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

Good afternoon, everybody. This is Tim Horan, the cloud and communications analyst here at Oppenheimer. Welcome to what I think is our 22nd or so year of our Tech and Communications Conference, this year, the second in a row that's virtual. And like last year, we are kicking it off with Verizon. It's just a day early this year because we have so many participants. Unfortunately, this is the time that DISH has decided to have their earnings call, so I apologize that for everyone who's kind of double booked here. But hopefully, you can all read that transcript because Matt's going to be much more entertaining and interesting. And with that, Matt, I think you might have an opening safe harbor statement.

Yes. Thanks, Tim, and hello, everyone. Good afternoon. Great to be here as always. But before I get started, just draw your attention to our safe harbor, which can be found on our Investor Relations website. I'm fairly sure we'll probably make some forward-looking statements today, Tim, and obviously, those are subject to risk, so I just draw everyone's attention to them.

We'd better make some forward-looking statements, Matt, or you and I will be out of business. Well, thanks everybody, for joining here. So a great quarter, good momentum. ARPU growth or ARPA growth, sorry, kind of guide is in the 3% to 4% range, I think. Can we talk about what's driving that and is it sustainable?

Yes, absolutely. It's -- as you say, it was a good quarter and some strong revenue growth in there, driven as ARPA increases and it's absolutely sustainable. This is something that we've done for many, many years. The nature of the way we go around those increases has evolved over time. But we've always had that ability to bring a customer in at a certain price point and then step them up to higher levels as we extend the relationship with them. And so that's absolutely something you're seeing play through here at the moment. We had very high step-up rates in the second quarter. Obviously, we may have got some benefit in the second quarter for those, but we'll get a full quarter's worth of billing customers at those stepped-up levels here in 3Q. So good to see customers migrating to premium and then migrating to the -- sorry, migrating to unlimited and then to premium unlimited when they get there. Over 60% of new accounts in the quarter selected premium unlimited as an example. So we certainly have the ability to keep driving ARPA increases. It's a mix of the pricing plan, but also the products that we have that customers are buying from us, whether that be things like our cloud product, our handset protection product, but also some of the value that's coming through from the relationships with some of the content companies that -- some of our customers when they get to year 2, stop paying for their relationship through their Verizon relationship. So there is a long way for us to go here. But what you see us doing is exactly what you heard us talk about at the Investor Day back in March, where Ronan guided consistent ARPA increase, some of that coming from the mix and the core plans customers on and a smaller portion coming from product also growing those segments, too. So absolutely, we expect to see that continue.

And can you talk about maybe some ability to upsell other products and services longer term to kind of keep that going? Do you have a game plan there? Maybe even like hotspot, what percentage of that is there? Would you kind of include fixed wireless and that ability to grow ARPA?

Absolutely. I mean, what it's really about is taking what is a best-in-class relationship with consumers, predominantly talking about here, obviously, businesses has its own path to ARPA growth. But within the consumer side, it's about taking those best-in-class relationships we have and how do we deepen them? So whether that be stepping customers up, whether that be bringing some of this content that we've brought in over the past 2, 3 years now, whether it be some of the products, the cloud product that I mentioned, the handset protection, there's other products in there that may be coming along, absolutely. And then fixed wireless access is another example of how do we bring that best-in-class network experience that customers know us for and give them another opportunity to experience that with us. So absolutely, we think about fixed wireless as being another lever as we grow the ARPA as we go forward here.

That's great, great color. And can you talk about a little bit more what type of ARPU do you get for customers that are really taking these premium products versus a legacy customer base? Just how much of an upsell is it?

Yes. So if you go back to when we introduced Unlimited, you had the customers who had the ability to -- they're buying really large data buckets. They've essentially stepped down to unlimited. That happened within the first 3 to 6 months, the vast majority of customers that could move to unlimited and saved money. And we've obviously worked through that. You see the service revenue growth that we have at this point. So now you have -- you still got a good percentage of people who have the ability to get on -- it's roughly 69% of our consumer base is on an unlimited plan. So we've got 31% of customers who can move from a data plan out to unlimited. And the vast, vast majority of those, it would be a step up in typically something $5 to $10 a month, depending on the current plan the customer's on versus where they go to. And then when you step from the entry-level unlimited to premium unlimited, that's typically $10 a line per month opportunity for us. So significant opportunities ahead of us as we step customers up here. And then you bring additional value and, as we mentioned, things like fixed wireless access, I'm sure we'll talk more about here and other products and services. Customers trust the relationship they have with Verizon. We have the right to talk to our customer base about other products and services that can be part of that. We're scratching the surface today. We think there's more opportunities to come.

Yes, I would agree. And so sorry, how many are on -- what percentage of the base is on the premium unlimited, the highest plan?

It's around, at the end of the second quarter, 27%. So there's significant runway as you think about certainly moving the customers who aren't on unlimited to unlimited. But then even those on unlimited, majority of them on the entry level at the moment. So you've got about 27% on the premium unlimited plan. And by the way, to get to our 5G Ultra Wideband, which is our millimeter-wave and it will be the C-band network, you have to be on one of those premium unlimited plans to get access to that Ultra Wideband Network. So we think there's a significant opportunity to move that 27% up fairly significantly over the course of the next 2 to 3 years.

And Matt, that 27% references that 60% of incremental flow share of taking the premium, is that correct, this last quarter?

The 27% includes that, yes, the -- obviously, a greater number of new customers coming in are immediately going on than the base to be moved up. But we're making good progress getting the base to step up as well.

And do you think COVID has helped that process? I mean, I know in my own household, I've stepped up most of my family members to premium, just because they've become so reliant on it for work and school and everything else.

Well, certainly, consumers and businesses value the quality of their connectivity, whether that be wireline or wireless today more than we did maybe 18 months ago. And so we're certainly seeing some of that. And even as we hopefully get back to a more normal type of activity. Obviously, Delta is maybe slowing that down right now. But as we get back to that, we think people will continue to remember the value, the connectivity experience brings and why having the best connectivity experience matters. So whether that's Verizon wireless, whether that's on the Fios side, et cetera, we think we don't just bring connectivity to our customers, we bring them the best connectivity experience. And we see them wanting to step up, whether that be in wireless, as you mentioned, step out there or whether it be the speed tiers within Fios, we do see customers choosing to step up to the higher tiers over the past 18 months.

And I was just reading an article yesterday, I think it was in the Wall Street Journal, where they were talking about the fires in California, how a lot of people have moved from the cities out to more rural areas here for COVID, and now they're not used to kind of dealing with fires like this.

Right.

But it got me kind of thinking, I know you guys historically were known as having, by far, the best rural wireless network out there. Have you seen a lot of increased usage in some of these rural areas? And is the network able to keep up with it?

Yes. That was one of the questions when we came into the pandemic last year, when we saw the change in the locations of the usage. Not only did usage increase in areas, as you mentioned, but where it was being used changed. We would obviously spend a lot of time densifying the network in urban areas. And then as you say, people weren't commuting into urban areas or if they lived there, some number of them relocated away. So the network performed incredibly well. The team does what they always do. And this is the -- you've heard Kyle talking at Investor Days in the last couple of years about the headroom we have in the network. We're always adding capacity a good 18 months in advance of where we see demand getting there. So when you have a shift in where the network is being used, that capacity exists in the network to be able to handle that. Network's performed incredibly well in urban areas, in rural areas throughout the pandemic. And it's what our customers expect of us, it's what our consumer customers expect of us. And as you mentioned, the wildfires we're seeing out there, it's also what our first responder customers have learned to expect from us. And they know that just like our consumers when they need us most, first responders more so than anyone else, when you need a network most, there's one network you should be on.

And I just have to tell you, personally, I switched over to using my Verizon wireless phone for most of my work calls, and that the voice quality is generally fairly impeccable. And I'm on it probably 10x more per day than I was pre-COVID and I'm sure I'm not the only one out there.

I think we can all relate to that, can't we?

Yes, I think we can. So maybe just talking about subscriber flow share a little bit. What would you like to target and how do you reach that target?

Yes. So in terms of share, it's very simple. We think we should be getting our fair share, which is -- means from a gross add standpoint, we should be getting at least our market share. And so the market will dictate how large the actual -- the flow share is. We saw a nice uptick in the early part of this year, certainly saw that through the second quarter. We'll see if that continues here all the way into the third quarter, especially as we're seeing some of the impact from Delta across the country. So the market will be what the market is. What you should expect from us is that we believe we should get at least our fair share on a gross add basis. And we'll be surgical in our promotions so that we're looking at the opportunities in the marketplace. You saw us do that in the second quarter as foot traffic picked up, as stores are reopening, customers were out there wanting to do things. You saw us bring some promotions to the marketplace to take advantage of that subscriber flow that increased versus what we'd seen over the prior year. So when the opportunity is there, you will see us do the things we need to do to compete effectively and get our fair share.

Got it. So I think you've been coming a little bit below that the last couple of quarters, but basically, you're saying when the economy opens, people want new phones, they go out shopping again. That's when you'll be much more targeted and aggressive in your promotions to kind of improve that?

Yes. No, so when you look at the gross adds in the second quarter, I think we were in line with about where we'd expect to be, maybe a little opportunity to get a point or 2 extra out of that. And we'll obviously look to do that any time that we can. And then also made good -- really good headway on the upgrade side with the customer base as well. So -- but you should see us continue to compete in the marketplace. And we do that off of the base of having the best network experience. That gives us a strong platform which to build our pricing propositions and our promotions.

And would you include your cable wholesale customers and the thinking about the flow share? Or are you thinking about that separately?

Well, the answer's kind of yes and yes. So on the one hand, we want to monetize the network, and there's multiple ways that we can monetize the network. Obviously, we can do that with retail postpaid customers. We can also do that with our wholesale customers. We can also do that by offering LTE Home, for example. So it's -- we talk about our 5 vectors of growth, one of which is network monetization, and we want to absolutely drive as much traffic on the network as possible. I'd like as much of that to be retail activity with the Verizon brand on it, but we're also very happy to be the partner of choice for the larger MSOs out there as they want to make an offering to their customers. So it comes down to, yes, our preference, obviously, is to have the direct relationship, but we also want to monetize the network to the maximum possible extent as well.

When I add up the postpaid phone adds for the industry, I think the last few years, we've been doing like 5 million to 7 million. This year, it looks like we're coming in to like 9 million to 11 million. That's just postpaid phone-only adds. And I know everyone's been asking like what's created this pickup? Do you guys have a little bit more color what's accelerated this overall growth and how sustainable it might be?

Yes. So we look at where that growth is coming from. Certainly, we talked about the switchable. That's certainly a little bit larger this year than it was last year. Pre to postpaid, we don't think, is fundamentally different. And then obviously, there's some other growth out there that everyone is trying to pinpoint exactly what that is. I'd say as you get into the second quarter, we saw enterprise volumes start to pick back up into an area we'd like to see them. Small, medium business also recovering in the second quarter. That's -- excuse me, that's part of the story. But the biggest thing that you're going to see us focus on is, while certainly volumes are an important view on the business for everyone, what we're really focused on is making sure that the gross adds that we're bringing into the Verizon family are ones that drive revenue growth. And I think if you look at the sequential revenue growth in service revenue, not just your last quarter but 3, 4 quarters in a row now, you've seen our focus on value-additive gross adds be coming through in the service revenue line and that continue to be what we stay focused on.

Well, that's a great point. And on that metric, you're doing extremely well on flow share and everything else. Great. Could you talk a little bit more about fixed wireless, kind of where you're at with that? How excited are you about it now? How important can it be to the growth over the next few years?

Yes, I'm very excited about it. I think it continues to be a very significant opportunity for us as we think about the next few years ahead of us. We've talked about how great the LTE network is and it's been obviously a very, very huge part of our success. But when you bring the bandwidth that comes in 5G, it really opens up the opportunity, not just do mobility wirelessly but also to do home broadband wirelessly as well. So as I think about fixed wireless in kind of 3 different buckets, the first is our millimeter-wave bucket and our 5G home internet. That's now in almost 50 markets across the country, continuing to expand the number of open for sale as we build out the millimeter-wave network. The second piece that's in market today is our 4G Home, which we launched late last year. It's now available in over 200 markets in every -- in parts of all 50 states. So we recently doubled the amount of the size of the footprint that our 4G Home is available. And then it comes back to my comment on to the previous questions around monetizing the network that we've built and where we have the capacity in addition to our Mobility customers to offer the LTE Home product. We're doing that. We're seeing good take rates on that. Customers are seeing great performance on it. And then last month, we upgraded the hardware, you think the router that customers get. So it doesn't just support LTE Home, it's also got C-band in it. So as soon as we turn the C-band network on, that customer can upgrade to 5G Home on C-band without having to change out hardware. So we're excited that we're starting to populate the base of LTE Home customers with customers that already have a C-band-ready device and C-band being the third one of the levers here within fixed wireless access. So excited about the opportunity that will kick in when we turn C-band on later this year. But fixed wireless access gives us the opportunity to monetize the network in a way that we haven't previously been able to, where we can offer not just mobility solutions for our consumers but also home broadband and also for businesses as well. We talk about fixed -- LTE Home, but we also have the similar product in 5G Home for business as well. You think 5G office the same way. So it gives us the opportunity to take that network that you built out mobility and yet monetize it with another use case. We're just scratching the surface here, and I think the next few years are going to be very exciting for us on fixed wireless access.

One of your competitors said the demand for their fixed wireless access product is extremely, extremely strong. I think they almost have to throttle it back a little bit. And I'm assuming you can almost add customers yourself at will, obviously funneling it in at the right price point. Can you talk about the overall demand maybe and what type of price do you think is -- makes the most sense?