Verizon Communications Inc.

Great. Well, good morning, everybody, and welcome to the first company sessions of the Goldman Sachs Communicopia and Technology Conference. I have the privilege of introducing and hosting Hans Vestberg, who's the chairman and CEO of Verizon. Prior to becoming the CEO in 2018, Hans worked as Verizon's chief technology officer and president of global networks. Prior to joining Verizon in 2017, he served as Ericsson's CEO. My name is Mike Ng, and I cover U.S. telecom here at Goldman Sachs. We have about 35 minutes for today's presentation. Thank you so much for being here this morning, Hans.

Thank you for having me.

Hans, around this time last year, you announced the frontier acquisition. Verizon's targeting 30-plus million fiber passings by 2028, 35 to 40 million over time. Could you just talk a little bit about how Frontier fits into the broader Verizon strategy and some of the opportunities that you see as you think about the integration of Frontier?

Yeah, and I guess my team has posted my safe harbor behind me, so the phone is calling as well. Yes, I will. So safe harbor statement, I might say something that is forward-looking, so just be aware of that. Let me talk about Frontier. So, yeah, one year ago, we basically announced the acquisition of Frontier. It was based on that we did a strategy how we're going to continue to roll out fiber outside our ILEC footprint. And, of course, when we had done that strategy, we realized that the footprint on Frontier were very good buy versus build for us, timing-wise and even value-wise as we closed it. And so that was the first. The second one is, of course, that then we're going through all the regulatory approvals. We have all the federal approvals. We're now working down the last couple of states here that we believe is going best definite long track to close in the first quarter, as we've said all the time. So all that you can park, and then you can sort of move on and see what are the synergies. Our early indication when we talked about synergies was 500 million in cost synergies. We haven't talked about our revenue synergies, but for obvious reasons, we see a great opportunity for convergence here. I usually say when it comes to convergence, when you have mobility and broadband together, fixed-wise access customers, they have a high degree on convergence. Fios, lower, and Frontier, the lowest. So that's sort of the opportunity we have. So we're very excited over it. Of course, it almost... is connected directly to our footprint because this was X Verizon business or assets. So the connection of it and doing the integration. I would say, you know, no acquisition is easy. It's always complex. But in all acquisition we have done the last 15 years, this is probably the easiest from integration point of view if you exclude Spectrum because Spectrum is way easier. So we're very excited over it, and we think we're going to have multiple opportunities, both for revenue and cost synergies. We have not come out yet and say how many passings we're going to do. We just said plus 1 million, and it's plus, plus, plus 1 million. We want to have better visibility on when we close and then we're going to have an investor update with how much passings, how much capital allocation we're going to do, what type of revenues, energies do we see and all of that we will of course come in one full package and how much capex we want to spend. So it's a lot of things still to unpack on it, but everything is going according to plan and we're really excited for it. The good news is also that Frontier has been performing really well since the announcement of the acquisition. They are on plan with what we assume they are business plan. And sometimes, you know, it's very easy. You buy something, it takes 18 months before you close. There's a lot of things happening. So far, Frontier has been executing extraordinarily well. We're very pleased with that.

That's great. And just as a quick follow-up, when you think about some of the Synergy opportunities that Just qualitatively, you know, what does that look like? Is that frontier service in Verizon stores?

Yeah, there's a lot of, but yeah, one is, of course, in the footprint of Frontier where more than 1,000 stores, of course, we can use that as a better distribution. We can use our IT systems in order to enhance the service levels and also the efficiency of deployment. So there's a lot of things we can do given our footprint that we can combine with them. Then we can have things to learn from them, how they have been reinventing themselves. Remember, they went bankrupt, so you think a little bit different than when you have an ongoing concern. So we have things that we need to learn from them that we can involve in our business. All in all, there's a lot of cost synergies. I'm also very excited for the revenue synergies for us to continue to drive convergence. step-ups and all of that, and of course seeing that we have a harmonized technology stack.

Great. I wanted to ask you about some industry news this morning. There was a low-Earth orbit satellite provider who acquired some spectrum, and could you talk a little bit about your views on that, whether that's as a competitor to broadband or in the future as a competitor to mobile wireless service and

So I read the same news that you are doing, so I don't have any other. But no, I think that, again, the portfolio spectrum is, of course, an interesting piece of business. This is the majority, of course, satellite spectrum. We are working with all the LEO and GEO players in order to have both backhaul or direct-to-device. I think this is just giving more opportunities for us to have more supply. I mean... I can only read what I'm reading, but I see this as creating more opportunities to do direct-to-device connection with satellites in especially areas where we cannot build because of requirement of international park and things like that. So I still believe that emergency or texting and calling in these areas will be important as a service that we will provide to our customers. Today we have ASD doing it, we have our iPhone, we have Skylo, so we have this sort of covered. This will just create more opportunities in the market and partners for us to go there, but it's a little bit early to say, but clearly this was in the in the cards after they sold out what it did last week or two weeks ago, that now their operations will be less of operation company, and now they're selling out the spectrum.

Great. Shifting gears, maybe we can talk a little bit about consumer wireless and the industry and the market. We've seen quite strong market activity, high gross additions, higher churn at the beginning of the year. Could you just give us an update on what you're seeing in the wireless market for consumer at the industry level? You know, where do you see churn trending and, you know, what is normalized churn level?

So what we saw in the first year was somewhat, I would say, elevated competition, higher promotional intensity. I don't think it's strange to me. I mean, the market is shrinking because the demographics of the U.S., it's not a growing market. We have less immigration, so it's less customers on the consumer side coming in, so it's a little bit more competitive. So that's what we saw. The other is that we now have over 40 months. That's how long a consumer keeps their phones. So sooner or later, people will start doing upgrades of their phones. We incentivized that even in the second quarter with our new offerings. So I think that was pretty normal, and that, of course, increased a little bit of the uh intensity we are coming in and out as always we are financial disciplines but we see opportunities we come in second quarter where it's a bit more uh aggressive that of course has elevated churn in the whole industry uh which is not strange neither so i think it's just a sort of a uh some sort of a uh an impact of what where the industry are in in which way we are and which sort of come come into the third wave of wireless i mean the first wave was sort of extraordinary expensive to have a mobile phone. The second was mass market. You can still build market share and grab a lot of new customers. Now we're in a saturated consumer wireless market, and then you need to work differently. And our strategy has been very clear there. We are building our vertical stack. We're building our horizontal stack. because we believe that we can continue to grow our service revenue, even though volumes might be smaller when it comes to new customers. That's why we build the whole perk system, adjacent services, access and loyalty programs, and seeing what they can do, all the step-ups and the convergence. That gives us, I would say, several vectors of growth that we didn't have before. Just the perks, we will have, last year we had, I think, 7 million perks. This year we said we're going to go to 10, then we upgraded to 14, and now we believe we're going to have 15 million perks. So it's going way faster than we thought. We basically have exclusive agreements with all the Netflix of the world, Apple One of the world, the Paramount Plus of the world, Disney Plus of the world. So this is a unique way for us to build something that nobody else is weak. building and it's good revenues and as samp at the head of cu consumer goods said this is good margins as well so all in all that's how we're building this market going forward and i think that's very important because the next couple of years is going to be a little bit more tighter new customers coming into the market and we will have that together with also the multi-brands we have on the prepaid so we can address any any market segments and we can scale it upwards with growth.

Yeah. I mean, there's a lot there that I would love to dive into.

Yeah, there was a lot in that one. I heard that. Sorry.

No, I would love to dive more deeply into a lot of those things, but maybe just starting out with the replacement cycle that, you know, you mentioned has approached 40 months at this time. You know, one of the topics that, you know, is on the mind of investors today is just the upcoming iPhone launch, right?

Yeah, tomorrow.

Yeah, we'll get it tomorrow. Yeah. So I was just wondering if you could talk a little bit about The launch of the, you know, iconic phones, what do you think that that does as it relates to the promotional intensity of the market? And do we see a pull forward of that upgrade demand early this year that may make the back half more?

Yeah, and remember, for almost three years, we have been having downward trends on upgrades. So that just sooner or later, we'll have an upward trend, and we believe it should be mid-single-digit to high-single-digit growth of upgrades this year, which probably will happen. Still to be seen is, of course, the launch of Apple, what that means to our customers. But, of course, if many Apple customers have taken sort of iPhone 16 in May, they might wait and see what's going to happen with this launch. So we're going to see how it's going to turn out the rest of the year, but definitely we are going to have growth on upgrades this year, which is just logical after years of decline and also with the promotions we have put into the market. But it's still very exciting. The Pixel 10 come out, I would say, great phone. Also very good traction on that one. So we see all these new devices coming out and being exciting. I've always said that when you see a real boom in upgrades is when you go from a G to another, 3G to 4G, 4G to 5G. And 6G is not even in the plan right now. It's probably a couple of years out. Or a real hardware redesign. Those are the moments where you see that consumers really throw themselves in. And I need this phone. I need to upgrade it. Other than that, we have seen that the softwares are so good. And the changes in between different versions have been a little bit smaller. So people have kept the phone way longer.

I was wondering if I could get your thoughts on the reaction to changes in device prices. I think the expectation for tomorrow is that we see some de facto price increases on some of the models. And how do the carriers, how does Verizon react to something like that? Is it more about... you know, making sure we get consumers upgraded to certain tiers of service.

There was many assumptions in that question, you know, and things that I cannot answer or I shouldn't answer. But historically, we have been very disciplined. We have a tiered model for our promotions. Basically, we take the highest highest plan for us, the ultimate plan, then you get a certain amount of promotion money. If you take the medium, you take less. And if you take the lowest, sort of the welcome plan, we give you 400. So we always tier the promotions. We thought that was a good idea to incentivize our customers. We're going to see what's going to happen in the future. I can never talk about the future pricing or whatever I'm going to do in the future, but that's historically how we have been dealing with different prices.

One of the things that you mentioned in response to the first question on consumer wireless was just perks and the platform. Perks is something that I thought is really interesting. You guys have talked about $2 billion of annualized revenue, mid-30% margin.

In less than 18 months.

In less than 18 months, and I think it has been a good driver of our view and should continue to be.

And the penetration is still low, and we still have probably two-thirds on my plan. So, first of all, getting everybody on my plan, and then, of course, also start getting a penetration on every account on perks. It's still, we have a way to go. I think what you realize when you have the size of the business we have, You need to take it in steps. You need to have the whole sales channel, digital as in the stores, being prepared to do it. So it takes some time. In the beginning, when we had these perks, it didn't even sell. But right now, it's selling. And, of course, the value proposition is that we now have the best value because if you take a plan from us, you take a couple of perks, that value nobody can compete with. So we definitely have the best value for our consumers, the postpaid right now. We just need to market it better, and we will.

Yeah. So it's a revenue and profit driver, and it also helps with the price value perception as well.

Yeah, price value perception, the loyalty, and then we also have starting with the adjacent services like the high yield account, bank account that we now have together with OpenBank. We have the credit card. So we're just building different services that have a brand affection that is connected with our brand, but also it resonates for our customer, and it has to be sort of flexible. Customers need to be picking and choosing. We cannot tell, hey, if you take this plan, it's included. Our consumers doesn't like that. They want to have the flexibility and they want to have the optionality of doing it. We still are the only one that can do a mix and match inside a wireless account, meaning if you have four lines, you can have one line on welcome plan, one on ultimate. No other competitor can do that. And that came from the consumer research we did two years ago that customers want that flexibility and optionality to move around. We have it both on the wireless, then we have it on our Perks, we have it on all other adjacent services as well. So part we are building based on the consumer insights we have, and now it's more about branding and seeing that the distribution channels can really handle the volumes of different products that we have.

Yeah. And just on the topic of Perks, you know, perks is one way that Verizon can be an AI beneficiary, right, because you're distributing Google events. That's how consumers are getting Gemini in many instances. Could you maybe just talk about, you know, that aspect of it, right, the AI apps and how that could potentially help?

Yeah, and also one of the perks is, of course, that we have the Gemini Pro AI app that we also are offering like a perk. So, yes, we see that as also softwares that, that can be enhancing the consumer experience you put them in. But remember, we are doing this on consumer wireless. We're also bringing the PERC system into my home, meaning broadband. We are gearing up for doing it on prepaid. We are starting it also in the SMB sector where we're also working the same because I think that's the way you're working this in the future to have sort of a virtual interface integrated stack for your customers, and they can pick and choose what they want. You need to have the best network in the bottom that is performing and with flexibility, and then you build upward. So, yeah, you're right. This is giving us a great opportunity to engage with our customers way more often than coming into the store once a year and doing your upgrade or buying your phone.

Yeah. And thinking about this all a little longer term, I was wondering if you could just describe how you think about wireless revenue growth in terms of subscriber growth versus pricing. On the subscriber side, should we be thinking more about

you know non-phone subscribers to the extent we get new types of devices or is there pricing opportunity because of some of these platforms that you mentioned if you look in the future i think we now have created so many vectors of growth uh on the consumer side that we grow on of course new customers are always important but we have so many other areas we can grow on right now and we just need to see that we deployed the capital in the right in the right area which It has the best return on investment. So if that's perks or high yield bank accounts or insurance, we will do that. If it's to acquire new customers, we will do that. And the financial discipline in the team is extraordinary. Then on the business side, we have been always very good balance between volume and price and whatever offers we have. Recently, of course, with some impact on the public sector for obvious reasons, when we see downsizing in the public sector with our market share, we have some negative impact on that. The other sectors are performing well for us, and we have, I would say, a high market share. So we have all of that, and then on top of that, what I see in the future is, of course, that the innovation of network-enabled devices, meaning devices that are using the network for their applications, for the processing, et cetera. We built the whole metro network and the edge capabilities five years ago, way early maybe, but that's really what we're going to see when AI will start to have devices that are going to connect with the network in a totally different way. They're probably a couple of years out, but that is the next boundary of wireless growth for us where we're both going to have new I would say, new offerings for these type of devices. And, of course, the manufacturer of the device needs to have edge capabilities from us that we can charge as well. So you're going to have dual revenue streams. So that's what I see happening also with time here. And then adding to that, of course, all the AI being built with our business side, the AI Connect, which have a great opportunity right now with lit and dark fiber for all the routes that needs to be built. And then over time, edge processing, edge capabilities, which we also already have in our data center. So there's multiple new vectors of growth that we have been building on for years, and we built a network to be prepared for it that is coming in the next years to come. And then we have the vectors of growth here and now with the perks, adjacent services, My home, my plan, and all of that were built the last couple of years. So we're excited over it. And you saw when we finished the second quarter, Now we're growing our beta with 4%, which we haven't done for a very long time. We upgraded our guidance in the second quarter for the full year. So, yeah, the team is doing a great job. We have a great team that is super focused on doing the right thing for our customers and then bringing that together.

Right. And you guys were early with AI Connect with the product formally. Yeah, we were very early with that.

Yeah, yeah. All the edge computing were probably five years too early, but, you know. Now we have all the capacity at the edge, which will be beneficial when the large language models are done, sort of, and you bring it to an AI application or an enterprise, for example, that's going to move out to the edge for transport cost, latency, security, and privacy, and we're going to be very well-placed to take care of that, serving 98% of the Fortune 500.

And just kind of wrapping up on consumer wireless, I was wondering if you could just... Oh, we're still talking about that? Okay. Briefly, yeah. And, you know, I was just wondering if you could talk about what current trends have looked like. How has back-to-school performed for instance?

Yeah, nothing special. I think this third quarter is always the quarter where everybody's waiting for an iconic launch. So even though back-to-school, I think what I'm really encouraged is our prepaid business. which has been doing really well. I mean, I think it's three quarters of growth after the acquisition. We had some five, six, eight quarters of negative growth. Now we are growing that business. The team is doing a great job. We have seven brands. We have the Visible, the Total Wireless, and of course, Straight Talk and a couple of other Walmart family. And all of them are distinguished segmented in the market. And these are perfect for back to school and things like that. So, no, I'm excited over the prepaid portfolio. And sometimes we have this conversation with investors, you know, yeah, but postpaid is important. I would say, I mean, high-end prepaid is profitable, more profitable than low-end postpaid. So, for me, again, the strategy is very clear. Build a network once, having as many profitable connections on top of the network. prepaid play a very important role there. Some prepaid offerings have limitation of usage. So you can make a good profitable business on any type of connections as long as you have the right requirement around them. And that's why I see the base of our prepaid that is plus 20 million is very important for us. And we can do quite a lot with it. And now we're growing as well.

And maybe just following up on prepaid since you mentioned it, could you just talk about how that strategically fits into the broader portfolio? Has the characteristics of prepaid changed relative to how we may have perceived it a decade ago?

I think that when you work with brands, there's a brand perception of your brand in the consumer world that you want to have. And of course, Verizon has a good brand. premium brand, high quality brand, the highest brand value in the industry, in the world, in our industry. So, of course, that tells you something when you want to approach it. That means also that some consumers might say, Verizon is not for me. That's why we built total wireless, which we have built up now in one and a half years, which is a high-end prepaid, for example, visible, 100% digital, where customers don't want to store, no hassle. They just want to buy the things online and nothing else. So we're trying to have the whole portfolio with Walmart, which is another cohort of customers that like that type of business. So I think that it's important when you're in consumer business and when you want to extend the time, you need to be true to your brands and the brand perception you have and what type of brand values you're building, and that's why the whole prepaid is playing a big business for us. We have never had this prepaid to postpaid convergence, but over time we're building that muscle right now with many of the stores we're building with total wireless, for example.

Shifting gears to broadband, obviously the market has been incredibly dynamic over the past several years. Your fixed wireless product has performed very well, 5 million subscribers on its way to 8 to 9 million by 2028. Could you just talk a little bit about fixed wireless access? Is it a transitional technology? Is it a good business? What do the returns look like relative to fiber?

It's a great product, and it fits very well in this portfolio vectors of growth. Certain consumers, certain business customers really like Fixed Wireless Access for the simplicity. You self-install, you get it quickly, and it's really good performance. Then, of course, we're also going to have fiber. But there are different customers there. It's a long-term strategy to be in Fixed Wireless Access. We are developing and improving all the time. We are now also starting with our multi-MDU solution. multi-dwelling units, meaning high-rises, where we're going to do fixed-wise access to high-rises, which has not been a market we have penetrated before, basically taking between the tower of one building, taking a very broad spectrum trans, sending capacity over, and then using all the cabling in the building, and suddenly you can also address multi-units. So we see more development on fixed wireless access and opportunities. And then on top of that, of course, being able to see that the business side is using fixed wireless access much more. I mean, when we did our business case on fixed wireless access, it was basically built on consumer. Right now we see very good traction on fixed wireless access on small and medium businesses, retail, retail offices using fixed wireless access for their primary broadband services. because it's so easy and so quickly. So this is a technology that's going to be here. Some of you might remember that when we launched it, we were first in the world basically with it. Nobody believed it even would work. I think the industry has proven that this is one of the great innovations for 5G. I mean, everybody talks, where are the big things from 5G? Fixed wireless access is definitely the biggest innovation of 5G so far, together with private 5G networks and edge computing. Yeah.

And how do you think about balancing your capacity between fixed wireless and mobile?

Yeah, so the capital expenditures that we have on mobility or in a very clear priority. Number one, we build for mobility, for the mobile case. The C-band we bought in 2019 or 2020 for $52 billion, we will finish between 80% and 90% of that build-out will be done this year. So what we're doing is that we build the C-band for mobility, and then our adjacent business cases fix files access. So we don't build our wireless spectrum for fixed wireless access. That's a secondary business case on the mobility. So during 26, we're going to finish basically the C-band deployment as we planned, and then it's more about capacity and business opportunities. And then, of course, we're going to have the opportunity to build more tuned to fixed wireless access, where the mobility will be the secondary business case. But right now, the team is focused on finishing the C-band deployment And again, this year we're going to finish between 80% and 90% of the plan. And then in 26, we're going to finish that out.

And as part of just the broader broadband strategy, is fixed wireless a business that helps you gain market share versus cable? Is it going to improve broadband penetration for the market overall? I'm just wondering where you think we are kind of from an industry broadband penetration perspective.

Yes, we have seen the last, I mean, we have been between 300,000 to 400,000 new net ads every quarter for many quarters right now in a mix of fiber and fixed wireless access. In the end of 2024, I already said that we're going to have a little bit lower net ads on fixed wireless access, not because we're not deploying faster, It's because we go from urban area to suburban and rural areas where we build our C-band, and there's less density of houses, so the passings on fixed-files access is a little bit lower. At the same time, we're now ramping up our fiber from 400,000, 450,000 passings in 2024 to 650,000 this year, so we're now looking forward to enjoy that increase in fiber that we're doing on the Fios footprint. As I said, in the second quarter, we're going to be having a stronger second half on broadband, meaning FIOS plus fixed-wise access in the second quarter, the second half of the year compared to the first half of the year.

Okay, great. Maybe moving to capital allocation, leverage, lots of moving parts here with the pending closure of the frontier acquisition. Could you just talk a little bit about... how long you expect it'll take to reach your target leverage, and are there things that perhaps you haven't been particularly prescriptive about as it relates to tax benefits from the One Big Beautiful Bill Act that should help on the frontier side, which you guys haven't quantified yet, that may help you reach your target leverage sooner?

Yeah, so the bonus depreciation that was part of the big bill that was approved here in August, that has a positive impact for us. $1.5 to $2 billion this year on cash, which is, of course, sizable money. But the capital allocation is very clear. Number one, we put it into our business. This year, we increased our capex because we increased our fiber build somewhere $18 to $18.5 billion, depending on where you believe you are in the guide. But more important, of course, we're investing in our business by buying Frontier. We have not come out to say what the capital intensity will be when we have Frontier. I will do that in one package. But historically, we have by far the lowest capital intensity in the industry, in the world, basically. We're on, last year, 12.7% capital intensity, which is low. I mean, the Europeans are probably up to 20s, and our competition here is 300, 400 basis points higher. Fiber is a little bit higher density, so the mix is going to probably go up a little bit, but I will come back with that. So that's number one. Number two is continue to put our board in a situation to increase our dividend. And for the ones that are following us, the press release on Friday confirmed that. Nineteen consecutive years of growing our dividend. Again, we added five cents for the next year. So a very good increase on dividend again, and that we have done for 19 years. And then we're paying down our debt. So far this year, until the second quarter, we paid down almost $7 billion in debt, $6.9 billion. So our leverage is 2.3. We want to go to 2.25. So we're definitely on our way. When we buy Frontier, we will come up a quarter of a notch, I would say, 25 basis points on our leverage. But given the cash generation we have right now, I think that that we will continue to work well on. And then after that, I mean, if we have proceeds left, we will start considering buybacks, which we don't have in the plan right now. But given how quickly we're moving here, we definitely want to consider that as soon as we get there. So, no, we're very clear on capital allocation and see that we honor our shareholders with good returns back and And, of course, given the size of the buybacks, the return on our yield is really high.

Great. And maybe just in the last couple minutes here, I was just wondering if you could talk about one or two things strategically that you'd like investors to take away from this conversation as it relates to the three-year outlook.

No, I think that what investors should look at Verizon is, first of all, extremely stable, very solid balance sheet, and, of course, more vectors of growth than we have had in many, many years. and then topping that with also more opportunity of cost reductions in many, many years with AI coming in. So, I think we're coming into a new era of business. We are best positioned with the best network, the biggest distribution, highest market share in every sector we're into, and then we're adding frontier. So, of course, we're excited. We have a team that is executing. I think that's... And we're very prudent with our capital allocation. I think that's what we want the investors to see. and knowing about our stuff.

Excellent. Well, Hans, that was a fantastic conversation. Really appreciate you coming out here today, and thank you, everybody. Thank you so much. Thank you, guys. Thank you.