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

Good morning and welcome to Citi's 2023 Communications, Media and Entertainment Conference. For those of you I haven't met, I'm Mike Rollins, and I cover communication services and infrastructure for Citi. Since this is our first keynote, let me also take the opportunity to wish you a Happy New Year, and thank you for joining us for our conference today. Before we get started, I'd like to mention that we do have disclosures available at the registration desk and on the Citi's Velocity page from which we're streaming the audio. We're also going to work to incorporate your questions into today's session. [Operator Instructions] And finally, continuing with the tradition of using our live surveys. They're completely anonymous. We're not tracking responses. We're just aggregating the results. You can access the live pool and Q&A, both with the codes that are up here, and there's placards around. I just encourage you to log in now, so you can get ready to respond to some of our -- where I hope are going to be some really good survey questions. And it's also available on the streaming site as well. So with that out of the way, I'd like to welcome back Hans Vestberg, Chairman and CEO of Verizon; and Kyle Malady, President of Global Networks and Technology. Hans, Kyle, thank you both for joining today.

Thank you very much.

Thank you.

Well, so we've turned the calendar to the new year. It always seems like a couple of days ago. So as you're now thinking about the year to come, can you just give us a high-level perspective of the strategy, the priorities? And are there any notable changes in your objectives from the past year?

First of all, we need to announce the safe harbor statement. Anything that Kyle might say, in fact, going to be forward looking and it goes for me as well so as you might be aware about. If you look into '23, I think a couple of things we're already changing. Kyle and I talked a little bit about our technology or not that is actually changing going into '23 compared to previous 5, 6 years. So we did talk about that. When cost to the other businesses. I think that, first of all, the mobility and especially on the consumer side, we have done quite a lot in the last 2 quarters as many of you knows we were -- where I was not really happy with our performance at the end of the first quarter. And of course, then that trickled into the second quarter. We started to take actions in the third quarter being a little bit more agile moving into the software segments that we had. We continued that work in the fourth quarter. So you're going to see us being more agile. You're going to see us being even more focused in certain segments. Remember now, we are all the way from the lifeline with the TracFone brands all the way up to the premium brands. So we're actually covering all the consumer segments. Our job is going to be even do smarter, more surgical actions in the different segments. You see that we retain our customers, but we also acquired the customers that we want to have, ultimately, with the goal of cash generation. That's number 1 for us. I mean we really think that it's super important in wireless revenue growth or wireless service revenue growth and EBITDA expansion or cash flow expansion. That's really where it boils out. So you're going to see us be more on that side. Then I think a couple of other things that we already have started merging in '22, I mean, the national broadband, of course, both with Fios and fixed wireless access is really doing well for us. That's a strategy we outlined 5 years ago, starting to be in fruit right now. The third quarter, you might remember, we had way over 300,000 new net adds on broadband. We continue with a good journey in the fourth quarter. Of course, I'm going to disclose the numbers when we meet in 3 weeks from now, but feel really good about that. And finally, we start to getting the traction. We talked about private 5G networks, mobile edge compute. Maybe the deals are small, but this year, we're going to get a lot of deals and that's going to be a great base for our sort of platform for us to grow with enterprise customers over time. So I think we have a strategy, but we're actually tweaking a little bit, being more surgical. I think, as I said, when we kicked off last year, we have all the assets where now this -- the spectrum, we have the network. We have built a network of 5 years. We have TracFones. We actually divested Verizon Media Group. So we're much cleaner what we're doing, and on top of that, we're going to see us doing more cost efforts this year. We announced it in the third quarter. So yes, it's quite a lot of differences we're doing this year, but the core strategy is the same. It's more how we tweak it and go faster in certain areas and actually changed a little bit focused in certain areas. Maybe you should say something about the technology...

Yes. So consistent with what Hans says here, we're going to -- we're tweaking our build a little bit. So for the last bunch of years, we've been building a lot of fiber outside of our footprint as well as inside of our footprint. We've also been really bolstering our core network to handle massive amounts of data in the cores and been focused a lot on millimeter wave build. All 3 of those things are starting to come to the end of the build process, if you will, right? So in our OneFiber markets, we are roughly 80% done with our core builds there. So now it's just a matter of hooking things up to it. Our millimeter wave, we're over 40,000 nodes. And now that millimeter wave technology turns into a tool for RF engineers to use in hotspots that they have and C-Band. So we continue to build the C-Band out. But the 3 major programs coming down and C-Band still continuing to roll allows us to take CapEx out of our program overall. So we're going to be less CapEx intensive going forward. Then the other thing that the tweak -- the other major tweak that we're making and Hans said, it's getting -- we're getting more local. When we were doing all this build, it was -- we consolidated a lot of things so we could bring a lot of scale. Now it's really about optimizing, and so we're having -- we have a close focus at the local level along with our sales counterparts and the BAU to make sure we're taking care of issues at a local level and servicing the customers in that way.

And you can say also that on the consumer side, as I'm also running the consumer business, we are doing the same thing. We are in a moment right now when we go more local with and executing more locally, both with branding, marketing, but also execution in hand-in-hand with our team in technology. So this is a pivot for the next step for us, been centralized for a while, and now we go local as the network has come so far with the coverage. We're now more in revenue optimization, capacity enhancements, and we have built everything, as Kyle said, from the data center to the edge we've built now with fiber, redundancy, multi-edge routers. And now at the edge, we can decide what type of business we're doing with different type of customers. I think this was a dream that I had when I started at Verizon in 2017. We 2 drove up this Verizon Intelligence Edge network, and now we're there. And that's why we're also going to see quite dramatic reduction on CapEx. And it's not because we're not doing everything we want to do, it's just that we have now built this. We still going to have, in 2023, a piece left of the $10 billion that we added when we bought the C-Band in CapEx. But ultimately, we're now coming down to a BAU that is pre-2015, 2014 levels in absolute number. And '24, we should be done with that. So we only have BAU. So clearly, this has been a strategy for a long time. We have the best network. It's just going to get better with the work we're doing. And later this year, we want to get all the spectrum we need, 160 megahertz on C-Band, covering the whole nation. And in the first quarter, Kyle has not only promised, he has guaranteed, we're going to pass 200 million POPs on the C-Band as well. Isn't that right, Kyle?

That's correct, Hans.

And just maybe finishing the topic on the BAU CapEx. So the goal -- remind us, the goal for -- was it 2024 BAU CapEx is?

Around $17 billion, somewhere there. That's where we're aiming for. It could be $17.5 million or something, but around that number is a BAU that probably is going to be the lowest capital intensity in the industry -- in the world when it comes to divided by the revenue. And again, we have built a network that is so smart. That was the whole intention from the beginning. That will, of course, unleash capital for us. And cash flow, again, remember what we have measured on ourselves is the service revenue and the cash flow. That's really -- and especially going into this year, it's going to be even more important for us.

And so maybe just rounding out one more part of the discussion on this. While we're just talking about CapEx and investment, what are the things that could cause you to want to spend more than BAU CapEx in the future? Is it to go more fixed wireless bigger, broader? Is it more fiber? Are there things, though, that are on the whiteboard somewhere where, okay, here's BAU, but here are things that we should just be mindful of that you might do in the future.

It would be something like when we did when we bought the C-Band. It has to be something that's very clear to the market why we're increasing. I think we have discussed this every time, and I will have Kyle helping me out here, but we have talked about the 4 million to 5 million fixed wireless access broadband customers as a goalpost for us. The network will handle that. We build it once. We use it once. There might be many, many years out a conversation when, hey, do we split cells and do unique fixed wireless access solutions. That's not in the plans for the next 4, 5 years. But after that, it might be that we come back and say, "Hey, it's a great opportunity. We split 10 cells here because we can get more subscribers." I think that's going to be a great conversation, and it's going to be sort of success-based fixed wireless access as we do Fios today.

It will be -- I think it would be opportunistic, really, right? I mean, like we did last year, if you remember, we spent some money, and we opened up 30 more markets for C-Band past the 46 that we had. We were able to invest and clear those quickly. So now we have those launched. So between now and when we get the full cadre of spectrum, if there's some opportunities like that, that allow us to accelerate and grab revenue quicker, then that's something that we'd absolutely look at, just like we do with Fios.

So we'll jump into the consumer business in just a moment, but let's queue up our first survey question. So the first live survey question...

Yes, I [indiscernible] with Kyle.

Yes, you guys are...

We get to vote as well?

You get to vote, yes. So we can get a placard up here. It's right up here. You could log in. And it should be visible now on our streaming site as well. I already see responses starting to come in. So the question is, what do you expect for Verizon's postpaid phone net adds in 2023? And the choices are less than equal to 0, over 0 to 500,000, over 500,000 to 1 million and over 1 million. So we're going to get those responses coming in. We're going to start talking about consumer. We'll get back to the results. So Hans, you've taken over consumer recently. What can investors expect from your leadership of consumer? And what are the changes trying to solve for? Ultimately, what's the end goal of these changes?

I think a couple of things, which we -- you already have seen coming into the market. We will -- first of all, from an offering point of view, we will be much more segmented to go for segments that we see that we are not performing well. And you have seen the Welcome 30 to Welcome 25 coming out with bring your own device, a special offering in a segment of the postpaid segments. The other thing we're going to see is also a harmonization more on the operations between the network and between the consumer business. And you also will see us combining our consumer investment. When I say consumer investment, it's everything from media to above-the-line promotions, below-the-line retention. And we're going to be much quicker on using that money instead of locking it up for longer times because the consumer sentiment has changed a little bit. So it's going much faster for them to change. We have been a little bit slow in some of those areas. So now we combine all that money in order to be quicker. As we saw in the fourth quarter, for example, we used a little bit more to media than we're actually with the spend because it was smarter than using in promos. And that is what you're going to see from us, much more agile decision-making, using the regionalization right now and being closer to the markets and having actually a decision taken a little bit lower down in organization. That's what you're going to see from us, but you can bet we will be disciplined. We're going to be focused on our cash flow and see that we get the right customers. We're not going to throw ourselves after the net adds that is not giving us the right quality and the right return on investments. That's not the main goal here. The main goal is service revenue. ARPA growth is very important for us. You saw in the third quarter how much we grew on that. That's important to us, and that is creating bottom line, at the same time, taking out costs so we get leverage on our scale. And don't forget, when you answered the question, which you've already done, our business side is doing pretty well. We have 6 consecutive quarters or 5 consecutive quarters over 150,000 subscribers, and they continue well. So we're taking there. So it's more about where do I take my subscribers, where are they giving my best return on investment. That's one process for us. Kyle is working a lot with me right now in the operation with stores and how we plan with incentives. You'd say commissions, but I think it's the same thing, yes? In the stores and how we are tweaking that up, harmonizing it with the overall. So that's what you're going to see from me leading the consumer business together with guys like Kyle, and of course, the existing management team of consumer.

And as you look at the fourth quarter promotional environment, can you frame what you saw? Verizon had a goal of getting back to positive in consumer? How do you do? And is there a significant amount of spillover? You raised the whole issue of iPhone inventory. Is there going to be a spillover from 4Q to 1Q?

So when it comes to the consumer net adds, I was going to say one thing. We were positive. I'm not going to go into the details because I have my earnings call, but we were positive in the fourth quarter, as we said, we should be. Team did a good work. When it comes to the promotional environment, it's always a little bit elevated for the holiday season. So that's nothing. But it was nothing unusually higher this time. We try to, as usual, be as disciplined as we could and go into certain segments. There were some choppiness in supply from one OEM, which you probably know who it is, but they sorted it out. So there is basically no spillover right now, at least for us. We had a good supply. We had a good collaboration with the OEMs. There were days that were complicated lead times, but we sorted that out. It was a very short time. So yes, that was good.

Let's go to the results of the survey, and we've gotten some good response rates here. So I'll read you the percentages and the answers. And for those online, you can see the graph there. So 15%, less than or equal to 0. This is for postpaid phone net adds in 2023. 65%, 0 to 500,000. 21%, over 500,000 to 1 million, and 0 was over 1 million. So how do you think about these -- the response from our clients?

Yes. What you are saying is their vote. My focus again is going to be generating service revenue growth. That's going to be the #1. One measurement is, of course, getting new customers. But you can step up. You can do ARPA. Remember, we have talked about this so many times. Our job -- and when we ended the third quarter, we had 41% of our customers on -- in postpaid on unlimited premium. I mean every step up that we do every quarter with 2%, that's far more important from a ROIC point of view than actually taking a new net adds. You can just make the calculation and you do them all the time. You know how much it cost, the new net adds, with promos and compared to do a step up. So again, you need to be smart in a market where it's a subscription-based model. That's what we have in front of us. It's one of the best subscription models in the world. You need to be smart, how you spend your money. Are you putting it on promos you get net adds? Are you doing the retention? Or are you doing it for step-ups? All the time, be more sure. Again, it's a financial game here. I know that some are very focused on the net adds as the main driver. It's not the main driver for the survey. It's one driver. So I think that's going to -- you're going to see from us. So I think the response are great, guys. We're going to see we're going up. Kyle, do you have a comment on it?

No, I'm not. That's -- I'm not gambling on that one.

Let's go to our second survey, and then we're going to come back and talk about the network while we get the responses. So the second question we're going to ask our audience, does Verizon need to reduce wireless postpaid service pricing at the risk of ARPU to improve volume growth? And your choices are no, yes and maybe.

And maybe.

But tiering and upselling can offset the base pricing changes. So we're going to let our audience respond to that. Kyle, coming back to you for a moment. In terms of network performance, can you talk about what you're seeing with the use of mid-band 5G? And is there a clear difference in usage and customer growth in the markets that have the C-Band versus the markets that don't have the C-Band?

We're getting great feedback on the performance of our C-Band. I mean, for me, being in the industry for such a long time and just having the ability, the Board given us the wherewithal to obtain the spectrum that we actually call -- is generational spectrum. And we've never been able to put this amount of spectrum in play for our customers, and the uptake has been great. Our usage growth in the markets. So we have C-Band is up quite a lot. And to the point now where C-Band usage overall is 15% to 20% of our overall usage, and we only have it going in 46% of our market. So we see average users using it more when they have Ultra Wideband, and we're getting great feedback on it. So the other thing that's really unique about it is, really the C-Band that we're putting in play now as opposed to LTE and low-band spectrum, which is just for mobility, this spectrum swath is really mixed use, right? So we're doing both home and mobility as well as millimeter wave. We're treating it the same way. So all of our Ultra Wideband spectrum is being used for both. We're seeing just what we expected, frankly, in terms of fixed wireless access usage and have it -- it is more than a traditional mobile customer, but also the time of day when people use it the most is offset. So we feel, from an engineering perspective, we're doing a good job, fully utilizing the asset. And I'm just -- frankly, I'm really excited that the -- also the Board gave us the wherewithal to get the new 30 markets up and running quicker. We're going to be really aggressive this year, bringing more and more online. And then I just can't wait until we can turn the switch on. I guess, it will be January 1 next year when we can bring the full complement of the C-Band to bear. But right now, we couldn't be any happy with how this is going.

And just adding to that. I mean from a consumer point of view, we see a greater pickup on step-ups and things like that in the market where we have the C-Band deployed. And remember, we only have 30 plus 42, 72 markets, I think, that has the C-Band today. Of course, they're populated because they're going to pass 200 million, but there's 402 markets where we have the spectrum. So there's plenty of markets left to be done. And that's also when you see our -- the skew on our fixed wireless access is much more on urban and suburban because that's where we deploy the C-Band right now. But of course, over time, not too far away, we're going to have also C-Band in some places more than 200 megahertz. So -- and we see actually the correlation there. So -- and then finally, I think everything that Kyle has built right now, we are prepared just to hang the radios, meaning we don't need to go out there again, adding 40 more megahertz or 60 megahertz. We have prepared them in places even prepared with 200 megahertz where we need 200 megahertz.

And I'll come back to the step-up point in a moment on the ARPU side, but let's get to the survey results and share what we saw from our audiences perspective on does Verizon need to reduce wireless postpaid service pricing at the risk of ARPU to improve volume growth. 28% said, no; 41%, yes; and 31%, maybe. But up-tiering and upselling can offset base pricing changes. So Hans, you mentioned earlier the importance of wireless service revenue growth. Can you talk about how Verizon is charting the path forward with the volume, with the ARPU up tiering that you're doing? And how price comes into play in terms of the competitive landscape?

I think that my answer would be no. But when we're going to segment in certain areas, we might be a little bit softer, and we need to have more competitive offerings. And we're going to have it, but we're still going to preserve our premium, and we're going to preserve the growth of our service revenue. So -- and remember, sometimes we talk only about consumer, but we have over 45% market share on the business-to-business and wireless as well. So we work the whole system constantly to have the right pricing. But very clearly, we're going to continue to see that we have premium brands, and remember, we have different type of churns in different segments of the market where we don't need to do much. Others, we need to do much. Usually, we have high churn in the higher segments. In the lower postpaid, we have been a little bit softer. That's where we need to do plans like we did right now with the Welcome 25, for example, which is bring your own device, see that you get away from the promotion. So again, think about the consumer investments. Again, you take money from the promo and you can actually do it on something else, and the return on investment is better and the lifetime cycle of the customers is even better and then the churn is improving as well. So you just need with surgical, but saying that we're going to do price reduction across the border, I mean that I think is just irresponsible and not really thinking about the business you're running. And we don't need to do it, but there are areas we need to be better for sure. And we will be aggressive in those. We come in, in the market and go out in the market in certain places. We're going to continue with doing that as well. So I think that's going to be our strategy, and that you're going to see us be more agile and more sort of surgical in that.