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

Great. Well, let's pivot to the 5G network build and the performance. I think you've taken a somewhat different approach than your peers leading with ultra wideband with millimeter wave. And there's a lot of questions around the coverage. The performance seems to be great, but in the limited area. So we got into it a little bit last week, but help us talk about what the ultimate vision is for how much ultra wideband covers and how that plays into 5G Home, and then what role DSS plays and the performance there.

So look, the first thing I would say is that any conversation about 5G in the networks has an element of talking about spectrum. We're in a close period at the moment, so there are certain aspects that I won't address. But if I just talk about the assets that we have and the strategy that we're taking is it's important to understand that 5G Ultra Wideband is a capacity and experience layer. It's not per se a coverage layer. So where we're choosing to deploy it is in the areas with the highest level of traffic. And what people sometimes miss is, and this is something that we made sure that we talked about last week when we had the sell-side session is, as Kyle, our CTO, deploys 5G Ultra Wideband in those denser urban areas that have the highest traffic, it does 2 things. It massively expands capacity availability at a really low unit cost from a network bit point of view, but it also improves the availability of the 4G LTE layer because it's actually relieving some of the capacity demand there. So it's not just those on the ultra wideband who are getting a benefit, but actually our 4G customers are getting a benefit. And that complements the 5G nationwide offering, such that as we've deployed DSS, we're able to do carrier aggregation in there. Certain bands maybe lower down can't do that, so we have a high efficiency there. And what we did was not all of our existing spectrum holdings have been deployed for LTE. So what we did is in the run-up to DSS, we expanded out with carriers, et cetera, to build incremental capacity, so that the kind of signaling layer that's necessary for efficiently managing DSS was not taken out of the capacity available to customers. So what we've seen in the performance is actually a slight improvement overall in network performance since we've deployed DSS and giving really good performance metrics at the same time as we continue to build out the ultra wideband. So when I pull those pieces together, a proportion of what we've been doing for ultra wideband so far has been in areas with little or no residential in it because they're dense urban city, the corporate spaces and other things. And so sometimes when people challenge me and say, "Well, what about the 5G Home?" The point is I'm building a mobility layer which is the capacity and experience. And then I'm using that strategy to then pick up either 5G Home or 5G office in our Verizon Business Group opportunities that come up the side of that. What I'm not building is a residential broadband network. So there's a phasing effect that the early coverage for the most dense traffic is may not be highly residential. As we then fan that out, and Chicago is a good example where we've actually tripled the footprint of coverage, then you start to increase what's available for residential and for small and medium business. So that will be the continued strategy. Our CBRS assets that we acquired recently have also been rapidly deployed, and that's also allowed us to have more capacity in the 4G LTE layer. And in due course, those CBRS assets will be available to us. In 5G, just not today. So that's really the strategy, Simon. Everybody's experience gets better because of the way we play the ultra wideband layer, the nationwide layer and our best-in-class 4G LTE layer. And not everybody has those tools.

Just to be clear, you still see fixed wireless 5G Home, 4G broadband as being an important growth opportunity for the company?

Absolutely. And very much the work that we've been doing around the brand positioning and the proposition has meant that we're already seeing the benefit of that enhanced focus in the Fios performance because I see home as an opportunity. And to the largest extent possible, I want to be bearer-agnostic. So I want to give customers choice, which says I can give you the best possible residential solution whether that happens to be a fiber solution or a wireless solution. I'll bring you the best that I can based on my network topography and capabilities. And then what I'll bring you is the best of Verizon, so mix and match across wireless and wireline, the benefit of those who are mobile and home customers getting higher discounts. So simply put, if you were taking 5G Home, it's $70 if you're not a Verizon customer. And about 50% of those who join us aren't Verizon customers. It's $50 if you are a Verizon customer. So what tends to happen is that attract new customers as a residential, and then they very quickly see the benefit of taking more of their services from Verizon. So that also gives me an acquisition tool for wireless as well as an acquisition tool for residential. So I still see residential as a very significant part. I also see the opportunity for us to build above the pure connectivity layer. We have very strong total mobile protection for our wireless customers is -- an important product, our data storage products in cloud and other things. We see the opportunity to sell more of those products and services into the home environment, both through the combination of a stronger wireless offering, but also to the 5G home product.

Great. So another area you see as a growth opportunity is prepaid, and you just announced the TracFone deal. So perhaps talk about what's driven the change in philosophy there as opposed to using third parties maybe to attack that segment versus being much more kind of ownership-focused and what the plans for TracFone are once you buy it.

Yes. So it's a great question. It's fair to say that prepaid has been a relatively small focus area for Verizon up to now. And really, a little bit of context, the U.K. market, when I first operated in it, was more than 70% prepay. And by the time I left it, it was about 30% prepay on the pre- to post migration happened there. What I've seen inside Verizon is that the tools that we've been able to build, not just our network tools but our distribution tools and our billing and service tools and the analytics layer that we have on top of it, allowed us to be much more efficient in both our distribution and in our base management. And what's really important in prepay is you can't bring a premium cost base and bring it to the value segment. You need to have a highly efficient execution structure. And I would say that today, we have best-in-class capabilities from a CRM and value-based marketing point of view. And so I now am absolutely certain that I have the tools to be a direct participant in the value segment and to do it in a highly cost-efficient way. I also have capability that I'm much more comfortable if I'm going direct to brands, so things like bringing 4G Home, bringing other products and services into that value segment. So we see the fact that we're now in a position where we have the tools we need, the capabilities we need. And in TracFone, we have a partner who we know and understand. It's a business we've been working with for more than 15 years, strong management team, strong brand portfolio. And so we see that as a great opportunity for us to build out Tracfone's capabilities and its brand portfolio, so that it can expand the opportunity in the value segment. Just for context, about 13 million of their 21 million, 22 million customers ride on the Verizon network today, but there's 8 million or 9 million that ride on competitive networks. And we have the opportunity to migrate those across to be on to Verizon, so enhance the owner's economics and with the tools, as I say, the CRM and base management and distribution tools, which we believe will allow us to be highly cost-effective in that segment.

Great. And another area where you -- some of your European experiences in the wholesale segment and with the MVNOs, and it sounds like you've done some updated deals there. Perhaps you could just elaborate on that. And I think also the concern in some parts, and again we saw it in Europe, that the cable company start as MVNOs, acquire spectrum, and then build out in hotspots so that they ultimately become more of a hybrid and you don't get the full benefit of the growth. In fact, you might, in a sense, be enabling a competitor.

Yes. So I think the first thing to say is if you look at where my core brand proposition is, the overlap with the MSOs exists, but it's only a portion of where my Verizon-branded business is targeted. Similarly, if I think about the approach that I will take with TracFone in the value segment is, it has some overlap with the MSOs, but a lot of it doesn't. So if you were just doing a segmentation map, while there is some overlap, there's actually quite a discrete piece of the addressable market that I believe sits outside the core Verizon position and the core TracFone portfolio proposition. So in that regard, the cannibalized -- the inherent cannibalization is lower than might be perceived, first thing to say. Second thing I would say to you is that the transaction with the MSOs was predicated initially on a spectrum swap and an opportunity for us to take spectrum. What I've chosen to do is to take that reality and turn it into a strategic relationship and build out that relationship with the 2 organizations in a way that I am their partner of choice, because there's no question they're going to be in the market, Simon. So the simple math of if they're in the market, you want them to be on your network or on somebody else's network. It's really simple math. So I've just taken a very pragmatic and strategic approach. Within that, what I've also done is recognize that as I have a best-in-class network capability. That's one of the value equations that I can offer to the MSOs. Because it's not simply about price of access, it's about quality of experience. So what I'm trying to make sure I do is be a great wholesale partner while at the same time ensuring they I have all the tools I need to be an effective competitor. And when people think about the economics of wholesale versus retail, sometimes they miss the fact that yes, the wholesale ARPU will be lower than a retail ARPU, but the cost of acquisition and the cost of retention sits with the MSO. It doesn't sit with me. So actually the blended economics may not be as discrete as people perceive. So I see it as natural part of us as a network looking at all segment opportunities that are out there and being highly efficient in our go-to-market strategy. And so I think it complements our growth strategy and our segment focus exceptionally well.

Great. A question on 5G use cases. It seems like there's a lot going on with Tami and the B2B side of things, and you mentioned B2B2C. We've got a lot of speed obviously with these -- with your new networks. There's talk of AR/VR. What are the things that you're most excited about in terms of consumer use cases for 5G?

So look, I think it is an important point that the Verizon Business Group in some respects is in the vanguard of some of this. Because I think the enabling layer of edge computing is a critical component in the delivery of the best-in-class 5G use cases. So 5G edge compute in and of itself is a business proposition for VBG, but what that does is it enables a lot of businesses to think about how they can optimize their end-user experience and opportunity using 5G. Gaming is a great example. We may well be working directly as a B2B partner with the gaming companies, but what they're looking to do is enhance the product by use of edge compute. If I think about others in the marketplace where they're in the experiences, they're thinking about how does AR augment end user experiences. And that can be in 2 places. It's no surprise that we've gone to areas like Stadia, big transport hubs and other places, airports, rail stations, et cetera. Because those areas are dense activity at discrete times, so network capability is important. But the opportunity to use those to enhance the live experience is significant, but the capability that you build in the venue also affords you the opportunity to transport some of that deeper immersive experience and enable it to a much wider audience. Think about the idea of as a B2B partner with the NFL creating experiences that mean that the virtual season ticket is as big an opportunity as the physical season ticket. So I would say to you the deployment specifically around gaming, around AR components will start to enhance consumer use cases quite significantly. The other thing that's important to think about, and we talk to developers all the time about this, is sometimes the least recognized capability of 5G is uplink capability. So the ability to aggregate carriers on the uplink or the ability for us in the case of millimeter wave to use the huge swath of spectrum we have in a different distribution of downlink and uplink, we're already saying on the 5G nationwide network between 50 and 75 meg uplink speeds, but within 18 months, maybe earlier, we will be seeing 200 to 250 meg uplink speeds because of carrier aggregation and deployment. In those circumstances, the use cases that require uplink for live streaming, for social, for a whole lot of experiential, things like that, the balance of the uplink and the downlink will be really significant for the innovation that we see. And that's not necessarily available for those who are building their 5G in a different way.

Okay. That's interesting. On the video side of things, you've got a lot of different video products with 5G Home with -- you've got a new streaming product that you announced yesterday, and you've got the traditional bundles with Fios. And you've sort of gone away from the bundling approach or bringing mix and match more to your wireline residential. So how do you see the future of linear video and the various streaming options? T-Mobile had their announcement last week. AT&T has obviously got a different approach. What's Verizon's take on it?

So the first thing to say is, and I reference back to a comment I made earlier, at Verizon Fios, we were subscale purchaser of linear content. And we were spending $60 to put together a $60 linear content bundle, so empty calories. As a 100 million consumer buyer, guess what? I get better terms. So we're leaning into cord-shaving and cord-cutting unequivocally. And we're trying to create more choice for our customers, whether they be traditional Fios customers or whether they be wireless customers that we have flexibility. The other thing that we bring to the table is this massive distribution platform I referred to earlier. And we're also Switzerland. I don't have content that another division of my business is creating, which may or may not be very good, which I'm trying to barter with Disney or other people. I can go out and pick best-in-class partners and act as a distribution agent for them in a way that they see the value and the relationship with me and the scale of it, and that creates more choice from my consumers. So that opportunity for us to be an aggregator and a distributor that creates real flexibility that leans into cord-shaving, cord-cutting makes my Fios business more economic. So what I'm actually seeing is while my revenues might be flat to declining because people reduce their linear video, my contribution is going up significantly in my Fios business. And those same economics will allow me to be a distributor of content across my wireless platform whether pure wireless customers or 5G Home customers in a way that's accretive rather than me being a subscale linear just paying money to have a product that makes me no margin. So that's exactly the approach that we're taking. And that's resonating, I can tell you, with the owners of content. They like negotiating with Switzerland.

Great. Well, that makes a lot of sense. Maybe just to wrap up and pick up on that last point on margins. Verizon has this multiyear cost-cutting program. You've got the COVID opportunities you talked about earlier. At the same time, you've highlighted wireless service revenue's growing 3 -- 2%, accelerating through the end of the year and to next year. How do you balance that top line versus margin taking share versus supporting profitable growth at consumer? And what other opportunities do you see to improve margins through costs?

So my primary business is a subscription business. And that's an important context because that premise allows me to think about these platforms I referenced earlier. People who are currently selling their product wholesale and don't have a direct to consumer, I can offer them billing. I can offer them service as well as access to 100 million consumers. So what I want to do is I want to use the scale that exists within the business and amplify that scale through my layer of IT and analytics and to be able to be very forensic segmented distributor highly efficient. If I do that, more of my growth relative to my peers can come from a base, because I think I have a better quality base to start with. I have lower churn, but I also have the opportunity to expand share of wallet, share of engagement with that base. So that's an efficient kind of base building block of the growth equation. On top of that, I can expand the addressable market in 3 ways: Either new products to those customers that I don't sell today and over and above the example that I used of the subscriptions, and that can be my home, the residential opportunity as it grows out; and then access sectors that I'm not in today like the value segment; and then on top of that is the opportunity of growth coming from new products and services that will come with really the leverage of the 5G capabilities, so that my partnership model, which, today, is kind of music and content, can then layer into maybe some other higher value. Maybe initially it's in gaming, but think about it in the home environment, things like telehealth and telemedicine, the management of long-term conditions. And that's where the relationship between the B2B business and the B2C business is very, very strong. Because Tami will be writing business with many of those companies as a B2B partner, enabling their capability to then serve end users. And then we, as the consumer business, can be a partner to distribute those, and so we see those vectors as being how we have a superior growth capability relative to those who are almost entirely dependent on the acquisition model for growth. And so that's why when we talk about GDP+, a big piece of that is actually the base we already have and the monetization of that base, which mix and match the platform strategy and the real investment in IT capability that allows us to be very, very efficient in our CRM and base management. And then on top of that, to build out a relatively small group of select partnerships across a range of kind of media and entertainment, yes, but then other services where we can be a real value-add or high-quality connectivity is a baseline need. And that's the context in which both the complementarity of the B2B business, which is driving a lot of these new 5G use cases, partnering them with B2C and the growth within the B2C existing base through these marquee partnerships like Apple, like Disney, et cetera, that's really the foundation of our growth. Yes. We will go and take our fair share in new accounts in the marketplace. Don't misunderstand. But I'm not as dependent on that as my only vector of growth in maybe in comparison to some others in the segment.

Great. Well, we really appreciate your perspective, Ronan. Thank you. And thanks, everybody, for your time today, and good luck with the rest of the conference.

Thank you.