Q1 2023 Verizon Communications Inc Earnings Call

Speaker 1: The C very.

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Speaker 2: It is now my pleasure to turn the call over to your host, Mr. Brady Conner, Senior Vice President and Vestor Relations. Thanks, Brad. Good morning, everyone, and welcome to our first quarter earnings conference call. I'm Brady Conner, and I'm joined by our Chairman and Chief Executive Officer Hans Vestberg, as well as our current Chief Financial Officer Matt Ellis.

Speaker 2: and chief financial officer designate Tony Skiatis. Before we begin, I would like to draw your attention to our safe harbor statement, which can be found on slide two of the presentation. Information in this presentation contains statements about expected future events and financial results that are forward looking at subject to risks and uncertainties.

Speaker 2: Discussion of factors that may affect future results is contained in Verizon's filings with the SEC, which are available on our website. This presentation contains certain non-GAAP financial measures. Reconciliation of these non-GAAP measures to the most directly comparable GAAP measures are including the financial materials posted on our website.

Speaker 2: Earlier this morning, we posted to our Investor Relations website a detailed review of our first quarter result.

Speaker 2: Please note that during the first quarter in order to better serve our customers, we reorganize the customer groups within our business segment.

Speaker 2: We now report the following customer groups. Enterprise and public sector, business markets and software service and wholesale. Prior period operating revenue results within the business segment have been recast to reflect these changes. You will find additional details in the earnings materials on our investor relations website.

Speaker 3: With that, I'll now turn the call over to Hans. Thank you, Brady. Good morning, everyone, and welcome to our first quarter earnings call 2023. We delivered a solid first quarter marked by strong performance as we continue to execute on our plan to grow the business across mobility.

Speaker 3: broadband and private networks. We're making steady progress and expect to keep up the momentum going forward.

Speaker 3: We remain focused on delivering for our customers and driving service revenue. Ebeata and free cash flow. We grew total post paid phone gross ads by 5% year-round this quarter and achieved 3% wireless service revenue growth, 11.9 billion dollars of adjusted Ebeata as well as a strong cash flow from operations.

Speaker 3: We reached more than 200 million pop's covered by C-band in just over a year since we lit up the first site. With access to that spectrum and advancing the build out as quickly as we did, we have enabled new source of revenue growth and elevated our customers' overall wireless experience.

Speaker 3: In the first quarter, J.D. Power recognized us as the most awarded for network quality for the 30th time in a row. We're seeing improvements in already leading network performance validated by year-to-date root metrics testing and our customers are taking notice.

Speaker 3: Where we offer C-Man, we see significant benefits in fixed wireless access, consumer phone rosettes and retention as well as premium take rates. We also see 4G customers benefiting as we offload traffic in some markets to our 5G ultra-wide by network. The performance improvements will continue as 5G penetration expands market by market.

Speaker 3: a priority in their spending. During the first quarter, Verizon Business continued to run a strong performance.

Speaker 3: delivering 136,000 postpaid phone net ads. This was accomplished in spite of some pressures around restructuring within the technology sector.

Speaker 3: On the consumer side, payment trends are at healthy pre-COVID levels and consumers are shopping. Evidence by our increase in consumer postpaid phone growth ads, which were up 11% year-of-year. With a new to Verizon ads leading the way, our growth ad performance is proof.

Speaker 3: that are surgical and segmented approach to the model is working. We're in a much better position than a year ago. Entering the second quarter with a sustained momentum around rosads, as well as post-paid churn, where we saw improved performance each month across the first quarter.

Speaker 3: We remain committed to our strategy not to compete on who can discount the most But rather who can offer the most value to customers the best overall experience and the best customer satisfaction

Speaker 3: Class Play is a great example of this. We listen to our consumers and introduce exciting partners like Pelaton and Netflix, providing exclusive deals on an easy-to-use subscription managed platform. And there is more to come. Our segmented approach to the market recognized that one plan doesn't not fit all and we have continued the work to address our underperforming.

Speaker 4: segments.

Speaker 3: I've talked about our efforts to be more targeted and surgical with our retention and we saw that play out during the quarter.

Speaker 3: By reducing up rate volumes and lowering inefficient spending, we were able to deliver working capital benefits while finishing the quarter in a good place with churn and executing on migrations to premium unlimited.

Speaker 3: Those are real cash savings and a key drive into the large year-to-year improvements in free cash flow. You have seen us taking pricing action most recently on some of our legacy unlimited plans. We continue to look across our base and evaluate opportunities.

Speaker 3: to more closely align pricing to our value proposition. On pre-paid, we're working diligently to realize the full potential of this segment. While net ads were down by more than 2,000 and 7,000 versus the prior year, this total was affected by two transitory factors. First, more than 100% of our net...

Speaker 3: Year over year decline came from higher disconnects within our safe link brand which provides services to customers on government subsidized programs

Speaker 3: We're still in process of migrating customers onto our network as well. Prepaid is an important part of our value segment strategy, and our investment here will continue, as we're confident that will pay off in the long term. Turning to broadband, which is a major growth area for us across consumer and business.

Speaker 3: We achieved the highest net ads in over 10 years, adding 437,000 total net ads within the quarter, including 67,000 net ads from Files.

Speaker 3: We're very pleased with the FiOS performance, with net-dads up 12% year over year. For fixed wireless access, we're seeing growth quarter after quarter after quarter. With 1.9 million subscribers at the end of the first quarter, fixed wireless continues to scale and contribute to the future.

Speaker 3: increasing it to our revenue performance.

Speaker 3: or business customers are increasingly turning to fixed wireless access after primary source of broadband connectivity.

Speaker 3: One over by the reliability and the overall value of the product. In addition, to take in share from our competitors, we're also seeing new use cases across all of our customer groups, leveraging the flexibility of the product to expand beyond what traditional wild broadband can do. Finally, in private networks.

Speaker 3: or Verizon Business Team continues to execute at the high level. We are now new deals with KPMG and Deloitte and have a strong family of businesses ahead of us. We've also established a leadership position as a top network provider in the public sector. This quarter we're now the 15-year critical infrastructure contract with the FAC-

Speaker 3: In creating the networks that move the world forward, we remain committed to running our business responsibly for our customers, shareholders, employees, and society. Last month, we published our 2022 ESG report, which highlights how business ethics, governance, environmental stewardship, and human rights.

Speaker 3: or at the center of everything we do. I encourage you to take some time to review the report and learn about how we are managing risks and unlocking opportunities surrounding the issues of utmost importance for our stakeholders. Our commitments here come right from our leaders and their teams.

Speaker 3: A few weeks ago, I announced new leadership for our two business units, the network organization and our chief financial officer. These leaders come with nearly 100 years of experiences within Verizon and bring a proven track record of successful execution. Let me take a moment to walk through these changes. Sam but takes over as a CEO of Verizon consumer. His objectives are cl-

Speaker 3: His focus is clear, drive sustainable growth in mobility and deliver on the revenue growth opportunities within fixed wireless, 5G private wireless and mobile edge compute solutions.

Speaker 3: Joe Russo takes over as the president of global networks and technology to continue our efforts to extend, enhance and solidify the nation's leading wireless network and vast global IP and fiber network.

Speaker 3: Finally Matt Delis leaves us at the end of the month. Over 10 years at Verizon and 6 years as our CFO . I want to thank him for his many contributions to our business.

Speaker 3: Tonys Gerdes assumes the title of Chief Financial Officer on May 1. I appreciate Tonys work to improve operations and drive performance as we search for long-term CFO replacements. So let's now move on and talk about efficiencies.

Speaker 3: The teams are on the way to deliver better, simpler and more efficient end-to-end processes for our customers and employees. Spear headed by the Verizon Global Service Group were looking into numerous areas across the business that will help provide bottom-line growth, including IT platform transformations.

Speaker 3: building advanced AI models for the better diagnostic and predictive insights, optimizing our real estate footprint, and managing our supply chain efficiently. We have also reduced headcount over the last quarters. All in all, our cost-efficient program is on track to achieve our target of $2-3 billion of annual savings by 2025, which will help to fund our growth as well as drive margin improvements.

Speaker 3: and dividend growth with our 16 consecutive years of increases, currently the longest streak in the industry.

Speaker 3: As we look to build on the free cash flow growth generating in the first quarter, we expect to see significant improvement in our dividend pay-off ratio this year. Putting the board in a strong position to increase the dividend once again and bring us closer to our debt targets over the following years.

Speaker 3: Going into the second quarter, I'm energized by the execution of the Verizon team and our new leadership across key positions.

Speaker 3: We remain focused on delivering for our customers and driving service revenue, a beta and free cash flow expansion. And with that I will now turn it over to Matt for the last time.

Speaker 3: Thank you, Hans, a good morning. Our results for the first quarter reflect the steps we have taken to improve our performance. She banned any investments in our network, are having a positive benefit on customer and overall network experiences.

Speaker 3: And as Hans mentioned, we are seeing a direct benefit around fixed wireless and phone gross ads among other metrics where we operate C-band. But more work remains to be done.

Speaker 5: Taking a look at operating results for the first quarter, let's start with consumer post-paid phones which had 263,000 net losses for the quarter compared to 292,000 net losses for the prior year period.

Speaker 5: Consumer postpaid phone gross ads was strong across the quarter. Up over 11% year over year, continuing the momentum from the second half of last year.

Speaker 5: Our efforts around the segmentation of our base and our more targeted go-to-market approach and offerings to those different customer groups have been key drivers behind our improved gross ads performance. Consumer post-paid phone churn for the quarter was 0.84%, up seven basis points compared to the same period last year.

Speaker 5: We are now seeing a return of involuntary turnrace to pre-pandemic levels.

Speaker 5: As for voluntary churn, performance was mixed across the quarter, starting off elevated as we saw normal holiday season activity extend into the early parts of the first quarter. But as the quarter progressed, we saw improvements in terms of year-over-year churn performance, ex-tender quarter was voluntary churn rates in line with last year. While we had poor work to do to improve consumer net ads,

Speaker 5: We are encouraged by the double-digit percentage improvement in gross ads combined with the improved churn level at the end of the first quarter.

Speaker 5: We enter the second quarter with significantly better momentum than a year ago. Moving on to the business segment, Verizon Business again delivered strong results. We saw solid demand across our three customer groups and had 136,000 pho-net ads for the first quarter.

Speaker 5: compared to $256,000 for the same period last year. The EuroV8 change was primarily due to a couple of large deals that contributed to our net answer results a year ago. Additionally, we saw an increase in churn due to business customers being more cautious around spending and the restructuring's hands noted in his remarks. Moving along to broadband, on a consolidated basis, we delivered 437,000 Edd. in the first quarter.

Speaker 5: internet net ads for the first quarter of 67,000, up from 60,000 in the first quarter of last year. Customers continue to be attracted to our high quality broadband products, which is reflected in the year-over-year increase in Fios gross ads, even in an environment with lower move volumes versus a prior year.

Speaker 5: FIS retention rates continue to be strong with our best churn performance in more than five years. While the first quarter results are prepaid with below our expectations, we remain confident in the value market opportunities and the benefits of having a portfolio of assets and plans that satisfy the needs of all of our customers.

Speaker 5: You heard from Hans some of the actions we are taking to create long-term value. As expected, in the short term, these actions are having a negative impact on our pre-paid net ads. Together with the elevated disconnection of our Sapling brand at Hans Reference, we expect pressure on pre-paid net ads to increase in the second quarter before they abate later in the year. Moving on to the financials.

Speaker 5: Consolidated revenue for the core to a $32.9 billion down 1.9% year over year, primarily due to equipment revenue being lower by 9%, as well as continued declined in business wildlife services. Wireless service revenue is $18.9 billion up 3.0% year over year.

Speaker 5: As we discussed on our fourth quarter earnings call, results of the first quarter include the benefit of approximately 185 basis points associated with a larger allocation of administrative and telco recovery fees from other revenue into wireless service revenue.

Speaker 5: This benefit was partially offset by the impact associated with the shutdown of our 3G network completed at the end of the fourth quarter. The shutdown resulted in the removal of approximately 1.1 million retail connections and the corresponding loss of revenue for the first quarter and beyond.

Speaker 5: We continue to see pressure on service revenue from the costs of promotions and the amortization impact in the first quarter. Additionally we see pressure from prepaid revenue as a result of lower subscribers versus prior year. To help us set these pressures, we've recently implemented additional pricing actions across our business and consumer segments.

Speaker 5: We expect to see the benefits of these actions ramp across the second quarter, as the business segment began building customers closer to the end of the first quarter, while consumers started earlier this month. As a result of these combined pricing actions, we anticipate approximately $75 million of incremental quarterly revenue moving forward.

Speaker 5: Additionally, the consumer team is working to improve efficiencies around device promotions and credits that we expect to yield revenue benefits across the remainder of the year. We believe that the actions the teams are taking will grow the top line driving both EBITDA and cashflow.

Speaker 5: To complement this, the team expects to make additional progress across 2023 on the development and implementation of cost efficiency initiatives resulting in a meaningful savings run rate at the end of the year.

Speaker 5: During the first quarter, operating expenses, excluding depreciation and amortization, were down 2.4% year over year, primarily due to lower cost of equipment from reduced upgrade volume, which helped to offset an increase in bad debt of approximately $200 million. Similar to involuntary churn rates.

Speaker 5: Bad debt expense reflects the return of collections to pre-pandemic levels.

Speaker 5: While up here over year, bad debt expense is relatively consistent with the prior quarter. Cash flow from operating activities for the first quarter totaled $8.3 billion, compared to $6.8 billion in the prior year. This increase was primarily due to working capital improvements driven by lower inventory levels.

Speaker 5: coupled with fewer upgrades and a modest improvement in customer payment patterns, despite the current macroeconomic conditions. CapEx of the quarter came in at $6.0 billion, which includes most of the remaining $1.75 billion of C-band related spending in our guidance. With the conclusion of the programlene

Speaker 5: we would expect a step down in the pacing of overall capex throughout the remainder of the year and continue to expect 2023 capital spending to be within our guidance of 18.25 billion to 19.25 billion dollars. The net result of cash flow from operations and capital spending is free cash flow for the quarter of $2.3 billion up $1.3 billion versus last year.

Speaker 5: Total unsecured debt for the quarter is $132.0 billion, an increase of $1.4 billion compared to the end of 2022.

Speaker 5: and $5.3 billion lower year-over-year. This resulted in net unsecured debt to a justly deba-dare issue of 2.7 times as of the end of the first quarter. At point 1 times improvement compared to the first quarter of 2022 and flat from the prior quarter. We continue to have very low near-term unsecured debt maturities.

Speaker 5: with the only maturity remaining in 2023 being approximately $600 million due in the second quarter.

Speaker 5: I wanted to take a moment to acknowledge that this will be my last earnings call as Verizon's CFO . It has been a fulfilling 10 years of Verizon and a privilege to serve as CFO and I'm thankful to everyone that has made it such a rewarding experience.

Speaker 5: From our talented finance team to my fellow executive team members to all of you that have had the pleasure of getting to know, I want to say thank you.

Speaker 5: Verizon is in good hands with Tony as its CFO . I've worked closely with him since my first day at the company, and I know he will always strive to drive the business forward in a way that puts Verizon and its shareholders first.

Speaker 5: I truly look forward to seeing what he and the entire Verizon team will achieve as I cheer them on from the sidelines as an enthusiastic customer and shareholder.

Speaker 3: With that, I will now turn the call back to Hans, including comments before we open up to your questions. Thank, Matt. In summary, our disciplined approach has led to significant progress on our key strategic plans, and we need to keep the momentum and focus going. We're pleased with how 2023 has started.

Speaker 3: We continue to deliver the best customer experience on the most reliable network supported by the best people in the industry. In mobility, our segmented it and surgical approach to the market is working and we are taking pricing actions where possible. In broadband, the combination of fixed wireless access and fiber is winning as we continue to capture market share. We continue to grow our cash generation profile and maximum share role returns, aid by our cost efficiency program and lowered capital expenditures.

Speaker 3: I remain confident in our strategy and our strong focus on execution. We are always identifying new ways to evolve our business and execute on the opportunities. In everything we do, we focus on driving profitable growth. We measure our success in maximizing value across stakeholders by our ability to grow service revenue, EBITDA and cash flow. Brady, over for the questions.

Speaker 2: Thanks, Hans. Brad, we're ready to take questions this morning. Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star one, please unmute your phone, and to record your name clearly when prompted.

Speaker 2: Your name is required to introduce your question. To withdraw your request, please press start 2. One moment for the first question.

Speaker 2: The first question for today comes from John Hudlick of UBS. Your line is open, sir. Yo, Dave.

Speaker 6: Great, good morning guys and Matt, thanks for all the help over the years and best of luck you in the future.

Speaker 6: If I could just start with a couple of wireless questions. First on the gross side of the consumer side obviously some strength there. Any other detail you can give us in terms of what's driving the double digit improvement. I think the H&T saw decline, just any change in the sort of promotional posture and I think you're doing there. On the other side of the ledger, churn obviously up a little bit over year over year. There are a bunch of...

Speaker 3: and we start building in, I would say end of the third then into the fourth when it comes to both how we convert our customers to be part of our journey with the more segmented approach. And that we have seen through the quarter when it comes to our growth sides that many of the initiatives we have had all the way from the welcome plan and many of the others, they have been working well for us.

Speaker 3: That's partly what we've been doing. And then of course, I think we're much more focused and of course now with a new team in place as well, where we have full alignment with Sampat when it comes to the execution here and seeing that we're getting the right customers in. I think that has been helpful as well. Then as you have seen, we're coming in and out of the quarter in promotions. We really are taking the opportunity when we see that we have an opportunity to bring in customers. So that's how I see in the moment.

Speaker 5: have right now on the consumer wireless. Matt. Thanks, Hans. Good morning, John . So on the churn side, certainly we saw improvement as the quarter went on. We had a little carryover from holiday level churn in January . By the time we got to March, we saw much better momentum there. So that's the jump off point.

Speaker 5: as we go into second quarter. The pricing changes that you mentioned in your question really didn't go into effect until we kind of came to the moving from Q1 to Q2. So that will be incremental to the results of the business here as we get into the rest of the year. So, but as Han said, really a case of rebuilding from the momentum last year that

Speaker 5: was, you know, a year ago was not where we wanted it to be. The midpoint of the year we talked about taking actions and you see the results of those actions showing up in the results and so the teams focused on continuing to build from there.

Speaker 2: Great. Thanks, John . Thanks, John . Braverade for the next question. The next question comes from Brett Feldman of Goldman Sachs. Your line is open.

Speaker 7: Yeah, thanks for taking the question and I'll feel like to reiterate my thanks to Matt for overalls help over the years. My question is about fixed wireals. So when I look at the formal remarks document you put out, it looks like you still have just over 40 million households where that can get your fixed wirealist service. The reason I bring it up is that would appear to be a fraction of the availability of your ultra-wide band network which now covers over.

Speaker 3: Is there still going to be a tailwind or are we getting to a point where it's lovely now? Thank you. Thank you, Brett. First of all, we're really pleased with the performance on the fixed-wise axis. The team is doing a great work and remember, it's not only the consumers side, it's the business side as well on the business side. Many new use cases are coming up on using fixed-wise axis. The team are...

Speaker 3: scaling and we're on scale right now. So I like the rhythm I see on our sales promotions right now. If you see in the first quarter, almost 400,000. When it comes to the network, you know that later, the latter part of this year in December , actually, we will get our next chunk of Z-BAND. Right now, we're covering some 70 markets out of over 400.

Speaker 3: in Carings, but in C-Ban coming out. But as I said, we're waiting for the clearance by the year end to get even more. But as we roll out right now, we open up markets. And remember, we talked about that we are in the network team. We're now decentralizing so we can attack locally, because we are sort of opening markets locally. The same goes.

Speaker 3: what somebody is working on right now. It's also taking his operations more locally, so we can both the marketing and execution locally. And you might have seen it that we do more local things, because as we open up more on fixed-wise access, we do that locally. And so far, our success rate is high. We are just going to do this in the right way. We'll take the learnings. We're doing better all the time. We also have started with different...

Speaker 3: from coming is actually in the more of the suburban and rural. And we also get, of course, more urban spectrum as we're only deploying 60, maybe 80 somewhere mega-hurt, 100 where we are in average 160. So I have to say this is one of the...

Speaker 3: biggest 5G use cases we have right now and we really see good traction so that's how we're going forward. So, thank you. Yeah, thanks Brett. Brewery for the next question. The next question comes from Simon Flannery of Morgan Stanley . Your line is open. Thank you.

Speaker 8: Thank you very much. Good morning. And again, my best wishes to Matt for the future. Just following up on Brett's fixed wireless question, you talked about scaling. It looks like you're almost hitting two million fixed wireless subscribers now. How is it working on the network capacity side of things? And what's your confidence in going to continue to handle increasing usage from the customers as this continues to scale? And then if we could just go back to the...

Speaker 3: The guys is great. First of all, we're used on an initial transfer spectrum that we're using, as I said, we're fixed while it's accessed on the ultra-wide band. We have so much more capacity coming on top of that. All the new features you have with Advanced 5G, Carrier Gation, we have new...

Speaker 3: devices coming up and can handle different spectrum. So there's so many more things. I feel really confident that we will manage this capacity without any problems to the levels we have talked about and way beyond that. Then of course, as I talked with many of you guys, if it comes a moment that we have a community that have a lot of fixed rights access, we will have over time other opportunities of sales please.

Speaker 3: When we see that we have that full, we're not selling anymore. But this expansion is right now on 5G Ultra Wideband. When it comes to the new team, the big changes I've seen, first of all, the first big change is that these guys are operational day one. I mean, both Kyle and Samphat is straight into it. If you look at Samphat, he's very much focused.