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

Thanks for joining us. Welcome to the second day of the 51st Annual JPMorgan TMC Conference. I'm Phil Cusick. I follow the communications and media space here. And we're happy to welcome Hans Vestberg, CEO of Verizon.

Thank you. That's correct.

Thank you for joining us.

Thank you for having me.

I believe you have something you need to say?

Yes, safe harbor. I can say some things that might be future-looking, so safe harbor to all of you.

All right.

Really, we're okay?

Happy safe harbor.

Happy safe harbor.

So let's just -- you and I had -- we talked last night and we've talked about 5G and technology for a long time. Maybe let's start with where we are there, and then we'll dig into some other parts of the business. Just where are we in that, in that sort of 5G process that you're thinking about?

So when I think about a wireless era, it's somewhere between 10 to 12 years. They usually have 3 different phases. The first phase is basically when you deploy the technology, takes some 3 to 5 years. And the second part is where you start doing innovation and start on new things and you get advanced on that technology. And then you have the maturity of it. You can say that 4G is in the maturity right now here in the U.S., and 5G is coming into the second phase where you actually started doing 5G Advanced and actually start taking advantage of all the 5G out there. So that's where we are from a technology cycle, and that's why you see -- and I'm not sure how deep you go into, but you see things like slicing coming up. You see new applications that can be used in 5G, especially for enterprises. And for some of you might remember, from the beginning, the design of 5G was very much to see that also enterprises could actually use wireless as their main source of communication, which historically has been other. So that's why you have low latency, enormous throughput. You can connect 1 million devices per square kilometers, which was never the case with 4G. That is all happening right now with 5G Advance, slicing, core networks that can handle 5G and all of that. So that's where we are. So I predict that the next 5 years is the second phase where we're going to see more innovation. We have already seen on the business side. I think consumer side, even though it's not imminent, but the next 5 years, we want to see more on the consumer side from 5G.

So I think 5G suffered somewhat from high expectations early on that didn't really play out?

As any wireless technology.

Exactly. But there is a lot of value of 5G in the business today. So how should we think about what 5G is generating for you today and then how that evolves in the next few years?

Yes. So the whole idea for us when we built our network was that from the data center to the edge of the network, we holistically build that with unified transport, with 1 fiber, fiber in between everything, multi-routers in order to have one stable base in the middle. And then at the access point, we basically -- we provide 5G or fiber or whatever it might be. And already today, we see several use cases on the 5G spectrum we have. First of all, consumers, how many of our customers -- already they have 5G devices. We have plans that include the 5G Ultra Wideband. Then, of course, the killer application today is fixed wireless access. I mean, we use the same technology, same radio base station. It's not a separate network. Almost 400,000 in the first quarter. New subscribers on fixed wireless access. So that's definitely the killer application. And that's not only for consumers, it's also our businesses. Retailers, SMBs are using that as the primary tool for broadband. And then the last piece that we are now seeing as well is private networks, where we actually use our licensed spectrum to build private networks in logistics centers or could be big grocery stores, could be factories, it can be offices. So all 3 of them are now happening. We talked about them for many years ago. They're all 3 happening and they're built on the same infrastructure. So basically, I have 3 business cases on the same infrastructure. That was the whole idea of the strategy, to see that we have the best return on investment on the capital we invested in the network to see that we have as many use cases, as many connections as possible on one invested network.

Now we've talked about fixed wireless as clearly on its way, not there yet, but being a billion-dollar business.

Yes.

What are the other pieces that we're going to see sort of next? Are the other things you've talked about private networks and things like that, are those in that 5-year period being billion-dollar businesses?

Yes, definitely. So the private networks is now starting with private networks. But when you have a private 5G network, you can, in the next step, put in mobile edge compute, meaning cloud services at the edge, which we are partnering with all of them, all the 3 big ones. So that's the next step. And then you start putting application at the private network. So it's a journey. It's a solution-based journey to business-to-business that takes some time. But clearly -- we're clearly in the lead. We were early out with it. We built all the technology together with some of the largest cloud-based companies in the world. So I think that's a journey and we are long term. That's why we built a network. That's why we bought our spectrum in order to see that we can monetize it in a different way. So private 5G network is just a slide-in to get in and then you start adding on that security, mobile edge compute. It could be virtual SD-WAN and things like that on top of it.

And what I'm trying to get to, and I think what investors' concerns are...

Sorry. I never turn off the phone.

That's okay. Right. Me too. I think what investor's concerns are is that this is a mature business, that wireless is a mature business. And they look at consumer and postpaid and what's going to happen and all the competition. But what I'm trying to think about is what is the sustainability of the wireless business in aggregate and being driven by all these other things?

I think the sustainability on wireless business is one of the most important infrastructure you have in any country in our society today. I mean, I think being in wireless is probably the best thing it can be. I mean mobility, broadband and cloud services are the 21st century's infrastructure. That's going to be in every man's, lady's hands over time in order to be part of our society. So no, I don't think -- it might be maturity because everybody has a mobile phone, but innovation is going to continue with wireless technologies. Everything for fixed wireless access, mobile edge compute. We're going to see slices on wireless network in the future where you can think about other slices that is not intended for a device, meaning a mobile device could be something else that is receiving the wireless signal.

Yes. What I'm trying to think about is, given the -- generally has been a lack of excitement about wireless by investors for the last couple of years, I'm trying to think about whether we're in the sort of stable and we can maintain a, let's call it, low single-digit growth industry? Or is there a resurgence in growth coming that could really get people excited? What do you think?

I think it's a lot of excitement, and I think there's a lot of opportunities in wireless. I mean, there's no other industry I would like to be in. I mean this is an industry that will continue to evolve and actually bring new opportunities for everybody involved. So no, I think definitely. And we saw the same -- it was a little bit different than 4G but it was a little bit same in the beginning. So what are you going to do with it? Why do you need this, especially on the consumer side. A lot of doubt? Then of course, we still had on 4G an unpenetrated market. There were people that didn't have a phone but were same questions. And then we suddenly say, wow, this is what 4G can do. I think the same with 5G and still, you're asking what is the killer app. I mean, I said, I've added 400,000 fixed wireless access broadband subscribers in the quarter. And when it comes to our C-Band that we bought 2 years ago, we only have gotten a fraction of it. We have gotten roughly, in 70 markets, 60 megahertz, and we have 160 megahertz in average in more than 400 markets. So we have just started it with this journey. So I think you should be really excited, what we can do with wireless and how we continue to build a very resilient, very strong network to handle all this traffic and see that we actually have innovation at the edge.

And you've been, since the last 5 years, building a fiber network underneath a lot of this mobile. Where are you in that process?

Yes. I think we're a little bit underrated there. How much fiber we built since I came in. I think we were running for a while with 2,000 route miles a quarter on fiber. We have built it in all meaningful places in the country where there's a lot of traffic because my main concern from the beginning is that from the radio base station or for the -- from the edge, you need to have fiber because all the data. So -- and that's why we built our own fiber so we have owner's economics. We basically are now more in success-based fiber, meaning we have gone over the hump, but that goes back to our capital allocation that we talked about. Our CapEx is coming down right now. One of the reason is that we actually built a lot of fiber since 2016, 2017. And right now, it's more success-based fiber where we see, hey, we can do a good return on investment there. So instead of building it ourselves or we build ourselves instead of renting it, that's what we're doing right now. So that's coming down quite a lot for us. But more than 50% of all our radios have our own fiber. And then you would ask yourself, why don't you have the other 50%? Some of them are very rural and fiber is not even needed there. So then you use mini-links or you're actually doing backhaul with satellite. And that is a piece of in between there where actually we have good rental fiber, so it doesn't really make the ROIC or the return on investment calculation worth to actually build our own fiber. So we have come a real far way and I think we're well on the way to how much fiber we have built and how much higher we have. And then adding, of course, our Fios footprint, where is in this area where we're also having a great success, I'm really happy with our Fios investment. But we are on year 20 or something on Fios, I'm not sure, about [ 17, 18 ]. That's how long it takes. And now we're adding first quarter over the fourth quarter, probably 50,000, 60,000 new subs every quarter right now, which is a great pace for us.

Does wireless do better in fiber areas?

Yes. Fiber, yes. I think that ultimately, in high-traffic areas where you have good technology, you do better in general. I've said it a couple of times. If I look where I'm rolling out the C-Band, number one, I get fixed wireless access. I get broadband subscribers. Secondly, the step-ups from our customers and even sort of the gross adds are better where we have the C-Band coming in. That's why you -- I'm not sure if many are following all the press releases we're doing, but we're doing a lot of press releases because every zip code basically that will come out with C-Band, we do a press release. And it's partly for you but it's partly for our own organization because we work much more locally right now. We have decentralized our technology team. We're decentralizing our consumer team so they can take action locally because we have so much demand on fixed wireless access. So our team needs to know. Wow, now we have C-Band. Now we can talk to local authorities. We can go out and market it. We have a backlog of people that have signed up for fixed wireless access. Now we can call them. So proactively can work with them. That's why it's so important with the change in structure we are doing. At the same time, how we're now building the network.

That's a good segue into consumer where you've changed your plans a little bit recently.

Yes, Thursday.

Help us think about the philosophy behind the price change? Was it a price raise? Was it price reduction? What's the sort of overarching view?

So in general, we spend a lot of time thinking about what's our next step. We worked with the mix-and-match for a long time, very successful. But we also understood that the consumer sentiment are changing, and we did a lot of research for quite a while. And I think that we found 3 things. I mean, control was really important for our consumers. Also, value was very important and simplicity. All these 3 together was very important for our customers. And that's why we launched myPlan on Thursday last week, where basically you pick your network solution. And then you can take perks and perks or discounted perks where you can add in what you want per line. You don't need to have Disney+. If you don't want that in a family plan, you can decide. We have different, different line. So it's a much more flexible way of doing it. But we always have our overarching goal, which you would know, it's grow our service revenue and expand our cash flow and EBITDA. So we wouldn't do anything that we see that opportunity, but we put more in the control in the hands of our consumers. Gone in a lot of research in this. The team has done tremendous work. And then just thinking about the backhaul as well. If you have fewer plans that are simpler for us. Also our back office is much easier. Our customer care is much easier for the customer care. So it's both efficient for us but also efficient for our consumers. So I'm really excited about it. I've probably been to, I don't know how many stores I've been to since Thursday, talked to the field force and our associates in the store and how excited they are of the plan, et cetera. So no, I think great work. It comes from a philosophy that I probably talked to you about 10 times, being segmented. This is a market where we have a great base. You see that you keep the base but also that you can bring in new customers, and this is basically how it works.

So I want to take a couple of pieces there. One was you talked about increasing service revenue. So the headline price goes from -- for a single line, $90 to $80, but it's going to be higher revenue. Do you expect, I assume people to take more than 1 perk?

Yes. We expect them to take perks, absolutely, and that we have seen since before. I mean, all the inclusion plans were...

Just give some examples of what those might be, maybe.

The perks?

Yes.

Yes. The one perk is the Disney perk, another is the Apple One perk. Third one could be roaming, international roaming perk. Every perk is $10 and you just click whatever you want. We also have a Walmart perk. We have 9 perks today. And thinking about this start of a platform that can be iterated over time. I can have other perks, going to have other network plans and all of that. So again, we're being in the forefront thinking about the customers being in control. But right now, all perks are $10. And as my colleague and the new head of consumer said recently, in average, we should make some 30% margin on those perks in average. They're a little bit different, of course. So we're not just distributing perks, which are not value to us. They are also accretive to us as well as they're creating our service revenue. And with the base of how the company is operating, that's leverage so it just falls down to the bottom line.

Now you mentioned segmenting the base. So there's a high-end plan and a low-end plan. And so at the start. Now you're going to make this more complicated, all right. So Verizon, I've always thought of a company that did phenomenally well at the high end and didn't really need to address the low end too much. How has that evolved in the last couple of years?

We still do phenomenal well in the high end. We did not do so well in the low end on the postpaid last year. I think in the second quarter was probably a quarter where we did not perform well, even though we actually had more promotions than ever. And of course, very disappointed with that. Then we moved into the second part of '22, and we did a lot of changes, both how we invest with our customers but also being more segmenting, having different models for different segments in the market. We came out with a Welcome plan, for example, which is bring your own device, where we basically got the foot traffic into the store and our store employees so that our consumers get the right offering. So that's how it evolved but we didn't perform well. You have seen in the fourth quarter and the first quarter, our gross adds is now coming up in the consumer. I think first quarter was up 11% year-over-year. So clearly, we are on a movement right now with really good traction. Even our store traffic increased quarter-over-quarter last year. So definitely, we see it moving in the right direction. We want to be financial disciplined. And so we're going to grind this out. I mean, we have a great team that is focused on doing that every day, and myPlan is a next step in that.

Is that 11% increase year-over-year, is that mostly coming from addressing that lower-end segment?

Partly, but also we bring in others as well, but partly, it came from that team, from that segmentation we did. And of course, we -- and that's why you see also that our promotions has come down. And the first quarter, we had less of phone promotions so -- because we have that plan. So it all plays into the overarching target. We have to continue to grow our service revenue and expanding our EBITDA and cash flow. Yes, definitely got the good foot traffic in the stores. We have a high conversion rate in the stores as we came out in the first quarter and even as I reported. The team is doing a great job in the store. And I'm excited to see what's going to happen with myPlan because that comes on the back end of all of this momentum we built up in the second half or the fourth quarter last year and into the first quarter.

Do you think that competition in the industry sort of changed and it took you a while to catch up?