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

Okay. Great. Good morning. I'm Peter Supino with Sanford Bernstein. And it's my pleasure to welcome you to the first presentation of the 2021 Strategic Decisions Conference. We are privileged today to host Ronan Dunne, who is Executive Vice President and CEO of Verizon's Consumer division, which dominates its business. Ronan joined Verizon in 2016 as Executive Vice President and Group President of Verizon Wireless. The company has since resegmented to Consumer and Business segments. Before Ronan joined Verizon, he was Chief Executive Officer and CFO of Telefonica's U.K. business, where he had good results. And it's been a -- Ronan has been a thought leader in the wireless industry in the U.S. for years now. And we are grateful to you, Ronan, for joining us today. And with that said, I think I need to offer you the chance to make a safe harbor comment.

Yes, indeed. I just would draw people's attention to safe harbor disclosure as it relates to forward-looking statements. Thank you, Peter.

And my safe harbor comment is that I -- while my interior decoration tastes are limited, they're better than what you see in my background. My family moved yesterday, so my house is full of cardboard boxes. And this will be my new office by next year when we do this again. So let's get going.

Yesterday, Verizon announced a major 5G upgrade promotion. Would you discuss the key market observations, the key objectives in the way this promotion ties into your plan for the second half of the year and at the highest level?

Yes. Sure, Peter. Thank you for that. And of course, the timing was designed to make sure that we have the opportunity to talk about it this morning. Very important, the Bernstein conference. But look, I would draw people's attention to the Investor Day we did after the C-band auction and the Analyst Day we did back in November, where we really flagged to people the approach that we were going to take across our multiple vectors of growth. And underpinning all of those was the adoption and engagement of our base with 5G. And so we talked about an accelerated adoption curve. And we talked about the strategy that we've executed now for about 10 quarters, which is really this concept of mix and match, which allows us to bring our customer base across from metered to unlimited and then to build the value within the base within our structured unlimited plans. So we've been really waiting for 3 things. First thing was we wanted to see traffic on the network returning close to pre-pandemic levels. And we've talked a couple of times about this idea of watching the handoffs on the network as being a very good proxy for economic and social activity. Secondly, we talked about the fact that we wanted to get all our channels back open and our retail. And when we reported Q1, we addressed the fact that we were essentially back open now. And we've seen continued growth in footfall and traffic there, such that actually announced a week ago that we're recruiting 1,000 extra staff for our retail stores. And the third thing, which I think is important from an investor point of view, is that all of the key handsets now are C-band compatible. So the opportunity for us to seed our base with C-band-compatible devices before the launch of C-band at the end of the year is both attractive from a customer experience point of view because more and more customers are out and about now, and they're getting an ultra-wideband experience. More of them are having a taste of what is today millimeter wave but will be expanded to C-band. But also from an investment point of view is the early migration to 5G actually optimizes our network CapEx over the medium term because we'll be able to exploit the incremental C-band capacity just as soon as it arrives. So for all of those reasons, we had focused on a laydown for 2021 that really builds to the crescendo at the end of the year when we'll be able to switch on C-band. And what we found was that, literally, the last 6 weeks, we've seen really strong momentum both within our business itself, but more economic activity and people out and about. So perfect timing.

So on the subject of strong momentum, the company has had a soft patch relative to its own historical trends in terms of net adds in the last 6 months. And I wonder if you'd comment on the extent to which that was the result of surprises that you experienced competitively or whether you felt that was a more macroeconomically-driven pause.

So I'd break it into 2 parts, and I'll just remind people that sequential service revenue growth at Verizon has been the strongest for the last couple of quarters in the market. So we continue to drive dollars through the till, which isn't necessarily a consistent pattern. The second thing I would say is that post rationalization of Q4 and Q1, people have considered that maybe we were short of where they would have expected us to be. The reality is that in the switcher pool itself, which is the premium part of the market that's addressable, we've performed well and taken consistently our share. What we did see in Q4 and probably more in Q1 was that those parts of the market outside the switcher pool, some of it may be outline, free line stuff, some of it is pre to post migration, where I've always acknowledged that I'm underrepresented in the pre- to post-migration part of the market because I have a relatively small prepaid business in comparison to my main competitors. So what I would say to you is the core business that drives the service revenue, the switcher pool and the new add lines in the premium category continues to be strong. And in May, we saw a switcher pool that was bigger than 2019 levels, and our relative performance in the switcher pool was actually stronger. So very strong performance and momentum. From a strategy point of view, we've talked about the fact that, subject to regulatory approval, we'll have the opportunity to play in the value segment and prepay more effectively with the TracFone acquisition. But our view there is that there's an opportunity to serve that market in market, rather than perhaps what others are doing, which is encouraging people from that value segment to get the best value to migrate out into the postpaid market. So we see that as an expanded growth opportunity later. So the balance of strong performance in the premium part of the market and expanded opportunity in the value part of the market means that, I think, we're well positioned, as I said in March, to see performance particularly as the economy opens up at and above the 2019 levels.

Those comments give us several options for the next thing to ask you. And I'm going to pick your emphasis on revenue per customer on the very strong financial results that Verizon has had in the consumer business. I think your emphasis on revenue per customer leads the industry. And I observed that Verizon talks about it more and emphasizes it more than net adds in some cases, despite the industry convention to focus on net additions. I don't know if you agree with the way I phrased that. But the point is, could you help us understand why this strategy is best for Verizon and your comfort level with its sustainability because we have many investors ask us how similar or different is the wireless business to something like consumer staples where companies frequently focus on price and mix and have very limited assumptions for volume growth and what are typically highly saturated, highly concentrated industries. And so is that really the right recipe for consumer wireless business going forward?

Peter, it's a great question. And I would make a couple of points on that. The first thing to say is it's not an either/or. We are very focused on participating in any growth that's in the market. Where perhaps I draw a slight differentiation between others is that I see growth as having elements of both base growth and revenue growth. And therefore, if I'm allocating dollars to invest in the market, I'm looking for the highest yield per dollar. And so one of the things I've talked about is that our value-based management is, I think, best in class in the industry. And that's that opportunity to migrate customers from metered into unlimited and grow the value. But that's very much an and. We also participate -- I mean, respectfully, it was notable that somebody said that port ratios aren't important anymore, somebody who's made a career out of quoting port ratios. That might be because I'm port positive against that particular carrier. So make no bones about it, I'm out there competing in the market for the customers that pay every single month. And I'm getting at least if not more than my fair share of those. So it's very much an and. And then the last thing I would say to you is -- to the stables part is, I do believe that particularly, as we approach the 5G era, that this opportunity of a subscription-based business where we have the opportunity to expand the subscription base and share of wallet, building on a core communications, which built around best network, but then expanding out the addressable opportunity with those customers based on trust, based on high-quality customer service and experience, I think, is an opportunity which affords us the ability to deliver superior growth. So don't see these things as 2 alternative strategies. See it is as a strategy where, I believe, I can amplify the growth opportunity by attracting the best-quality customers and then serving them well and expanding out the range of choice I offer. The experience with content has been really, really positive for us. We expanded that further with our gaming offerings just in the last week or so. Customers see real value in that. And the other thing I would say is, to our announcement yesterday, our ability to offer a great deal for a customer, where they're then going to commit to stepping up and taking more of our services from us, I see that as a good model for us to continue with that idea of growing the value of the relationship as well as growing the number of relationships we have out there.

All right. So the switcher pool and content bundling are 2 topics I want to come back to. One last big picture or strategic question. Investors often ask us how in a mature and consolidated industry, like wireless in 2021, that any one competitor might differentiate itself for an extended period of time. And my question to you is, as a manager, is that even an important question? And if it is, how would you respond to it?

So the first thing I would look at is the churn characteristics in the marketplace because customers are voting with their feet every single day. And what the evidence is, is that customers are ascribing value relative to other carriers in the market because the barriers to switching are essentially 0, yet customers vote with their feet every single day. So I do think that reliability is -- continues to be hugely important. I think, as we enter the 5G space, the opportunity not just to monetize from an investment point of view but create experiences around 5G that are actually of value to customers will create a period of differentiation for the industry and an opportunity for customers to see kind of -- reengage with the category. And then it only works when it all works. That needs to be brought together in a way that the experience that the customer gets is something that's important to them. So I do think it's differentiation. But maybe 10 years ago, it was just the network. Now it's network and experience and its access and it's your loyalty being rewarded. So I think that's a good template for the industry. But I also see, going back to the previous question, is from an investment point of view, I see the opportunity for us to be a growth stock at above GDP as being essentially the combination of great foundation of communications services and the expansion of the relationship with the customer. And I think, as we do that, I think that will create additional sources of differentiation for us as a carrier.

Okay. I'm going to drill down into a couple of specific topics. On the subject of the switcher pool, the promotion that we talked about that you introduced yesterday with which we led off this discussion seems upgrade-focused. And I wanted to ask you if that's the right characterization. And if it is, why not a greater focus on driving additional gross adds with your promotion dollars this quarter?

So again, anything that we're doing is intended to drive across this strategy, which is the 5G adoption strategy. And we've talked about having more than 50% of the base by the end of 2023 on 5G. And that's hugely valuable from us from a network efficiency point of view and from an experience expansion point of view. To do that, you have to bring your base with you because just filling in the top of the hopper with new isn't sufficient. So within the offer that we announced yesterday, there's a great offer for customers who aren't currently on 5G to upgrade into the 5G space, come into our premium tiers, experience some of our incremental value add. But also there's an incremental offer for people who are considering switching, which says upgrade your network experience and come to the best. So we've also, on top of the -- up to $800 on Samsung, up to $700 on iOS, to have that opportunity to be compensated for any switching costs and incremental cost of moving. So it's definitely an and. But the base is going to be so critical in this. As we expand out our 5G offering, we're already over 70 cities in millimeter wave in airports and stadia. More and more of our customers are actually experiencing that ultra-wideband experience every day as people get out and about, start to travel again, et cetera. So that's the trigger for them to say, "Wow. This is amazing. I'm now in the mind to think about upgrading." And so with they're hearing people talk about the experience they've had, so perfect timing for us to bring the base with us as well as continue to perform in the switcher pool, which, as I say, we're doing better than some people might tell you.

Yes. I want to pause on that. I think there has been a legitimate basis for concern that Verizon churn remains best in class, but that Verizon's gross add results have been worse than the industry that in context of a declining overall switcher pool, that Verizon has faced pressure from specifically AT&T incrementally and also a steady amount of pressure from Cable and T-Mobile. And is that a fair characterization? And if so, why doesn't this promotion attempt to [indiscernible] that specific?

So there was a little bit of a breakup, Peter, just at the end of the question. But to the broad point about the size and shape of the switcher pool is the switcher pool in the first quarter was a little shy of 2019 levels. But the non-switcher activity, which was new to the market lines was greater than anyone anticipated. And to be transparent, some of that, it's still unclear where that came from. And so when you say my performance relative, in the switcher pool, which is identifiable customers who have service and are moving from one carrier to another, I'm absolutely performing where I would expect me taking my fair share. The gross additions in Q1 probably had some double counting as businesses started to open again and people maybe took business lines on top. What I need to make sure is that I'm participating in all of the growth that's in the market, which is associated with both base growth and revenue growth. And so the offers that we have in the market today will appeal to people who are considering pre to post migration. They will appeal to people who are on a metered plan today either with me or with one of my competitors. And they will build to those who are already enjoying the benefits of unlimited either with me or with a competitor who haven't yet dived into 5G. So I do think it covers all of those key bases. Within our plans, we've made connected devices more attractive, et cetera. So that growth is also there in the market. But I would always correlate, it's got to be an and, it's got to be base growth and related service revenue growth because that pays earnings per share, that pays dividends that generates the cash for buybacks, that generates the cash from investment. Over the medium term, the 2 things have to move. Yes, there might be disparity quarter-to-quarter. What I'm trying to make sure I do is that the yield on every single dollar that I invest in the market is generating long-term value for investors. And I think we're doing a superior job. But as Hans said, when he was talking at a conference a few weeks ago is it's not like I don't have headroom to invest in the market. I have the flexibility to invest in the market. And we will do that. What I am confident, though, is every dollar we invest in the market will deliver the right yield. And when we talk about things like churn, we continue to enjoy best-in-class churn. Even our performance in May exceeded our own expectations, and that's a market where the switcher pool was greater. So I think making sure that your base is well looked after, high-quality network experience, high-quality service experience and incredible value. Sometimes people describe us as the super-premium carrier. When you look at the value that's embedded our unlimited plans, in many respects, it's the best value in the marketplace on the best network.

On the subject of the -- well, I think I want to quickly comment that many of us appreciate the distinction you just made. Your answer is very helpful in reminding ourselves that there are certain structural attributes of your business that affect your balance of gross adds and net adds, while the update on your performance in the switcher pool is very helpful. Let's go from there to content bundling. You mentioned it earlier in this conversation, and it's been an important driver of plan upgrades and ARPU for a couple of years now. Why should consumers buy these products through Verizon when they're available direct-to-consumer on an ongoing basis? And then talk to us about the role of the 6- to 12-month promotions within those bundles. How should consumers think about what they're really committing to give the limited nature of some of the offerings?

So a key thing here is that we are leaning into trends that already exist in the marketplace. So there is a multiscreen content consumption trend. There is also a cord-cutting and cord-shaving trend. So the insight that we're leveraging on the mobility side is that customers more and more are consuming a range of content on their mobility devices as well as their tablets and other things. So that's first of all, driven by customer insight. Second thing is we're building a business that has the ambition to be a national residential broadband competitor as we roll out our fixed wireless access. So the ability for us to scale our relationship with content providers, where previously, I was a subscale purchaser of content in the Fios footprint in the Northeast, I now have broader relationships, which give me more leverage with those key relationships with the Disneys, the Discoverys, et cetera, of this world. So from a strategy point of view, that helps the whole of our business. And Peter, I know we don't talk much about the Fios business, but the quality of business we're writing in Fios and the yield we're getting per customer is the best ever in Fios' history. And only a part of that is pandemic related. That business is being transformed as customer behavior changes. And we see that with video net adds negative every quarter. Not a bad thing. I was spending $60 to put a $60 content bundle together. So me losing video and then people coming and using mix and match, using the fact that they're also getting wireless content through their wireless relationship is actually helping to fuel the Fios business and is great for fixed wireless access. To the 6- and 12-month, the key there is you get 30 days free of something and you know people are doing it as a promo for their benefit. If you get 6 months or 12 months, you've a proper objective opportunity to see whether or not this is something that you value. And then we give customers the choice of, say, inclusions within our premium tiers, which says, "As well as getting other benefits, you can also get essentially the best pricing on content that you've determined over the 6 to 12 months is something that you genuinely value." And all of our customers are essentially getting wholesaler better pricing for these inclusions because we're using our purchasing power to transfer that value. And customers understand that. If somebody buys a handset for the customer, they pay $1 per dollar. If I can spend $0.50 to give a full dollar of value to a customer, that creates real value for them, but also creates much greater yield and choice for me. So gaming that we just announced the other day is another example. We see this as something that we can move across multiple verticals where our purchasing power and our scale affords us the opportunity to bring better value to our customers on brands and services that they genuinely value. This is not pile them high and sell them cheap. This has brought stuff that customers want and make it accessible and affordable in an intuitive way as they go multiscreen.

You mentioned industry net additions in the first quarter and how very strong they were. And a common topic in discussing your company is the industry net add growth opportunity over the next many years. So I wonder, as you analyze your own business and leaving aside the extraordinary strength of the first quarter, beyond population growth, what are the sustainable drivers of industry net adds from 2021? And if I could pin you down, over the next 3 years, what would your guess be about postpaid phone net adds for the next 3 years on average?

So without getting too forensic about it, I think you have population growth, but you also have the fact that adoption of the first smartphone is getting, relatively speaking, younger and younger. So you have that expansion from an age profiling. The people who are dying in their 90s may not have had a smartphone, but younger and younger people are joining. So it's a doubling effect. It's not just the natural population growth. It's the addressable market age profile is expanding. So that's one factor, and that is important. The second thing is multi-device use. In an expanding economy, you may well see people using a work phone and a personal phone. And so that can be a vector of opportunity as well. And I suspect that some of what we saw in the first quarter, small company formation in the first quarter was at a record level, I think 1.4 million businesses were formed. So I think you'll see that as an expansion. And obviously, I only reported a piece of that in my part of the business. The rest of it would be in Tami's VBG organization. I think the other things that we will see growth in is that there will probably be an evolution for us in the addressable market for the value segment because we don't really participate in the prepaid space to any meaningful extent at the moment. So when I look at us in particular, we see the opportunity in the value segment to grow that segment, not to pre to post migration, but actually bringing more value and more product offering there. When we spoke in March, we also said, which is important is that we thought as drivers of growth that we would see continued double-digit growth in product revenues that sit on top of that connectivity. And as mobile edge computing starts to migrate from B2B into the B2B2C space, I think, in the outer years of those 2 to 3 years, you may well see a growth in other connected devices like those that support AR, VR, other things like that. So I would say it's low single-digit device growth in the classic smartphone space at the bottom end of the single digits. But I think, actually, in meaningful connections that are driving kind of ARPU and ARPA accretion, I think you may see that in the low, mid-single digits in kind of year 2, year 3 as that starts to expand. And of course, for Verizon on top of that is the opening out of the fixed wireless access market, which affords us the opportunity in that space to drive connections, which will particularly accelerate as we get to not just the first 46 PEAs, but then the balance of the Continental U.S.A. with our C-band offering.

So before we get to 5G Home, which I'm restraining myself from asking you about, I wanted to ask a premium value category question, which is, as you discussed earlier in the presentation, much of the flow of industry new subscribers and a significant portion of the gross add flow in the industry is driven by premium value by price-sensitive customers. And it's been where the highest rates of net subscriber growth have been for the last several years. Start Unlimited hasn't been a huge topic in your investor communications since you launched it. And I wonder if it gave you a large enough presence in the category or not.