Verizon Communications Inc. (VZ) Earnings Call Transcript & Summary

The C-band, if you do get your hands on it, is going to take between 1 to 3 years to clear. And so that's another question we get a lot, which is, okay, you're going to have the opportunity to acquire this resource, but it's going to take a bit of time. Can you help us understand what you're able to do on an engineering standpoint to preposition the network? Or maybe even from an engineering standpoint, how quickly you can move once you have insight into what form of incremental spectrum resources are available to you?

So I won't reveal what we're doing and planning right now. I think that's our competitive edge. But I can -- just to give you a parallel, when we started with millimeter wave some 4, 5 years ago, we talked and had a conversation with the whole infrastructure ecosystem. We talked with the chipset manufacturers because it takes years to get everything right. We prepared our networks. We tested it out very early on. And as you have seen, the majority of all 5G phones coming out right now, they have millimeter wave in them. As well as the network providers are scaling their base stations with millimeter wave. That's the way Verizon has worked all the time, and that's also why we have the best network because we are planning ahead. I wouldn't go into what we're doing in C-band. But I can tell you, our team is constantly thinking about the future. Different constellation of technologies, different types of carrier aggregations, how would the chipset and the network work with the software in order to get the best performance and the best experience for our customers. And that we'll continue to do and I think is a unique feature for our team and for Verizon compared to anybody else.

Right. So just last question on this. Obviously, in addition to any investment you would have to make in the spectrum, you'd have to deploy it in your network. How do you feel about the level of capital investment the company has been making? Do you think that that's the right envelope to remain in even after an auction? And then the entire cost of getting this spectrum to use also involves the handsets. You need to drive penetration of devices that can see that spectrum. How does that shape your view around how you're going approach new handset launches that are coming up in the near term?

So if you -- I can only refer back to the -- when it comes to handset. I mean we would constantly think in planning for long term when it comes to spectrum, to handset, the chipset that can handle it and all of that, and that's our job to see that. You don't build a network and there's no handset that can use it. We have seen that happen in other places, where people have a lot of spectrum but no handsets. That's a fairly useless strategy. So we will continue to do our way of working. We're going to look at the full ecosystem, all the way from the commercials, the handset, the network, the infrastructure in order to take on new investments. That's clear. And when it comes to the investment, our capital prioritization is clear. It's been clear for quite a while. Number one is business. Number two is continue to see that our shareholders or our Board is put in a position so they can give the shareholders a dividend that they should have. I mean we just increased the dividend for the 14th consecutive year. And number three, pay down the debt, which we now, in the second quarter, ended up below the credit metrics that we had pre-Vodafone, which was our ambition. So -- and finally, when we feel that we are in that mode, also doing buybacks. We don't think we will come back to buybacks before we have concluded what will happen in the auction on the C-band, but that prioritization is clear. And we've also said that if we find new opportunities, we are not afraid about increasing our CapEx, but it has to be clear what type of opportunity that is. Right now, we have been having this [ band ] for quite a -- it decreased a little bit, we see here. We saw the opportunity to invest more, which we are doing. So that's how I see the investment thesis for us and how we are prioritizing our capital.

Great. I want to ask one more question about your consumer wireless business before we move on here -- or at least your consumer mobile business. You expanded your agreement with Disney. You've been offering Disney+ for a limited time to a certain number of your customers. You've now broadened that to include the Disney bundle for free at certain tiers. And so I was hoping you can maybe share a little bit about the experience you had that made you motivated -- both you and Disney motivated to expand that. And then also just to kind of remind us how this fits into your strategy because some of your peers have made a decision to become more integrated across entertainment and connectivity. It looks like you continue to see evidence that remaining in your connectivity expertise is really the right way to go.

So who doesn't want to have ESPN+ these times? We have NBA, NFL, NHL ongoing at the same time. I would love to have it. So it's a great timing. No, joke aside, when it comes to our strategy in this area, again, the Verizon Consumer Group have innovated dramatically. We learned this from Apple Music, where basically, we made it for free for our customers in combination together with Apple. Later on, we made them to be paying customers. We had our fair repayment back from Apple in that moment. We do the same with these 3, and we're happy with how this has performed. And some of you know how great start it was for Disney+, where we brought these customers in, and they are now starting getting paying customers. Now we do that on the next step together with a wider Disney+. We will not do that for every brand or every [ phone ]. We will do it for distinct areas on brand that actually match the brand of Verizon. And we think it's having a full suite of opportunity for our customer base. And clearly, Disney+, Hulu and ESPN in one package, we think that's a very attractive package. We see what's happening with the cable viewing. So of course, over-the-top streaming services is more and more important. And Hulu, of course, also have their normal linear TV in there. So it's a good way to continue to meet our customer demands together with the best network. So I think this is great. And we're probably going to have other areas where we're going to find the best in those areas to see that our customers are having an opportunity to bundle the best of the best.

As I sit here and do this on the screen, it can't help but constantly remind me, we're in the middle of a pandemic. And so before we move ahead, I do want to just ask, can you give us an update on what business activity is like for you? You obviously saw a significant slowdown in activity levels as you closed stores and as people went into a lockdown. Can you give us an update, how are activity levels in your stores? You obviously have exposure across the small business and large business segment. I think your perspective would be greatly appreciated.

So just a quick rundown on the customers. On the consumer side, as we came into the quarter, of course, in the second quarter, the activity level was down some 20%, 25%. What we have seen lately is that sort of the overall activity level on consumer is down 10%, 15%, the switcher market. And that is, of course, an improvement. So we see a gradual improvement. But let's also face it. I mean it was only 10 days ago that we had all our stores open in normal opening hours as well. So it's a little bit early to judge. But clearly, we have seen more sort of digital sort of business than the -- sort of going to stores. But right now, we have -- the last 10 days had our stores open. So we're going to see how that turns out. But that -- there's a little bit lower business right now compared to 1 year ago for obvious reasons, but it's gradually improving on the consumer side. The other thing that we get questions about is, of course, the state and the health of our consumers. As we said that when we came out of the second quarter, we had a small portion of our customer that asked for refinancing. 80% of them are actually doing some sort of payments. We believe this will continue to be great customers for us. We have now 6 more weeks since our earnings call. The trends continue. We have one billing cycle behind us. We feel good about those customers, that we can continue to keep them and they can continue to have our services. We work with the financing. So that's happening on the consumer side. On the enterprise side, it's a little bit split. I mean you have a big portion of our customers that actually are investing right now because they see a great opportunity of innovation and digitalization. And with our new go-to-market, the TAM in our team in Verizon Business Group, they are totally sort of dedicated to solve the customers' challenges, which we've never been able to do before. So here, our transformation is actually paying in. There are, of course, some customer groups in the enterprises that cannot really execute right today because their business is basically 0 or clearly hugely down. Public sector continue to invest. That's an area where we see good investment. We have done some announcement about how much we're supporting back-to-school. I think we're up to 38 states that are now sort of taking our broadband. I think it's over 28 million, 30 million students that will have our solutions when we kind of go back to school and having broadband. So we see a lot in this area. Then we have small and medium business, probably the most sensitive one, but these customers are hanging pretty well. But of course, you have -- if you don't have any business, of course, we have seen some of these customers taking a little bit more easy on investments, and some of them probably see and wait if they're going to continue. So that's the state. And finally, we have our media guys. The advertising came down quite dramatically at the end of Q1. Q2, it's down 25% at the end of the quarter '19. We believe in this quarter that probably going to be low double digits or decline. So we also see that slowly coming back. So that's the state of the business right now. But this is an uncertain time. But clearly, we see gradual improvement constantly in all the customer groups.

Great. Well, thank you for that update. I want to talk a bit about 5G Home, which is your residential fixed wireless broadband product. You announced that maybe 2 or 3 years ago, you have an objective of rolling that out to your target market over about a 5- to 8-year period. And I believe you signaled that you're going to have better customer premise equipment coming soon. So I was hoping you can give us an update on the time line for beginning the process of really accelerating the deployment of the 5G Home product. And then also, if you could just give us some insights into how you think about the target market for that product because, obviously, you've deployed these spectrum resources in dense areas. Cable companies tend to be very highly penetrated in those areas. How do you bring this to the right customer?

Yes. As you rightfully outlined, we are now coming into having the next-generation CP that's going to handle the radio signal and the WiFi and the hub, so to say. That is coming in the fourth quarter. Everything is on time and whatever you want to say. So we're very excited for bringing that in the space. We are working 2 years right now since 2018, when we launched the first, when we started with our own software. Then we went to the global standard, but with the chipset that was a little bit weaker. Now we're really doing this sort of big last. And we're going to have more than 10 cities having the opportunity of 5G Home in the fourth quarter. This is a totally transformative business. We're thinking totally different. We think about self-install. We're thinking about no bundles when it comes to TV channels. You can take the broadband. You can even move the broadband with you. It's a totally different thinking. And of course, we are addressing a market of the next-generation customers that want something much less complicated than we have seen in the cable industry. And then, of course, in many of the markets outside our Fios, there's usually one player only in the cable area. We think we can definitely compete with that. I mean we will guarantee 300 megabits per second. That's really good, and we have constantly now proven that is possible. So all the way from the performance of the network, the self-install, the possibility of flexibility, what we want to take as a content bundle. And then, of course, we have a big customer base outside our Fios footprint that we now can work with and see how do you want sort of a seamless service all the way from the home, to the mobility. All that is totally new to the market. So I think that Ronan and team are very excited. But remember, we call it also fixed wireless access. It can also go to small businesses. It's not only for the home. So we have multiple opportunities. As said, it's going to take us some 5 to 8 years to build that out, what we want to achieve, because we start in the urban areas with millimeter wave for the mobility case, and then we move out. And that's, of course, we're taking more and more coverage for homes and small and medium businesses. So we're going to launch 10. And then over time, we're going to launch more cities. And basically, every city, we have millimeter wave, we have the potential of 5G fixed wireless access of 5G Home. So we're excited about it. And it's a new market for us. It's new money. And remember, we build the network once. It's just one build. So we monetize the network in multiple ways. And again, that goes back to the strategy, Network-as-a-Service. That's what we outlined 2 years ago, and that's how we do it.

How quickly can you make 5G available -- 5G Home available in the market after you've lit up your initial deployment of millimeter wave?

So you can do that immediately. It's just that you need to see that you're covering some residentials and some small and medium businesses because there's no difference in how you build the network, et cetera. So you can actually do that immediately. Then you need a certain cluster of customers to market it to before you start. So we have some rules when we're going to -- when we go after a city, depending on how much we're covering from that part of the segmentation, meaning homes or small and medium businesses.

Great. So we've talked about how you're going to initially look to leverage your 5G deployment in the consumer space by getting people into the right unlimited plans, potentially driving ARPU and ARPA there. Just talked about the opportunity in the consumer space. The third big opportunity is enterprise. And I think that's the one that investors sometimes have the hardest time wrapping their head around. Can you help us understand what your vision is for 5G as enterprise solution? Because you've already started to work with companies like Amazon and IBM, and I don't think that those partnerships are really well understood by investors at large.

So again, this is the -- now we talk about the fourth vector of growth. I outlined the 5. We have one left, which we'll probably come to. So this fourth area of growth is, of course, the 5G mobile edge compute. It's when we bring cloud software to the edge of the 5G network in order to have low latency for applications or tremendous bandwidth or security or privacy. That's what we're doing. So you need to think about that. We take the sort of data center -- the huge data centers, Amazon, and we bring them out to the edge of the network, which is a huge difference from the compute and storage. That's what we do. This is a unique sort of partnership because, I mean, nobody has built this before. We have built this together with Amazon. The first site was launched early this year, the second site here somewhere in August. So we have 2 sites right now. When we talk about the site, that's actually covering a quite big area as our network is fiber sort of connected. So that's what we do. And right now, we do this for public. So it's -- if you're a developer or an enterprise, you just go into Amazon and you actually say, "I want to develop and do a service on top of my -- the 5G mobile edge compute." And then you pay for storage per hour, how much is used and all of that. We have our cut on that from Amazon. So the whole offering here is coming from Amazon and their normal sort of cloud offering. That is a 5-year private solution later on. That's when you build, for example, a factory that's going to be connected to robotics with 5G. Then you build that for that factory and for that company and they own that. They own the whole processing, the whole 5G network for that big factory plant or it could be a big warehouse or an enormous retail store or something like that. That's in a use case. And that's where we work with the IBMs of the world, SAPs of the world because they have the software there. So I see that we will do the connectivity. We will get revenue from a platform of 5G, which is going above and beyond connectivity. And by year-end, we're going to have 10 of the sites with Amazon, and we're constantly working with this private opportunity as well. This is revenues we never had before again. This is part of the growth vectors, the 5 growth vectors we have, going forward to the GDP-plus.

Yes. If I go to the Amazon example, in that scenario, the customer -- the app developer is not simply developing the Amazon. They're developing an app specifically to run over your 5G network because it would need to because that's where the Amazon servers are co-located in this relationship that you've created. So it does look a little bit more like a platform. What are you doing to ensure that you are creating an ecosystem of developers who appreciate that? Because it seems like the early mover advantage there can be quite valuable over the long term.

This is a collaboration, of course, with Amazon because their developer communities now start developing on top of it. It could be enterprise companies developing something. Earlier, we have seen gaming companies coming in and start developing services that can only be sort of enjoyed on a 5G phone because of the speeds and the latency. So that's what we're seeing. So we are part of that. Then on the other side, we work with the large software houses like IBM, SAP, et cetera, that also are creating softwares and services that will need low latency or enormous throughput or it could be only for security reasons, meaning you substitute your WiFi network in a place where you're actually going to own the whole 5G network as a private mobile edge compute center. So it is a little bit different, but that's why we have been working for years with our 5G labs. We have partnerships working with innovation on top of it. But ultimately, we want to ride together with sort of the developer communities that are out there instead of Verizon creating something new. I mean there are many of them. And hopefully, we're going to have more developer communities come in as we're going to see other cloud providers being able to offer what Amazon is doing today.

Great. I got time for one last question. So hopefully, a year from now, we'll be doing this in person. And you'll have launched 5G across more devices and across more markets. You'll have probably participated in another auction. And if Matt Ellis gets his way, you'll have an A investment rating on your balance sheet. What are Verizon's priorities going to be at that point in time? What are -- do you think at that point, you'll be positioned to achieve that GDP-plus type of growth?

I think that first of all, we have this pandemic that is overshadowing, and I don't think anybody can give any forecast when we're going to get back to normal. Usually, U.S. is coming back quicker than any other country in the world, but I'm not here to make a forecast on that. But if I think about how we would look 1 year from now, these 5 growth vectors that I'm talking about all the way from scaling 5G to the business-to-business opportunity, the MSOs that we're working with, the new segments, together with TracFone now and, of course, the continuation of Mix & Match, all of those will have moved forward quite dramatically. And I think that we will sit in a situation where we're delighting our customers with constantly new type of services and innovation, which we want to be recognized for. Ultimately, that's going to pay off for our shareholders as well, and we are on that journey. And if that is GDP-plus then or a little bit later, that we're going to see because it has a little bit to do with the market in total. But clearly, we have a path for both seeing an expansion on bottom line as on top line and continue to be very prudent and having a well-balanced balance sheet, so -- and good cash generation. So we have the path on that. We see that. And that's why we have outlined these 5 growth vectors based on our network and service. So I would say we feel good about it. It's a lot of execution. We are not distracted. We know what to do.

Great. Hans, thanks for being here, and I look forward to seeing you back here next year.

Me, too. Thank you very much.

See you.