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

Good morning, everyone. I'm Sebastiano Petti, and I cover the telecom, cable and satellite space for JPMorgan. I want to welcome Hans Vestberg, Chairman and CEO of Verizon. Hans, thanks for joining us today.

Thank you so much for having me. And why don't I start with the safe harbor? I'm definitely going to say something future-looking. So just take a look at the safe harbor and you know what to do. That was the public statement.

All right. That was a good one.

That was a good one, yes. Thank you.

So now we got the important -- this important stuff is out of the way there, Hans, there's a lot going on at Verizon these days in terms of the pending Frontier acquisition, evolving product solutions in the wireless, broadband, consumer and business and the brand refresh. So where are you spending most of your time these days? What are your biggest near-term priorities as you position Verizon for the next decade plus?

So right now, I guess I spend the majority of my time on product and solutions that we're launching and seeing that they are rightfully designed and have the right pull-through; secondly, work a lot with the capital allocation priorities as we're preparing for our next step when it comes to capital allocation. We will probably come back to that. And thirdly, of course, we are preparing for the pending acquisition of Frontier. I think that's where I spend the majority of my time because all of them are important for our future, important for our continued growth on revenue and EBITDA and cash flow expansion. So that's where I spend majority of my time together with my team, of course.

Great. And in early April, you announced the third phase of the Verizon Consumer Group transformation, which is the 3-year price lock. So a couple of things to touch on there. First, how does the Verizon guarantee value proposition stand out in the marketplace?

Yes. So for some of you that remember that now we talk about consumer wireless postpaid first. We came out there in '23 and started to do a lot of research with our consumers, basically came out with a lot around flexibility, but also control over the bill and getting more value. That was sort of the 3 themes we saw. We came out with myPlan, which some of you know is a very modular way of selling consumer wireless. Basically, you pick whatever wireless plan you want for connectivity, then we have all our perks that you can add all streaming services on wireless exclusive to us. And then you have all the adjacent services from insurance to credit card, the latest high-yield savings account with Openbank. All that is sort of what we call the consumer offering framework. And we saw a really good tick-up, and I think it's the fastest-growing consumer postpaid product we ever had, myPlan, over 50% of our customers in a very short time have myPlan. The next step was sort of what we announced in April was 2 things. One was the 3-year price lock on myPlan and myHome. myHome is for broadband, very similar to myPlan. And then we also had any phone trading guarantee for new and existing customers. And that was sort of a next evolution of where we are in our consumer wireless. And we have to say, when we came out on the first quarter, we said that we had basically double-digit gross adds, and that was the 22nd of April. I can continue to say that we have a very good gross adds growth, double-digit continues. At the same time, you might remember what I said after the first quarter, our churn on postpaid was elevated, mainly because our last price-ups was a little bit higher than expected. And as I said, after the first quarter as well, we believe that churn will normalize in the second half of 2025. But good traction on the program and the new offerings, which I'm pleased to see. So that's postpaid wireless performance. But all in all, in a market where the majority of the U.S. population has a mobile phone, it becomes very important with the right offering and the right service and the right brand together with the best network. I think that's how we compete, and I think we're competing better than ever.

Got it. And then I guess maybe thinking about why the price lag, why is this the right strategy as you think about the competitive backdrop and...

I think the backdrop was -- I mean, it was a coincidence that we also, of course, had a little bit of consumer sentiment declining because we had been planning for that for quite a while. So no, it was a good time because we have, for a while on consumer postpaid, been doing some price increases. As we went into 5G Ultra Wideband, we saw the performance in our investments. And so we had done some price increases in several places, together also with trying to get some customers off some old plans because that's efficiency for both the customer and us. So it was a good moment to get there. And as said, I mean, now we have 50% on myPlan that has a price lock. We still have 50% that doesn't have it. We also have all our perks that we can continue to grow. We have all the adjacent services. So we feel that we still have a good way to continue to grow our business, our service revenue on postpaid wireless. Then when we come to prepaid, we come to the business side and come to broadband, more areas where we have great opportunities to continue to grow and been proving the last couple of quarters that we're really performing well in those as well.

Great. All right. So sticking with wireless for a moment here. While there's been a lot of focus on gross adds and switching, you did talk about the double-digit growth in Consumer in April continuing. Tony touched upon the performance continued to be strong at the time of the earnings call. Churn has been more elevated than we expected coming into the year. Part of that is market-driven, but you also said somewhat idiosyncratic as it pertains to the price increase. So I guess, help us think about even before the 3-year price lock launch, gross add momentum had been improving within the business. I guess you had talked about stores, promos, some of that momentum and then now the price lock perhaps somewhat more additive. So how do we think about the BAU go-to-market strategy and, I guess, blocking and tackling in addition?

No, I think that on the wireless side, we work very much with segmented growth. We have some 8, 9 different brands in order to address the full market on wireless. As you saw, our prepaid brands are doing really well. First quarter was just very, very good. First time we're really in the green on growth on prepaid. And again, it's -- we have a portfolio and a strategy right now that appeals to any segment of the market when it comes to wireless offering, all the way from Lifeline, which is the government subsidized plans to, of course, the ultra-premium Verizon plans. And that is the go-to-market. I mean our new brands like Total Wireless where we open almost 3 new doors a day is, of course, performing well, addressing a segment where just in between postpaid and high prepaid. So I think we have segmented up all the brands. We have defined the brand and the segments in a good way and that we now see performing well. We have also changed our incentive structures for our distribution. We have done a lot of changes, and that's why we see the performance improving a lot. And then we add now also the opportunity of convergence happening across the distribution with fixed wireless access and Fios. And nowadays, after 25 years, basically, we have also Fios in the stores because for 24 years, 24.5 years, Fios was sort of separated. Nowadays, in our ILEC, we can offer both Fios and wireless in the store, which helps a lot with the convergence. And as we said when we reported the first quarter, where we continue to take market share on broadband, the vast majority of all the new broadband customers, we had almost 340,000 in the quarter, new broadband customers, the vast majority was converged customers. They had wireless or they bought wireless at the same time. So we see this working. And the great news for us is that we have owner's economics on wireless and broadband. We have owner's economics on the wireless, on our fixed wireless access and our Fios. We own the whole network. We own all the fiber. So that's going to be a competitive advantage in a market where the majority of the customers, business or consumer have mobility and broadband services. And if you can offer the convergence and a good experience on that, that's going to be the key because, ultimately, our focus is to continue to grow our service revenue. I mean this is one of the best subscription-based service businesses in the world, I would say. And that's what our focus is. If we can grow the service revenue, it's going to fall down to the bottom line. And you see the leverage in the fourth quarter -- first quarter with a 4% EBITDA growth and a very strong cash flow. I think it was up 37%, many numbers now, but I think that was correct. So you see the leverage coming when the growth is coming. We had 2.7% growth on service revenue in the first quarter. So I think everything comes together in the strategy that we have and the sentiment in the market. Then we need to execute. There's a lot of competition out there. Everyone want to beat us. But I think we're standing stronger and taller than we have done in a long, long time, and the team is doing a tremendous work.

Great. I think just closing...

I went over a couple of things there for you, so it helped you.

Yes, thank you. Yes, checking a lot of boxes here on my sheet. So as we think about -- I think that we can -- we discussed this yesterday, but I think expectations for churn to get back to BAU levels...

Second half, yes.

Yes. And then I think just over time as well, I think Sampath has said, trying to return to be a leader in the industry in terms of churn. But I guess, how do you balance that against the focus you just touched upon in terms of service revenue? Because the 3-year price lock, while you do have myPlan selling in some of these good guys from a benefit, you do also -- this industry has relied on price. So how do you balance those 2? I guess, what gives you the confidence in churn improving in the back half and into next year against your maybe pricing strategy taking rate on legacy plans and what have you?

So there are so many levers there included, and we are in very different momentum in different businesses. I mean in Consumer, we have the last couple of years, basically, grow our service revenue with prices, the majority, and volumes has been a smaller portion. Now we're trying to rebalance that. On the Business side, it's been basically the opposite. We have constantly added new customers in our Business segment over, I don't know, 6, 7 quarters, even longer. First quarter was a little bit weaker, but that was a very clear reason for that. We can come back to that. And they have done less of price increases. On prepaid, we basically have not done any price increases. They have only volume. So you need to balance out what is happening. And something I think we need to be important for the investors to understand, when you have a segmented growth that we have all the way on the wireless side for consumer, all the way from Lifeline to the ultra-premium Verizon, they are segmented also what you give to the customers. So the profitability can be very similar on all these. I mean a prepaid customer is fantastic. They pay in advance, and they have some limitation how much they can use. So I think when I think about it, I think about every customer, every connection should be profitable for us, and they should be accretive. And if they are that, it doesn't matter to me if they're prepaid or if they're postpaid or if it's SMB, et cetera. The market is very focused on postpaid, enormously focused on that. But for me, my measurement and my team's measurement is service revenue growth, EBITDA and cash flow expansion. And then net adds on consumer wireless is just one indicator along hundreds of indicators that I need to manage, but it's only 3 that we're 100% focused and the whole team and the thousands of people of Verizon are incentivized on, and that's the service revenue growth and then EBITDA and cash flow expansion.

So adding it all up, we touched on gross add activity in the second quarter, your outlook on churn, but you do have guidance or expectations out there for...

Yes, I have a guidance.

Yes, 2025 postpaid -- consumer postpaid phones ahead of 2024 level. But I guess...

The guidance is that we're going to do better, yes.

Yes, yes. And so I guess...

I'm not sure that is a strong one, but we're going to do better, I promise you.

Okay. Well, there you go. Let me check the box there. I guess just -- so -- but higher gross adds, higher churn, but you still have confidence in getting there.

Yes.

Got it. Okay. Now skipping to broadband, you have accelerated the fiber build pace in Fios to 650,000. Expectation is that level in 2025. And you're running ahead of plan, I think you touched on it on the 1Q call. Why not go even faster? Is it a function of just lower returns in the Fios footprint versus what you think you can unlock in Frontier?

I think on the Fios, we have been running for quite a while on 400,000, 450,000 open for sale every year. Now we've increased that to 650,000 this year. I think we are disciplined with our capital. We want to see the return on investment on fiber because the fiber return on investment is quite long time given the cost of deploying fiber. What has happened the last couple of years is that, first of all, we are more efficient to deploy fiber. So that means we have reduced the cost. Secondly, we can do more with less. And then the equipment is coming down and the technology is improving. So that's why we have good return, even increasing to 650,000 OFS. If we would see more opportunities in our ILEC to grow our Fios and with good returns, we will continue or increase for sure. So it's a little bit of the machine ramping up. But clearly, the product is great. Our churn is very low on Fios. I used to say, when I have churn on Fios, somebody is moving to another neighborhood and they need to disconnect. That's how great the product is. And so that's where we are on that. And so we will continue to see the opportunity on Fios. But clearly, the cost economics of deploying Fios is improving, even though because if you go from Tier 1 market or Tier 2 market, of course, it's more expensive to go to a house in Tier 2 or Tier 3 because of the distance and et cetera. So it's going to be more costly. But as the improvements are coming on cost at the same time, then we can start penetrating further out in our ILEC.

As you think about those cost improvements and if the returns do make sense, pro forma for Frontier, would you be willing to accelerate the build even if it means taking leverage higher or using your balance sheet to get there?

That's a good question. I've been a little bit stubborn on this one, not commenting much. I go back to what I said when we announced the Frontier acquisition, which, by the way, I think is fantastic, but we are in the regulatory process for approval. We're going to do plus, plus -- remember, plus 1 million OFS a year for sure. But I want to combine everything before I come out to the market, knowing how much I'm going to do, what is the capital allocation, what are the revenues we are planning for it and how we're going to report it. I want to have that in -- how we're going to operate. I want that in one package. And that package, I will come out with when I'm closer or have better visibility of when this is going to be closed and we're going to have Frontier with us. So stay tuned, but plus 1, not 1, it's plus 1. It's very important with the plus before. So we will come back with that. But clearly, where we're going to see opportunities, we capture them. And I always remind people or investors when we acquired the C-Band spectrum, of course, when you get an asset, you want to monetize it as soon as possible, but it also comes with some responsibilities for guys like me that is just not deploying capital without seeing opportunities increasing for us. So that's why I want to see all that coming together in one.

Yes. Okay. So 1 million...

Plus.

Plus. All right. And so yes, you did also kind of touch on -- we also did kind of touch on again last night with the MDU launch. You're live -- the MDU FWA launch. So you're live in 15 markets today and expected to roll that out over the year in both the Consumer and Business segments. I mean, how meaningful of a contributor could this be, Hans? Coupled with the expanded C-Band coverage, greater emphasis on converged bundles, could we see a reacceleration in total FWA adds as we maybe enter -- as we go into next year?

Yes. So the answer is yes. So our FWA performance has been extraordinary. I mean we have been, together with Fios, we have been between 350,000 and 400,000 net adds every quarter now for a long, long time, meaning we're taking market share like a lot in the market right now on broadband. I said already in the third quarter last year that we're going to have a little bit lower net adds on fixed wireless access because the C-Band that we're deploying right now, the mid-band spectrum, the priority is mobility. And now that goes to Tier 2 markets and Tier 3 markets. That means, of course, there are less -- there's a lower volume open for sale on fixed wireless access when you get there. So it's more technical than anything else. So we're going to see a little bit lower, and that's -- we had 339,000 net adds in the quarter. But the things that is now going to be different, first of all, we're going to continue with the C-Band deployment. We have the MDU solution where we can address multi-dwelling units with fixed wireless access with a unique solution that actually we have invented. That's going to add. And then we're ramping up Fios. All that together, of course, is going to give us even greater opportunity on broadband and convergence going forward. And then, of course, adding to that Frontier when it comes, that's very important thing. So fixed wireless access, still fantastic NPS. Customer just loves it, how easy it is. We're improving the device. We are improving the qualification. We're doing a lot still. Churn is higher than Fios because I mean it's a new product, but we constantly are improving it. So it's an important product in the portfolio and high -- we have, as I said in the first quarter, very high convergence on fixed wireless access and wireless.

And the main, obviously, area of debate, I guess, within the ecosystem is just usage on FWA and taxing the network. Can you remind us what some more recent stats I think you guys have put out on that and how you're thinking about that?

Yes. So we give out the connection report, consumer connection report, something like that, yes, I don't remember the name, every 6 months. The last one we came out, we talked about broadband growth. The broadband growth in the network is some 6% right now. A user of Fios or fiber versus a user on fixed wireless access, they use equally much. There's no difference. They are the same type of customers. They just have a different view on what type of solution they want to have, which historically, people -- or I'm not sure people, but some believe that fixed wireless access was for people not using broadband. That's not right. They use equally much as anybody else. And they have equally many screens, they have equally much computers and gaming at the same time as a Fios user. So that's a -- so when you see the growth -- and of course, the growth, what we see in front of us in broadband, we don't see any super spike again as when you saw some of the gaming, et cetera. The only thing that can really rocket if we're going to see some new emerging virtual realities that's going to take a lot of broadband capacity. We haven't seen it yet. So that's how we see on the performance and the growth on the capacity in the network. Remember, we built the One Fiber in 2017 to '22, where basically we have our metro rings across the country, taking care of all the capacity needs with our own fiber, which was an important investment we did because that means we have owner's economics on all the data traffic going over our network.

It's a great segue there to one of our -- one of my favorite topics, private networks. On the 1Q call, you noted that the private network business continued to scale. I think you talked about a dozen deals were signed in the first quarter. I guess, how would you describe the demand from private networks today maybe versus last year when we were on this stage?

Way better. I mean we have had for 2, 3 years, an increasing funnel of private networks, also seeing more and more use cases, more industries using private 5G networks, all the way from for capacity reasons, security and privacy reasons and low latency reasons. And they're different in the retail industry than the financial sector compared to manufacturing. All of them have different reasons for it. But as soon as you get in a private 5G network, then usually the CIO or the Head of IT of the company starts seeing a lot of new opportunities, how to use it. They are fairly small. The first private 5G networks that you sell, it's like a WiFi network. But over time, they are growing. And usually, you start with one big warehouse. And if it works there, they take it to all warehouses. And we are in that scaling right now. And then historically, we have had -- now we get some technicality here, but we have had a broken-out core network in order to manage it with the 5G stand-alone, which is the next-generation core network, which we basically have for 60%, 70% of our network today. Then you can actually do a slice of the network as a private 5G network, way quicker, more efficient for our customers. It takes instead of weeks to set it up, it can be down to days. So that's a big difference. Of course, you need the radio elements inside the private network wherever it's going to be. But -- so I see that combined with the next generation of Gen AI, where Gen AI sort of today are large language modules being developed in large data centers with an enormous capacity, which, of course, requires a lot of fiber, et cetera, which we can supply, and we talked about that in our AI Connect. But in the next step, I think that many, together with me, believes that a lot of the Gen AI applications that's going to be enterprise-driven, they're going to sit at the edge of the network because of transport cost, security and privacy. Many companies like Verizon, you want to have it on-prem, whatever you have, you want it on-prem. That could be a third party, but still it's going to be our data centers. So I think this hangs together all the way from private 5G network and edge computing. And some of you know that we were very early on, on mobile edge compute, maybe too early, and I take that responsibility. But I'd rather be too early on something than being too late. Now we're sitting in a really good position on monetizing that investment and our assets we have there. And all that hangs together for me. And as we launch AI Connect in the first quarter, we have a very much higher activity with our customers and deals at the moment. They are still small, and it takes time to do a configurable network for Gen AI or even doing lit-up fiber and things like that. But the activity is very high and revenue -- this is going to be good for our business group because then we get more revenues on the fixed cost base that they have.

And you're seeing lit and dark fiber healthy demand in both?

Yes.

Good. So great -- I mean, the network is the founding of everything you guys offer, right? I think it's very core, very important to you. And you are deploying C-Band to 80% to 90% of the planned sites this year. You're also rolling out 5G advanced features. So I guess just maybe update us on the network road map and how you're thinking about the capabilities that additional C-Band capacity, 5G advanced, what opportunities could this potentially unlock for you in the coming years?

So the C-Band, what we have seen so far when we deploy C-Band, we have lower churn in those markets, and we have also higher premium mix from our customers. Historically, we started with the Tier 1 cities because that's where we get the C-Band from the beginning. Now we're in Tier 2 and going to Tier 3 markets. We are aiming for 80% to 90% coverage of C-Band this year. That means that whoever can calculate that somewhere in '26, we're going to have to be 100% done with the C-Band, which has been an effort, and we are ahead of plan with that. So that's very important. And from a principal point of view, when we do capital allocation of our radio budget, mobility is the #1 priority. So meaning that #1 for us right now is to see that we get to 100% coverage with our C-Band. And the secondary priority is then we get fixed wireless access opportunities. We are not, at this moment, doing certain radio capabilities only for fixed wireless access. That is secondary priority for us. I always get the question, when can it be a first priority? Yes, it can be, but not before we have concluded the C-Band mobility deployment. After that, we're going to see what's best success-based radio capacity investments where they are. I mean, is it to fill up gaps we have? Or will it be to have more mobility capacity? Or will it be actually to bring in more fixed wireless access customers? And as you might know, we have a target now to 8 million to 9 million fixed wireless broadband customers 2028. So -- and that includes only us priority mobility and having fixed wireless access as secondary business case.

Okay. So as we're thinking about -- so after you get past the 8 million to 9 million, if -- once you get there, not if you get there. Once you get there, so there could be some success base, but do you think that the -- from an FWA long-term road map, do you think that the FWA, that core base is still sustainable long term? Or do you see usage or anything like that, they might find a fixed broadband solution?

All is built to be sustainable customers. I mean that's how we designed our network that these customers that we have, we expect that they're going to stay on fixed wireless access, and our capacity is built for that going forward as well. So yes. And clearly, it's working. The strategy is working. As said, a fixed wireless access customer is using equally much capacity as any fiber user. So it's no different. So we know what they're using, and we can do forward planning on capacity, which we're doing 5 to 10 years constantly. And then, of course, involving also efficiency in technology, I mean thinking about 5G advanced features, all of them are improving how we can bring more bits to our network more efficiently and bring the totality to a better place.

Great. And so as we're wrapping up here, and so Verizon reported its highest-ever EBITDA in the first quarter of 2025, up 4% year-over-year, also reiterated all your 2025 financial guidance despite declines in consumer confidence. We talked about some pressures in the federal government as well as a fluid business environment. Obviously, a lot changes week-to-week. But at the same time, you are leaning in on volume growth, which we spent the majority of the conversation discussing here this morning. So I guess, help us think about what underpins your confidence in achieving the full year EBITDA and free cash flow guidance. What are the top and bottom line levers to get there? Business EBITDA margin is quite strong as well, and you have some other programs via the voluntary separation program, HCLTech.

Yes. So we confirmed our guidance when we came out for the first quarter, and I think it's important to reiterate, we had our best EBITDA quarter ever in the history of 25 years of Verizon. We made $12.6 billion in the first quarter in EBITDA. So the guys are doing a great job getting leverage off the growth we have. We have been taking out costs throughout the years. And of course, last year, we had yet another year when our voluntary separation program was quite big and also partly are changes in the wireline business where we took out a lot of cost, and that is now proof of it. And then we're growing 2.7% in the first quarter. So all in all, that is helping us. And if I look to the rest of the year, we see a good opportunity to continue the growth within the guidance and then we have more cost out. We -- I would say, when it comes to cost out, we do a lot of generative AI. We have brought very little to the bottom line. We have actually used it to sell more or being more efficient in front of our customers or maybe, to some extent, more efficient allocating capital. There's going to be time also when we start bringing that to bottom line, especially in customer care and other areas. So I feel confident on what we are doing with the cost base and the revenues. And then, of course, that gives us a free cash flow from operation that is very strong. Last year, it was almost $40 billion, 39-point something. And then, of course, we have a capital allocation on that, and we will continue to invest in our business. The midpoint of our capital expenditures this year is $18 billion. We also continue to be very clear with our Board that we want to put them in a position to grow our dividend. We have been growing our dividend for 18 consecutive years. Last year, that was $11.2 billion in dividend. And then we're paying down debt, and we paid down more than $10 billion, I think, $11 billion debt last year and $1.5 billion this quarter. That's how we do capital allocation in the best interest of our investors and shareholders. And then when we come to our leverage target, 2.25, we are 2.33x right now on net secured debt to EBITDA. We will have the optionality of buybacks. We just need to remember when we buy Frontier, we take over $11 billion of debt, which means that we're going to go up 0.25 or a notch of leverage. So we need to work that through. But given the great cash flow generation we have in this subscription-based business, I feel very confident that we'll get there, and we will have a good conversation with the Board when we get there.

Great. I think that's a great place to leave it. Hans, thank you so much for joining us today. It's great to see you.

Thank you.