satisfaction. Plus Play is a great example of this. We listen to our consumers and introduce exciting partners like Peloton and Netflix, providing exclusive deals on an easy-to-use, subscription-managed platform. And there is more to come. Our segmented approach to the market recognizes that one plan does not fit all, and we have continued to work to address our underperforming segments. I've talked about our efforts to be more targeted and surgical with our retention, and we saw that play out during the quarter. By reducing upgrade volumes and lowering inefficient spending, we were able to deliver working capital benefits while finishing the quarter in a good place with churn and executing on migrations to premium unlimited. Those are real cash savings and a key drive into the large year-over-year improvements in free cash flow. You have seen us taking pricing action most recently on some of our legacy unlimited plans. We continue to look across our base and evaluate opportunities to more closely align pricing to our value proposition. On prepaid, we're working diligently to realize the full potential of this segment. While net ads were down by more than 207,000 versus the prior year, this total was affected by two transitory factors. First, more than 100% of our net year-over-year decline came from higher disconnects within our SafeLink brand, which provides services to customers on government subsidized programs. We're still in process of migrating customers onto our network as well. Prepaid is an important part of our value segment strategy, and our investment here will continue, as we're confident that will pay off in the long term. Turning to broadband, which is a major growth area for us across consumer and business. We achieved the highest net ads in over 10 years, adding 437,000 total net ads within the quarter, including 67,000 net ads from Fios. We're very pleased with the Fios performance, with net ads up 12% year-over-year. For fixed wireless access, we're seeing growth quarter-of-the-quarter-of-the-quarter, With 1.9 million subscribers at the end of the first quarter, fixed wireless continues to scale and contribute increasingly to our revenue performance. Our business customers are increasingly turning to fixed wireless access as the primary source of broadband connectivity. won over by the reliability and the overall value of the product. In addition, to take and share from our competitors, we're also seeing new use cases across all of our customer groups, leveraging the flexibility of the product to expand beyond what traditional wired broadband can do. Finally, in private networks, our Verizon business team continues to execute at a high level. We announced new deals with KPMG and Deloitte and have a strong funnel of business ahead of us. We have also established a leadership position as a top network provider in the public sector. This quarter we announced a 15-year critical infrastructure contract with the FAA, worth over $2 billion to design, build and operate and maintain the FAA's next-generation communication platform. This is in addition to many ongoing projects we're working on for large federal agencies. In creating the networks that move the world forward, we remain committed to running our business responsibly for our customers, shareholders, employees, and society. Last month, we published our 2022 ESG report, which highlights how business, ethics, governance, environmental stewardship, and human rights are at the center of everything we do. I encourage you to take some time to review the report and learn about how we are managing risk, and unlocking opportunities surrounding the issues of utmost importance for our stakeholders. Our commitments here come right from our leaders and their teams. A few weeks ago, I announced new leadership for our two business units, the network organization and our chief financial officer. These leaders come with nearly 100 years of experiences within Verizon and bring a proven track record of successful execution. Let me take a moment to walk through these changes. Tampa takes over as a CEO of Verizon Consumer. His objectives are clear. To enhance our consumer operation model and experience, deepen our segmentation approach, scale fixed wireless access and broadband, and drive financial discipline. Kyle Malady was appointed CEO of Verizon Business. CIOs are increasingly searching for technology-rich solutions, and nobody knows our technology like Kyle. His focus is clear, drive sustainable growth in mobility and deliver on the revenue growth opportunities within fixed wireless, 5G private wireless, and mobile edge compute solutions. Joe Russo takes over as the President of Global Networks and Technology to continue our efforts to extend, enhance and solidify the nation's leading wireless network and vast global IP and fiber network. Finally, Matt Ellis leaves us at the end of the month, of the 10 years at Verizon and 6 years as our CFO. I want to thank him for his many contributions to our business. Tony Skadis assumes the title of Chief Financial Officer on May 1st. I appreciate Tony's work to improve operations and drive performance as we search for long-term CFO replacement. So let's now move on in talking about efficiencies. The teams are on the way to deliver better, simpler, and more efficient end-to-end processes for our customers and employees. Spearheaded by the Verizon Global Service Group, we're looking into numerous areas across the business that will help drive bottom-line growth, including IT platform transformations, building advanced AI models for the better diagnostic and predictive insights, optimizing our real estate footprint, and managing our supply chain efficiently. We have also reduced headcount over the last quarters. All in all, our cost-efficient program is on track to achieve our target of 2 to 3 billion of annual savings by 2025, which will help to fund our growth as well as drive margin improvements over time. With almost all of our 10 billion C-band capital expenditure program behind us, we expect our cash generation profile to expand over the next few years, driven by revenue growth, cost management, and efficiencies with capital expenditures. This helps support our objective to achieve consistent dividend growth with our 16 consecutive years of increases, currently the longest streak in the industry. As we look to build on the free cash flow growth generated in the first quarter, we expect to see significant improvement in our dividend payout ratio this year, putting the board in a strong position to increase the dividend once again and bring us closer to our debt targets over the following years. Going into the second quarter, I'm energized by the execution of the Verizon team and our new leadership across key positions. We remain focused on delivering for our customers and driving service revenue, EBITDA, and free cash flow expansion. And with that, I will now turn it over to Matt for the last time.