Q2 2021 Verizon Communications Inc. Earnings Call
Yeah.
Good morning, and welcome to the Verizon and second quarter 2021 earnings Conference call.
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It is now my pleasure to turn the call over to your host Mr. Brady Connor Senior Vice President Investor Relations.
Thanks, Brad Good morning, and welcome to our second quarter earnings Conference call. This is Brady Connor 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 2.
Information and 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 and Verizon and <unk> filings with the S. E C, 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.
Now, let's take a look at consolidated earnings for the second quarter.
And the second quarter, we reported earnings of $1.40 per share on a GAAP basis.
<unk> second quarter earnings include a net pre tax gain from special items of $182 million, consisting of a pretax gain of approximately $1.3 billion related to a pension remeasurement credit as well as a pretax loss of $1.1 billion from early debt redemption costs.
Excluding the effects of these special items adjusted earnings per share was $1.37 and the second quarter.
And May we announced an agreement to sell Verizon media to Apollo funds with an expected close date and the second half of 2021.
Upon the announcement certain assets of the Verizon media business were classified as an asset held for sale as.
As a result, we no longer depreciate or amortize these assets, which resulted in a partial quarter benefit of 3 cents per share and the second quarter and this benefit will continue until the deal closes.
With that I'll now turn the call over to Hans to take us through a recap of the second quarter.
Thank you Brady and thank you for joining our second quarter earnings call.
It is a remark on what the difference a year can make.
And we're quickly resume and pre pandemic norms and the price on our network and in store traffic is almost back to pre pandemic volumes on our office employees are graduate calling back office well of course, some behaviors changed permanently the mass shift toward online activity and speed up the timeline for work from home day Standalone.
On a banking entertainment tailor made this and et cetera, all of the societal and behavioral shifts how 'bout and impact on the business and they reaffirm our network and our service strategy and our focus on delivering on the 5 vectors of growth.
Finally, after a year of virtual meetings I've been spending time in the field with customers and partners and importantly, with our frontline workers, who have done such heroic work throughout the past year, serving all customers all and all we had a very enthusiastic and cautiously optimistic stakeholder.
Base.
As we conclude the first total 2021 I have to say I'm extremely proud of the achievements, we have made the strength and Verizon in all aspects, let me mention a couple of and milestones.
The strength and our strategic focus with our divestment on Verizon Media group, which we believe will close around the end of the quarter.
We invest and in the best portion on the C band in order to accelerate and amplify our multipurpose network as a service model. We have also improved on 2 to adult organizational structure and we brought in a diverse slate of top leaders.
Our finance and Treasury team did an outstanding job of strengthening our balance sheet with low cost of borrowing and maturity for our debt.
We also laid out our long term financial goals would focus on growth.
All of these focus on scrap and execution and to deliver profitable growth. While our teams have paved the way for continued great financial performance and in the second quarter, we not only generated our strongest earnings on record and we're also produce good growth and profitability in all our units and segments.
Okay.
We demonstrated continued strength and our wireless service revenue growth and combined with our scale and operational efficiency, we produced 5.6% adjusted to beat that growth.
Given the strength on our first half results, we're raising our full year guide and that will provide details later in the call.
When it comes on our operations our recent investments in our customers 2 of the biggest fight the upgrade promotion and innovative trading coupled with a mix and match for both wireless and Fios customers had led to a strong performance across both our own offerings.
On a net book side, but just continue to offer our customer the industry's best network experience for the 16th consecutive time root metrics awarded to arise from the best overall network performance and for the 27th consecutive time J D power named US the number 1.
On network quality.
Our C band and build and we're on track to build 7 to 8000 sites by year end and we're on plan to launch the first 46 markets.
And we are also strengthening our network by expanding our fixed wireless access and reach.
If we look to the traffic and the network the customer activity is near pre COVID-19 levels.
And Thats mobility traffic comes back we have seen millimeter wave usage increased 290% June year to date and as we continue to deploy millimeter wave sites and we get more device penetration. We expect these numbers to continue to increase.
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And track 2 words 5 to 10 per cent of traffic and most dense urban areas by year end.
We're making progress.
And executing across all our 5 vectors of growth.
On the 5 year adoption approximate 20% of our wireless phone base are now on fire devices with a majority of them.
The band capable.
In the second quarter and the step buy rates were very very healthy and.
This reflects value and differentiated experience for our customers. We also had a record high new accounts that opted for a premium unlimited plan.
The next generation based on application, we launched the first commercial available private 5 and network solution and the U S. It's an on site private 5 G that brings on premise find the capabilities to large enterprises and public sector customers.
The team and Verizon business group continued to make very important partnership and 1 of them and in the quarter was with Mastercard, where we will work together with most or all of them fighting and mobile edge compute transforming the contactless payment for consumer as well as small and medium sized businesses.
The customer differentiation that we continue develop further strengthened in the quarter when you content and experience to our mix and match platform, where the broke and device trading the biggest upgrade day every promotion and were also added through partnership and co.
And with Apple arcade and Google play pass.
Expansion into new markets, we have been focusing on continue to have broadband nationwide and we expanded our find your home services, which is nowadays across 47 markets on the Ford Your home, we expand into more suburban and urban areas and is now available on imports from all 50.
States at the same time, we launched a new home router, which is compatible with the seabed.
Finally, we have recently expanded our fight the pieces Internet also to parts of 42 cities.
In summary.
Our strategy is working and it's more relevant and ever driving value for our investors and to our customers and society as they embrace new ways of living and working.
We have great momentum on all 5 vectors of growth delivering on profit growth with alignment for long term growth targets with that and I'll turn it over to Matt to discuss the financial results.
Thank you Hans and good morning, everyone.
Second quarter results were exceptional both financially and operationally we continue to execute on our strategy driving contributions from all 5 growth factors.
We attracted new customers and accounts and deliberate low churn and amid strong upgrade activity all of which serve to accelerate 5 G adoption and advance without C band deployment later this year.
Accelerates from volumes contributed to another quarter of strong sequential wireless service revenue growth building on our industry leading performance in recent quarters.
At the same time, our disciplined approach is driving profitability and strong earnings results.
Let's go through the details beginning on slide 6.
And the second quarter consolidated operating revenue was $33.8 billion up 10, 9% year over year.
Service and other revenue rose 5.7% driven by strength in wireless files and media.
Equipment revenue Rose 47, 6% year over year, given COVID-19 impacted sales a year ago and was up more than 17% from second quarter 2019 levels.
And by healthy upgrade activity.
Yeah.
Total wireless service revenues were up 5.9% year over year, and 4.0% compared to second quarter 2019.
The results represents sequential growth of $139 million nearly double our industry, leading sequential growth reported in the first quarter.
Total revenues were up $5.4 per cent year over year, driven by continued broadband subscriber growth.
Adjusted EBITDA of $12.2 billion grew 5.6% over the prior year in line without service and other revenue growth. Despite absorbing approximately 60 million of incremental tower lease costs related to the updated agreements to accelerate the deployments about C band spectrum.
As Brady and Hans highlighted adjusted EPS for the second quarter was $1.37, and the best on record.
Execution of that strategy is translating to record earnings results and we are well positioned to continue the momentum into the second half of the year.
Now, let's review our operating segment results, starting with consumer on slide 7.
Momentum build throughout the quarter and we timed out promotions to take full advantage of the economic recovery and increased customer activity.
The result was 1 of our strongest net new wireless account quarters.
With stores fully opened and consumer behavior closer to pre pandemic levels, we delivered $1.7 million and postpaid phone gross adds and the quarter up from $1.2 million and second quarter, 2020 and almost identical to 2019 levels.
Phone churn of zero point, and 6.5% remained favorable throughout the quarter and benefited from new offers and the marketplace.
This result was a record low for a non COVID-19 impacted quarter.
And as a result phone net adds of 197000 were our best second quarter for consumer.
The response to our differentiated customer proposition, including the broken device trade and and the biggest upgrade debit promotion was terrific.
Device upgrades, which was significantly higher compared to both second quarter, 2020 and 'twenty and 19 drove 5 G adoption and step ups to premium unlimited plans are strong indicators that our strategy is working.
We exited the second quarter with approximately 20% of our phone base using 5 G capable devices with the vast majority supporting C band.
In addition step up right. So a historically high and nearly 60% of new accounts opted for a premium unlimited plan a record high and.
Quarter, and approximately 69 per cent of our account base was on unlimited plans with nearly 27 per cent of our account base on premium unlimited plans.
The quality and reliability of that file service combined with the simplicity of our mix and match offerings continues to drive strong demand for broadband.
Fast Internet net adds totaled 92000, and the quarter supported by strong customer retention and our files Internet customer base is more than 7% higher than a year ago.
Our trailing 12 month total for US Internet net add performance is the highest since 2015.
Now, let's move to slide 8 to discuss the consumer financial performance.
The improved customer activity translated to impressive topline trends.
Total revenue for the quarter grew 11, 2% year over year and was also $6, 7% higher versus second quarter 2019.
Equipment revenue was the biggest driver rebounding above pre COVID-19 levels from higher activations aided by our customer value proposition.
Wireless service revenue momentum translated to $5.4 per cent year over year growth and 2.5% growth compared to second quarter 2019.
Service revenue was driven by customer growth step ups products, such as content as well as reseller and prepaid.
This growth comes despite minimal contributions from international roaming, which we expect should provide a further uptick to growth and future quarters.
Momentum and files continues with revenues of $2.9 billion, surpassing pre COVID-19 levels driven by the continued uptake of gigabit speeds.
The results represent our highest revenue result ever.
We remain encouraged by the continued margin improvement within files and driven by the adoption of mix and match plans and a greater contribution from broadband.
Consumer segment EBITDA for the quarter grew 4.9% over 2020, representing and EBITDA margin of 44, 3% down from the prior year, primarily resulting from higher activations.
Now, let's move to our business segment on slide 9.
Business wireless activity was highlighted by postpaid gross ads of $1.2 million up 6.3 per cent or the second quarter, 2020 and up $2.1 per cent over second quarter 2019.
Segment postpaid phone churn was 1.07% up 17 basis points year over year, reflecting elevated disconnects from COVID-19 related purchases in 2020, particularly within the education vertical of public sector.
As school as planned from or in person learning. This fall, we expect disconnects to remain elevated and public sector in the third quarter.
Despite the disconnect precious flow net adds was strong at 78000 with improving trends and both SMB and enterprise both of which posted its strongest phone net adds and over a year offsets and the disconnects and public sector.
Let's now move to slide 10 to review the business financial performance.
The business segment delivered strong topline growth with total revenue up 3.7% year over year.
Equipment revenue, which is up approximately 47 per cent was the primary driver of the increase.
Wireless service revenue growth of 8.0% was driven by strong momentum and small and medium business and the first quarter of enterprise growth since the onset of the pandemic public.
Public sector continue to show strong growth over 2020, though it was pressured by Covid related churn and education.
The wireless strength was partially offset by declines and business wireline, which returned to a more normal trajectory after elevated COVID-19 related demand.
Business segment, EBITDA margin was $24.1 per cent and the quarter down approximately 210 basis points year over year, mostly driven by higher equipment volumes and wireline pressure.
Well pressures likely persist in the near term the economic reopening business transformation initiatives and 5 chief of enterprise provide opportunities to drive margin.
Now, let's move on to slide 11 to discuss Verizon Media group.
Verizon Media group continued its recent trends and delivered strong performance driven by high customer engagement with our brands and demand for our advertising platforms.
Total revenue for the quarter was $2.1 billion up approximately 50% from a year ago and up 13% from second quarter 2019.
Let's now move to our cash flow results on slide 12.
Cash flow from operating activities for the first half of 2021 totaled $24 billion compared with $23.6 billion from the prior year.
The change was primarily driven by higher cash taxes, and higher working capital requirements due to greater volumes.
The cash tax impact was a result of a onetime benefit received from the second quarter of 2020.
Well as it relates to postponements of payments and the year ago period.
These expected headwinds were offset by our strong operational results.
Capital spending for the first half of 2021 totaled $8.7 billion as we continue to support traffic growth on our 40 LTE network, while expanding the reach and capacity of about 5 <unk> Ultra Wideband network.
C band Capex was more than $160 million and the first half and we have placed orders for approximately $1.4 billion and related equipment year to date, giving us confidence that we will be within the previously provided $2 billion to $3 billion range for the year.
The net result of cash flow from operations and capital spending is free cash flow for the first half of the year of $11.7 billion.
During the quarter, we began to normalize our cash balance closer to the pre pandemic levels, given the macro environment and we ended the period with $4.8 billion of cash on the balance sheet, a sequential change of $5.4 billion.
We exited the quarter with unsecured debt of $141.6 billion, a sequential improvement of $6 billion as we continue to focus on optimizing our debt footprint.
Our total borrowing costs and the second quarter were $1.4 billion, which was relatively flat to second quarter 2019 levels, Despite having approximately $40 billion and additional debt this year.
Net unsecured debt at the end of the first half was $136.8 billion and our net unsecured debt to adjusted EBITDA ratio was approximately 2.9 times.
Now, let's review our annual guidance targets on slide 13.
Our strong first half performance and the momentum and out business gives us the confidence to raise guidance.
Please note that the updated guidance reflects the planning assumption that the Verizon media sale closes at the end of the third quarter.
Starting with revenue, we are raising our wireless service revenue growth outlook to 3 and a half day, 4% up from the prior 3% plus.
The drivers of the revised outlook are broad based and include positive trends, we are seeing for customer acquisition premium plan adoption.
Products and services, such as cloud and content as well as prepaid and reseller growth.
The anticipated timing of the Verizon media sale means we would not recognize any revenue from that business and the fourth quarter.
As a result service and other revenue is no longer an apples to apples comparison with 2020 and we are withdrawing that growth guidance at this time.
Turning to earnings.
We now expect and adjusted EPS range of $5.25 to $5.35 up from the prior range of $5 to $5.15 day.
The increase is driven by the improved wireless service revenue outlook, the aforementioned media DNA benefit and a reduction and the expected interest expense related to the C band investment.
Our guidance for the effective tax rate and Capex are unchanged.
In summary, we're competing effectively and delivering strong volumes growing accounts driving healthy step ups and positioning our base to capitalize long term as we grow 5 T adoption and customer performance has led to quality financial results as demonstrated by the sequential wireless service revenue growth.
While also flow into the bottom line with best on record adjusted EPS, we enter the second half with a lot of momentum and I'm confident we will continue to execute our strategy and delivered strong operational and financial results throughout the remainder of the year.
With that I will now turn the call back over to Hans to discuss our priorities for the remainder of 'twenty 'twenty 1.
Thank you Matt at our Investor Day, we laid out commitments from 'twenty to 'twenty, 1 and beyond the scale on network as a service strategy and generate GDP plus growth.
We made transformers and investment over the last 12 months through acquisition, and Divesture and customer innovation and creating a strong platform for growth and our second half 2021 and be on our priorities for the second half continued to build on our current network and customer initiatives to further amplify and next day.
And finally adoption.
Further cement our network leadership through industry, leading millimeter wave and C band assets.
We expect to close on Tracfone and V. M. D transaction later this year, increasing our focus on what we do best and bringing innovation and best in class customer experience through the value segment and.
And overall drive growth across our 5 acres and disciplined and customer focus execution and then the great trustful and the first half, we compete and very well and the marketplace and we're very confident and excited on the opportunities ahead with that I'll turn it on the Brady and for the Q&A.
Thank you Hans Brad we're now ready to take 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 on mute your phone and record your name clearly when prompted your name is required to introduce her question to withdraw your request. Please press star 2.1.
1 moment please for the first question.
Your first question comes from Brett Feldman of Goldman Sachs. Sir. Please go ahead.
Yeah. Thanks for taking the question and 2 if you don't mind first and that's why do you go back to somebody and color and that was getting on the improved outlook for wireless service revenue growth. This year, you're at the high end and that's actually a pretty significant improvement and I know you outlined a number of things that were behind it and I was hoping you can maybe just dig into that a bit more I'm, particularly interested in and what you're doing to outperform and how does it mean.
The planned next and then are you seeing a return of any of the fees that had come out and run rate last year and is that something you've seen already or is that embedded and the outlook and then just on the improved EPS guidance. If we just sort of look at the 3 cent benefit you got from moving away from the DNA and media in the recent quarter that would imply that the improvement in your outlook.
And maybe capture 7.8 cents and gesture.
Just from that accounting shift with the rest of it being operational but if it's more nuanced and that I think we all appreciate that and say thank you.
I can't I can't use towards and that will fill in but I think that on the service revenue and I think.
And I've seen and.
The last 4 quarters, right now and <unk> and.
However, the team has done a fantastic job to differentiate our offerings all the way to see that our customers are doing step ups, they're taken on limited premium and and that's at them and takes it was handled and new accounts in the quarter was taken on limited premium on the penetration of 5 years happening so.
We just continue the team and.
And we would roll in on on the consumer side, even talk about that they have these molding and women I did for several years, where we do the mix and match them and how about differentiation on and it's clearly resonate and the market and at the same time, and we see and of course, they call on them and calling back the stores are getting.
And almost back to pre pandemic salt and.
All in all it's a good timing price and that's also why we feel good about our guidance and and how where the service revenue growth growing and remember we are always focused on profitable growth. That's what the team is doing and from NAFTA and I see opportunities we support the team to do it but as long as it's gonna be a profitable growth and that's what we're seeing right now and with all the momentum and the market.
And the team is taking advantage of that and that's also translate back to debt and to.
And to the guidance, but all and all I would say these are trapped and they've been out and having for a couple of years and that's been very successful and Matt and thanks homes and thanks for the question Brett So starting with the question about 1 and service revenue growth and as Hans mentioned, it's really building on the momentum that we've seen and the first half of the year the kantar.
And then you continuation of the sequential.
Service revenue growth, we saw that day, probably couple of quarters, we saw that increase even further and the second quarter. We expect that trend to continue as we get into the second half of the year because of the operational momentum and that Hans mentioned, most step ups to higher price plans et cetera et cetera are in terms of the debt.
And the fees, obviously the year over year, a component is rather unique this time as second quarter and last year was the most heavily impacted by Covid and most specifically for US of course, we had the keep Americans connected pledge and that was in place for all of the second quarter and then as you said impacted some of the.
Fees as you think about the numbers this year, a good chunk of those backing and where more and be a you level a couple of items and so the answer and the numbers yet obviously international travel is not back to anywhere close to pre pandemic levels I don't expect that to be there from the balance of this.
This year and expect that you know hope that'll be a tailwind as we get into next year, but the guy doesn't it doesn't make any assumption about and acceleration of our return of those fees and the second half of 'twenty, 1 and 1 other thing I'll draw attention to as well when you. When you look at on numbers and you think about return of phase 1 of the things that's been very strong and the first half a day.
And there is customer payment patterns, which is a great thing to see and certainly with all the stimulus payments out there there's a lot of money and the system and customers are actually paying more frequently so even though we're back to normal in terms of things like late fees, we're actually charging significantly less and we were and second quarter of 19, because more of our customers.
Are paying on time.
At this point, which is certainly a trend that we're very happy to see so some of the fees are back up but not all of them are back when you think about it and went out and assuming they'll be back in the <unk> for the balance of the year. The guide is based off of.
The strong operational momentum and the business customers stepping up to those higher price plans and we see that momentum continuing.
Second question about the EPS guidance and you know, obviously I'm glad to be able to raise the guidance. That's based on having a very healthy business and it is performing exceptionally well and as you mentioned some of the the upside to the guidance comes from the media depreciation and amortization probably about.
You know 6 to 8 cents, depending on the timing of the close but the majority of and it's coming from cash items.
Whether that be the wireless service revenue guide we were just discussing.
But also related to our improved our expectation around cash interest expense and lower than anticipated.
At the start of the year. So most of the guide is driven by cash related items.
And that's and cone space of the the strong momentum you see and the business both operationally and financially.
Okay. Thanks for that color right.
Great.
Yeah, Thanks, Brett Brad we're ready for the next question.
The next question is from John Hodulik of UBS, Sir Your line is open.
Great. Thanks, and good morning, guys.
Just a question on the upgrade rate and obviously, it's not just year over year, but even over the 19 levels do you expect that.
That trend to continue and maybe even accelerate as we move into the second half of the year and then and <unk>.
You could comment on the impact on margins.
Imagine that.
It helps incentivize people to move into those higher higher price premium plan, but with the higher mix of equipment revenues and they put put pressure on margin. So just how you foresee that sort of margin trends and the second half and at these volume built it would be great. Thanks.
Yeah, and I as I said before them and we have these formula right now and that's what had 4 and since we launched on limited with both mix and match and then and our value and value proposition that we have done and you saw and the second quarter that now we added and also gaming with good traction with bolt on Google and Apple.
And gaming and this is a unique model for us at the same time of course will have and excitement around 5 D would you have and and.
And on network is performing extremely well so.
Think that.
Our team they have a very very good and molded and for continuing decent and I think I've sat and in the first quarter. It will come more on these value proposition and differentiation and yes. It came we went into gaming. So I'll say it again I have a lot of confidence and the team and rollout team took on to continue to come up with things that are on customer loves and using our.
And on network and our brand to continue to grow this and then and that is the whole strapped and and remember the 5 vectors of growth. We're playing in all 5 of them and that's why we were so confident of our long term guidance.
And and you'll see part of that and this quarter and that's where all radar or executing on all of these vectors.
And John So as you mentioned, obviously, the higher mix of equipment revenues.
<unk> was up and the margin percentage and I think you almost have to look at the margin dollars, which were up sequentially.
And also up significantly year over year, and so very happy.
With that performance at the margin line as you say once we when we have a higher equipment revenue.
And it has an impact on the margin, but I liked the combination of our volumes and margin that we had and the second quarter as we head to the second half of the year with the outline of our and the office we have in place that Hans mentioned combined with new devices coming into the market and as we get closer to 5 G launch the on to.
And lying strength and the economy and.
And I would expect that we will see good equipment volumes and the second half of the year and I would also expect to see good EBITDA dollars and the second half of the year to go along with that.
Okay. Thanks, guys.
Yeah, Thanks, John and Brad array from the next question.
The next question comes from Phil Cusick of J P. Morgan Your line is open.
Hey, guys. Thanks.
2 if I can consumer wireless broadband adds were strong at home broadband drive that and how many home fortune 5 key customers do you have now and.
And second a lot happening and N V and Atlanta These days with boost going after AT&T yesterday couldn't you'll cable away last year did you look at that deal. How do you think about the potential for new competition from all these channel. Thanks.
Thanks, Oh, when it comes to broadband in general I've always thought of and our vision as we all have offline, we want to be a nationwide and.
And why the broad non provider and we're going to use taxes.
Technology that is best suited for our customers and a mix of everything from fiber to and 245 millimeter waves. He bought it and all of that and this quarter. So we open up even more opportunities from that we open more and more than 5 day, a whole markets. We opened more 40, a whole markets and there are enough.
Force us match and.
And that's why we we we we took a more.
And fire subscribers and ever in the last 3 or 4 quarters and so this is playing out well for US. We're opening up all of that we are very excited about what's going to happen and the second half with and you see b and that has he buy and that's why also and we executed on everything we said, we should do it and in the Investor Day, and the second Walker and we look forward to the second half.
From this year and we will continue to report out what we're doing and the second question and I. Thank them and we are open for business, but we don't comment on any particular needs in the market or was something like that but.
And we are happy with the with the customers will have on our end.
No.
Great. Thanks, Phil Brad we're ready for the next question.
The next question is from Simon Flannery of Morgan Stanley. Your line is open Sir.
Thanks, So much on just a quick 1 on Tracfone and you set a closing and second half of the year any more color on the process or there's more ex timing expectations would be great and then on the C. Band I think you'd said previously you wanted to deploy about 7 to 8000 towers. They are this year I see you.
<unk> reiterated the Capex guide, but any color on getting the equipment and supply chain and the ability to hit those targets in terms of rolling out and and any updates to your longer term targets of $175 million on C band and how are you thinking beyond that thank you.
And so on on the Tracfone and I think nothing has changed and it seems we outlined or we proposed acquisition is tracking according to plan and we'd approaches that that.
And that we need to go through our team is responding to all the questions why I've sold and it's gonna be and the latter part on the SEC and are hopeful the 2020 walnuts, we thought all the time, so nothing strange it's actually on track, but that's where we are.
And.
Second question was C band and C band, Yeah. The seventh day, it's white house on sides, Yeah, we can definitely and say we're on track.
When we reported the first quarter, we had just started and everything not only feed and.
Food and finding and the supply chain, we the guys in our supply chain and on a great job with our partners. We have all the gears, we need to to deploy to 7 to 8000 and down on a team executing very well. So we feel very good about being able to have San Jose 8000 sites up and by year and and when it comes on a long term and we have the.
Same ambitions and that's before we haven't changed at all and and we continue to execute so we will do it as fastest and as we can given the different type of milestones that are involved and are in the spectrum, but I. So far we are executing on that plan and where we are on or ahead on the plan and we execute and right now for the end of the year and Simon 1 of them.
Data point for you that the vast majority of the radios and do we need to turn on those 7 to 8000 and sides already sitting in AR and our warehouses.
Greg why Chinese robust working very well with our partners and you know obviously a lot of books and want to do but the net 1 team.
From where we are very much and have to be came out and the auctions will be on today. They you know the detailed plans in place and they're executing strongly against it.
So well on this.
Spectrum clearing is working okay and are you.
Spectrum clearing is also on track I mean, we stay close with the folks doing everything we hear from them is it's a that's a completely on track as well.
Sounds good thanks a lot.
Alright.
Yeah. Thanks, Simon Brad we're ready from the next question.
The next question comes from David Barden of Bank of America, Sir Your line is open.
Hey, guys. Thanks, so much.
And the first quarter you guys talked about how the second half of the year would be you know and improvement proprietary and the consumer business. We've seen obviously some of the new promotions come out.
On <unk>.
Margins have drifted down to the 44 per cent range does rone and have permission from you Hans to take that down further if you see some more gains opportunistically in the second half with either the current kind of 5 G handset upgrade promotions or new stuff coming down the pipe and.
And then the second question is.
Consumer a cost of service has been up pretty significantly on.
For the last couple of quarters relative to the past year is that related to C band pre positioning or is there something else going on and and what's the outlook for that thank you.
And when it comes to the consumer group and and and.
And explain a little bit why the margin is lower because the hardware heart report on it is included there and we think that's a it's a good sign on what's happening and the market and I wouldn't say and I mean, we constantly think about profitable growth and that has been our strategy as long as how it would be and there are enrolling on and team. They think about that but of course, if they see and opportunity as we saw.
When the traffic came back in the stores and the economy's coming back we did some offerings and this quarter, which was good timing and and we will continue to support drilling on what do we see that yes.
And that's a good solution and for the market and our customer going to love It and I can't I can.
And tell you on differentiation is really resonating with the market and that's what you're seeing and second Walker.
And then we will come back and see if there's something he wants to do and the second half, but clearly we're focused on profitable growth and we won't have.
We are writing high quality business.
Business and in high quantity and that's what you want to do and I think you'll see that's coming through and these results.
And so just adding to that homes and so obviously.
The margin per cent will be impacted by the volumes, we saw good volumes and the second quarter and.
On the walk as Hans said, what we're focused on is if you're also looking at sequential service revenue growth continue to lead the industry and that.
Cause not on net adds are created equal and and Ah that also coming with EBITDA dollars, increasing so the margin percentage will play out where it does but he stopped and volumes.
But we're focused on and you're seeing that sequential revenue increase and also the EBITDA dollars flowing and the right direction in terms of your question around the cost of service predominantly and in consumer.
And don't forget 1 of the items that we had and the second quarter.
It was a step up and the network rents and lease of about $60 million a quarter as a result of the new lease payments, we put in place as you know on to the accounting you look at the total payments over the life on the lease and and kind of flatline at irrespective of how the natural cash flow and payments flow. So.
And that was obviously a significant upgrade to our lease agreements and that was a 1 time step up and the quantity right. There are the flow through the books that are let's say about 60.60 million and close to a penny a share impact from that and that should be the same going forward now so that's the biggest driver.
You're seeing on the cost of service.
And so Matt just maybe a follow up on that so okay.
Go ahead go ahead Dave.
So just that's all and consumer.
The vast majority of the wireless network costs are allocated to consume and some of that is in business, but the majority is and consumer and obviously the majority of the customers. The majority of the wireless service revenues and consumer and so the costs and they're gonna be allocated and largely in line.
On a similar basis to that so yes, most of it is and consumer.
And then probably worth noting that on your EPS guidance includes negative 3 cents for the 2.3 for Q impact of that increased how expenses.
Absolutely that's fully baked into the guidance that step up and that cost. So that comes back to the underlying strength of the business that we have even with that that baked in as well.
Thanks.
Great. Thanks, Dave.
And we're ready from the next question.
The next question comes from Michael Rollins of Citi. Your line is open.
Thanks, and good morning, and curious what you learned during the pandemic and now that reopening about where customers want to transact for wireless whether it's upgrading phones with changing service providers and are a large portion of wireless transactions simply destined to remain and Caesar.
Co locations versus a virtual or online channel and then just a follow up on.
You mentioned and number of markets that you've been focused on for ultra wide band and <unk> home and just curious if you could share some population and household coverage numbers for ultra wideband and home for the end of 'twenty, 1 and the target for the end of 'twenty 2.
Thank you and no of course, we see some changes in behavior.
When it comes to our customers, but we had already started building our omni channel that a customer can start on the web and they can and then just the water and it can start and just the war and on the phone and all of that and what did you see that day, we do these as seamless as possible.
But clearly we see much more digital than before.
And but also when they call on them it came back and and vaccinations in the United States, We're coming up on the high high Elevens and it wasn't so would the traffic coming back in the stores and and so we and I had a I would say all of our stores opening day and second quarter, and we see much more food traffic and what I've seen and.
Previous quarters, not really back to pre pandemic days, but clearly and fairly close so and we think our customers still gonna and want to come into a store and and see our technology and our products, but they might be wanting to finish to a delivery and ER and IR and ER.
And the approach as you know they get and Florida, and that's how we build our stores. So we're working at it.
Closer to see that the new behaviors that we can meet that's what customers really feel good about and do it dealing with us and I think that our team you know are doing great job in that area.
Yeah, Mike in terms of your question around the millimeter wave coverage, we don't really talk about the the millimeter wave coverage in terms of Pops you heard Hans mentioned upfront that we are on track to seeing 5% to 10% of our dense up and usage on on millimeter wave by the.
And at the end of the year, that's a combination of more customers, having 5 J devices and their hands on customer.
Activity moving back to more pre pandemic levels, and then obviously building out more on millimeter wave sides. We said, we would do 14000 sites this year being over 30000 and by the end of the year I can tell you. We are running well ahead of schedule for the 14000 and side through the first half of the year and so.
And as we do that we continue to add coverage and then we said we'd expect to cover 1 to 2 million homes are with millimeter wave and open for sale by the end of the Yammer and we're on track with all of those items.
Any early look toward 2022.
On the Bill continues and you obviously were not going to give guidance for 2020.2 but everything the net 1 team is doing whether on millimeter wave whether on C band and remember we said we'd be at around 100 million Pops by during the first quarter next year and we expect still.
And on track to be at that level. So at this point in time and I cant speak more highly about the work. The network team is doing is they build whether it's the fiber that are obviously is important to the network. The millimeter wave expansion. The C band expansion and continue and to have the best food.
G network out there as well so they're doing a tremendous amount of activity and they continue to be on both out 2021 plans and how long the time plans too.
Thanks.
Alright, Thanks, Mike.
Brad we're ready from the next question.
The next question comes from Craig Moffett of Moffett Nathanson. Your line is open Sir.
Yes, hi, Thank you I've 2 quick questions first of all ever and a return to a question that Phil asked and I didn't hear the discussion can you talk about the dish wholesale deal with AT&T, what your observations are and and whether you were part of that negotiation.
And and then separately if you could just comment on whether you saw any significant impacts from the E. P. P. P program during the quarter either in your wireline business with Fi OS or ER or your wireless business.
Hey, when it comes to specific deals and the markets are.
We don't comment on that then and apparently this is something.
Something that's AT&T won from T mobile and so.
And I cannot comment on our Ebola and maintaining itself or.
But that said we're open for business, we haven't and that's because the strat today and.
On mobile, which is paying off well for us with the 5 vectors of growth and part of that is monetization.
And and we're very happy what we have.
Yeah, Craig to your second question, we saw some of our customer base, certainly participate and that during the course of the second quarter I wouldn't say it was a significant impact on our numbers, but we did set and you see our customers participating.
Thank you.
Thanks, Craig.
Brad right from the next question.
The next question is from Doug Mitchelson of Credit Suisse. Sir Your line is open.
Great. Thank you 2 questions from me as well I mean first 18 team moved to 30, and 36 months and said I E. P is periods this quarter and your turns even lower than they are to your customers stick around even longer on average have you thought about quite longer than 24 months and about why is 24 months sort of the right period and I'm just really curious on C band.
And as we try to figure out how to model 2022, and and and you you get the licenses cleared and and you flip the switch and light that up for customers.
As you go into 2022 How's your go to market strategy change if at all you know and and what consumers sort of see in terms of their experience that's going to be materially different obviously was a big investment and I'm, just sort of thinking through on a practical basis, what happens and that starts to kick in.
Yeah, No I can't I can't start with and we do see but on all 4.
For obvious reasons, and we think it's an important moment, where both amplifying and accelerating our RFID and the network amplifying the opportunity however, given away or are all commercial ideas.
And when we're going to do once he is right now we wouldn't do that but of course, we were excited over it and we think it's gonna be grateful and customers is going to be.
Fantastic performance and it expands our <unk> and.
Mobile adoption and so far the fixed wireless access options and it also extends RFID and mobile edge compute options. So it's just playing straight into our talk strategy. So we are a we're excited over it and we will come back and how we will bring that to our customers. So they are equally delighted after all we don't have to book today, but yes.
And something that is so much superior and anybody else.
Yeah, Hey, Doug on your first question about the the handset.
Device payment period.
We're very comfortable with the offers we have and the marketplace. It's 24 months for a lot of items and some of the higher priced items and it's a little bit longer I'm, just just to manage that but as you mentioned the churn is very very strong and you know don't 6.5 and consumer from phone churn shows and what we're doing with.
Customers are is working very very effectively if we feel the need to adjusted we will do so but it will be based off of what we see customers need.
And not be focused on any and impact on on on the accounting treatment associated with it. So we will continue to.
Be focused on finding the right offers and from our customers and I think you see from the results and the second quarter. What we're doing is resonating with customers both from an AD standpoint, and also the Oh Gee on standpoint too.
Great. Thank you.
Yeah, Thanks, Doug Brad we're ready from the next question.
The next question comes from Peter So Pinot of Bernstein. Your line is open Sir.
Hi, Thank you.
On a related questions. The first is 1 of your competitors has talked on.
Repeatedly about the network capacity improvements that come from 5 G and if you adjust that company's target for M&A are you could infer that their capacity is up about 7 times 4.
For their <unk> expansion and so I'm wondering if you could suggest a similar number for horizons capacity and our growth potential considering the wonderful investment and the C band and then on a related note as it relates to the home business I'm curious if you could describe how you think.
[noise] about allocating the cost of spectrum.
Okay on the first of all on a on.
On the Uh huh.
And these are listening to what I've talked about are on fire before first of all 5 D. As a technology is better to handle data and unfortunately, and that's obvious and 3 days spent and in food and that's why it's so so that's happening and that you need to add to that youre not only talking about spectrum, you're talking about how you engineer and how you build the network so in our case.
Well of course, we see great opportunities for being able to hand, and much more data and remember I'm in today on the millimeter wave we might use 400, sometimes 800 megahertz, but not more and we have 600 megahertz nationwide and so there's so much more and can do and and and.
And it kind of showed at Investor day, our head grooming the network it is bigger than before and that's before we start building and what we're building right now so we feel really confident and how much how many cars, we are doing and remember him and all our foggy and he's already the best in the nation and then we're adding up and right now what we're doing and finding that is also a extra.
And so and.
Oh, there's can talk and we usually execute and we will continue with that.
Hey, Peter on the second part of your question about allocating cost to the spectrum every frame that and actually view. It from the standpoint of this is the first time that we've had wireless technology, where we can drive multiple revenue streams off the same network build whether that be the mobility, which has obviously been the foundation.
For G..3 G and and you know everything since the start up on it but then the ability to also have fixed wireless access to also have the public mobile edge compute all coming off of that same network build that same network investment, we think gives us the opportunity to provide.
A very good return on the investment that we've made and both C band and millimeter wave.
Thank you very much great. Thanks, Peter.
Yeah.
Hey, Brad we're ready for the next question.
The next question comes from cannot and center catch wire from Barclays. Your line is open Sir.
Thank you a couple if I could firstly on the non pay churn from obviously that you know I think you guys noted the benefit because of some of the subsidy programs.
But at some point back from probably the worst for the industry as a whole so.
Could you help us understand how big.
Of and impact that typically isn't and normalized here non pitch on and how much of a day when that is right now.
Get a sense for what that might do when things normalize.
And then secondly, I mean, you have a lot of content bundles. Now you also have the new deal with Apple arcade.
Could you give us some sense for how this impacts your cost of service I mean, how much of the increase and cost of services on the kinds of bids.
You did quantify the number but and you.
And if they would be good to get some sense for what this is doing overall total cost horses and heartburn.
Thanks.
I can and Matt will talk about the no pay share on them.
When it comes to the content deal with them and I think I've said it a couple of times and all of them at all.
Our whole idea is to offering and exclusive all first of all wireless customers and also on Tau for that partnership to brands that we really think resonates with us and the model and that's why I've spoken about before is that D. C has incremental revenue for us it's not only a loyalty is actually incremental profit for us. So it's a toss.
A different model that might sometimes and.
And I've been in the market before because suddenly we use the best network, the best distribution and the best brand to work with companies like Disney plus et cetera to give our customers a premium experience on top of the differentiation we're already to average.
And mix and match and ultimately when we make these customer to paying customers, we get our fair share on that because we with our assets have created it together with the asset for at least and plastics, Gabriele or gaming et cetera. So that that's how the model is working and as I said before we are very pleased with the.
I think well have 6 or 7 on these offerings and the market right now and all of them or a very positive to us and to our customers and we will continue to see if we can find more and I think it's a unique model that we have created and nobody else has seen and market.
And I said again, it goes back to rolling on and a team being very very innovative and creative to see that we bring the best on customer not only the best network, but also the differentiation you know friends. So I have to say I'm very I'm very pleased with that and I said, we have more and they found them.
Hey come on on your other question around the the churn I would say, it's a it's a it's a very small number of basis points of benefit coming from the.
Reduction and what we called and voluntary churn.
And what you're also seeing and the the total churn number is actually the benefits of it.
On the engagement with the customer the experience and customer has on the network. The other experiences we bring to that relationship that Hans just touched on <unk> being a bigger piece of the the strength and the there from a phone churn number that we report it especially on the consumer side and in terms of the impact of cost of sales offices.
The content cost associated with the.
The items that Hans mentioned do flow through that and you should expect to.
See that number continue to.
Be a contributor of that line, but when we look at the overall profitability of bringing that together the overall customer proposition. It's EBITDA additive to the business and also brings a better experience to the customers and we see that as a win win.
Thank you book, Great Thanks and on.
Right and we've got time for 1 more question, let's let's go on 1 last question. Please.
Certainly your last question is from Colby <unk> of Cowen Your line is open.
Alright, great. Thank you.
And I made first off on business EBITDA margin each year.
Your analyst day back in March you had guided to.
Sustaining north of 25 per cent and we saw that below that and in the second quarter also on the first quarter on there there's at 1 time impact.
Impact and it sounds like you're guiding for that to continue to be.
Below 25 per day I'm, just curious what's changed so quickly that you're you're.
Targeting below that target and have used it looks like for 2020..1 and then also on as it relates to the.
And just upgrade ever.
Promotion on you know when we look at process space competitively, obviously AT&T has been doing something similar and.
The fourth quarter, even on T. Mobile did something just yesterday do you really look at this as a promotion and implying at some point there is an exploration and you pull back from the market.
Or is this really just that the new way of competing.
And today's competitive market and and really something that investors should assume and <unk>.
Some form and the other is going to be with us for for a long period, if not permanently and king.
I can't make it quick answer on the promotion and Matt will come back to we have already pulled to the the biggest part of the upgrade from the market that we need.
Good day today as the last day, yeah. So, yes, we see it as coming in and out when it's the right moment, but not probably comment.
Little bit more on it and.
On the business side, I'm, and and Q4.2018, math and I talked about that we think that this is 1 of the great opportunities and will have over time with the business side and remember we had never consolidated RBC decided it was and it was comparator lies in between all the different pieces and we'll have time and her team.
Hi, there during that moment and remember we said we're going to invest in order to see that we have the platforms on problem knocks on CX and you works for our customers to be harmonized in order debatable to scaled needs to be a good business and that they're doing and they're probably about halfway through it and they're doing a lot on old transformer.
And the business at the same time doors on headwinds as we have seen before them and that would be the wireline side and sort of.
And on cyclical or seasonal and cyclical it's a sustained decline.
And and then we'll have a wireless piece and that's why we take more than our fair share, we're leading in all segments and.
Violence of course, she is coming into this quarter of course, we had more hardware this quarter on spot and then we're building on for the for the new opportunities with 5 day mobile edge compute 5 private fiber networks and they are.
And the 5 year business Internet, which is using fixed wireless access. So we have a lot on new products coming out that we're building on and we weren't where we have the same ambition so all it and.
When it comes to financials, and then we just need would be realistic and what's happening on a market and.
And how the team, but I'm I'm proud of and the team on what they are transforming to AR and AR and what we're aspiring for them and seeing it progress on mobile edge compute and pieces Internet that's of course, new opportunities and have not seen coming into the P&L, yet, but we're building it together and we did transformation we're doing.
Yeah. So just a couple of other comments on the on the business margin net Kobe. So Hans mentioned the higher volume as we mentioned it upfront that the the wireless volumes that we saw the gross adds.
We're not just higher than <unk> last year was higher than 2 June 19, So <unk> certainly seen volumes come back, especially in enterprise and small medium business and that's having some.
Some impact there.
And then obviously the wireline pressure I would expect our second half margins to be a reasonably similar to what we saw on the first half of the year. The business transformation work. The team is doing is having a positive impact with more to come as we go forward here. So feel good about the direction that teams headed there and spine.
And of these circular our wireline pressures and we see and and in terms of your question on on promotions as Hans said its a promotion that means it has both the start day to then and dates and today is the end date. So we've run promotions since the beginning of the wireless interest rates they've evolved over time. They will continue to do so and do you know the great position.
We're ready and it's because of the strong operational results and financial results. It gives us the ability when the time's rights and the market place to bring the right promotion out there. We felt this was the right promotion at this time with the economic reopening and wanting to get more customers or the 5 T device and Manhattan as we're about to launch a C band.
And within the next 6 months. So we will continue to look and what is the right promotion for the right time, but the underlying operational performance of the business showing up and sequential wireless service revenue increased yet again and it gives us a position to have flexibility as we think about how we approach the market.
Thank you great. Thanks Colby.
That's all the time, we have today for questions, Thanks, and thanks, everybody and be safe.
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.