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

[Audio Gap] The telecom infrastructure, software analyst at BofA. Jessica and I welcome you to, I think it's a 32nd Annual BofA media telecom conference. So thank you for being here with us today. We're going to kick right off today with Sampath from Verizon, Sampath, thank you for being here. I think we have a safe harbor they want us to show. So should be on the screen over there. So please see that because you say anything 8-K worthy today. So thank you again.

Thank you.

Thank you for being here today. A lot has been going on in telecom recently. So I wanted to stick maybe to the current events to kick off. Last week, AT&T announced the acquisition of spectrum from EchoStar. So I guess what are your thoughts on Verizon spectrum position and the need for additional spectrum to meet capacity needs?

Michael, thanks for having me here today. And congratulations on picking up the telecom vertical. Welcome to the family.

Welcome back, right?

Exactly. Verizon, we really like our spectrum position that we have here today. We've made some investments in C-band as well as some opportunistic investments. And our goal is to run the best network on earth. And for the last 32 times in a row, we won the J.D. Power best network. And sometimes, we've done that with the least amount of spectrum. Sometimes we've done that with a lot of spectrum. But historically, we run one of the most efficient networks. So if you look at number of subs over a unit of spectrum, we are the highest in the industry. And that's not by chance, in spite design and how we architect the network. Having said that, we always look for opportunistic places. It's built by conversation for us on spectrum. And sometimes build as you go and build more sites, by also may require a build depending on whether it's compatible with your current spectrum position or the radio position you have or not. You saw the recent transaction with EchoStar 3.45 GHz and 600 GHz. I can tell you, both of those were not compatible with our radio portfolio that we have at the moment. But we continue to be opportunistic and financially disciplined. You see that with U.S. Cellular, where we picked up some spectrum. It's 2 megahertz average for the nation, but in certain pockets, it's 25 megahertz, which really excites us to do that. So opportunistic, financially disciplined, and it's a build and buy on every single transaction we look at.

Okay. And just to be clear, so you mentioned some spectrum network is already capable of carrying that, others not. The AWS-3, your network is capable today of that being a software overlay. AWS-4 would actually be an equipment upgrade. Is that correct?

Yes, that's one way of looking at it. But when you look at the build and buy conversation, sometimes you just -- you get a spectrum, you turn it on, sometimes you get a spectrum, you have to build some capacity around it. It depends on our radio portfolio. And rate portfolios also don't stay still. They have a way of evolving; new technologies come in, we plan ahead. so at the moment, that may seem like it, but look, this is a build by conversation that we've had. And it's a similar philosophy we've had for the last 25 years when it comes to spectrum.

SP1 Okay. And I'd leave that conversation there for the moment. I wanted to switch to competition, a lot of discussion in 1Q and 2Q of this year about elevated competition in 1Q, churn obviously ticking up year-over-year. I think last quarter, there was some commentary around how much of that churn increase was competition versus price increase that we're taking across the industry. And I believe it's around 10 basis points of the year-over-year increase is attributed to competition versus pricing. So looking forward to the second half of the year, do you still believe that 10 basis point increase is going to be persistent for the second half of the year? Is it reasonable it might come down?

We are in a competitive environment. But what we tend to find is we're also writing very good quality business. The type of lines we bring in, the credit class of the lines we bring in, the add-on services, the converged offering that customers tend to buy. The overall CLV of the customer, we are bringing in are very good. So cost of acquisition, cost of retention is slightly higher year-over-year, but it's kind of offset by the better quality business that we are writing. We are extremely financially disciplined. So you'll never see us do promotions that don't make sense financially. We've stuck to that knitting and that's played off well. Overall, the switcher pool has increased year-on-year; similar to the back half of first quarter, second quarter is the highest switcher pool. The switcher pool continues to remain high in the market there. So because of that, that does drive some churn in the space. For Verizon, there's also an added thing of price ups. We've done some strategic price ups over the last -- this quarter and late last quarter and some of that drives some churn in this space. But when you think about it, our business is managed around service revenue, wireless service revenue, adjusted EBITDA and free cash flow. Those are the 3 most important metrics for me as an operator that we focus on. Quantity has a place in it. Volumes has a place in it, but we take a much more holistic view of how do you create long-term shareholder value, and it is to drive more free cash flow in the business. We've raised our guide $2 billion on free cash flow, some from tax legislation, some from just significantly better EBITDA that we are seeing in the business. So taking a holistic, long-term view of the business, wireless service revenue, EBITDA and free cash flow is how we like to get measured.

Okay. And others, others focus also on migrating prepaid subs up to postpaid and claim that, that is a -- that's a good plan, right? It's NPV positive for them. Why doesn't Verizon pursue a similar strategy?

Look, we do that. But it's -- I like everyone of my customers to go through a credit check, go through social security, have a social security number. And that's how you build a sustainable long-term business. Our average FICO score in our base -- for the phone base is 720. It's an extremely strong base that's resilient in most economic times, and that's the kind of base and customer base we want to build. On the welcome plan, which is our initial entry-level plans, we are extremely attractive for prepaid customers. We do attract a fair share of prepaid customer. But what we don't do is auto-migrate customers from prepaid to postpaid because our prepaid offerings are great. People are there by choice, and we want to take care of them within the prepaid category itself.

And I understand your comment about being financially focused and service revenue, EBITDA upside to free cash flow. The market points is myopically focused, though, on postpaid phone net additions. So what are you doing to increase your share of net adds to bring your own churn rate down, which you can also been a few in the ad side. I think last quarter, you talked about customer experience being part of that toolkit that you have an AI in there. Maybe talk about what you're doing, what you can do to improve net adds at Verizon.

Yes. There are 2 ways to increase long-term net adds. One is do better on gross adds and second is reduce your churn. It's just simple math there. On the gross add, we've had 10 quarters of really strong gross add momentum in our business. If you look at last quarter, we had very strong gross add. In this quarter, in July, we were not aggressive in our promotions by design, we pulsed in and out, but as we got back onto a more normal cadence in August, we saw gross add momentum really build up. So we're seeing good momentum in our gross adds this quarter as well. So I think that driven by our sales engine, marketing, value prop has done exceedingly well for us. We do have more work to do on the churn side of the base. Some of it is competitive churn. Everyone's churn has gone up with it, but we do have, I think, once at least in half a generation opportunity to be the leader in churn. And the first piece of that is value proposition. Really compelling value prop for base and new customers. Our Verizon best value guarantee gives every customer, whether it's existing customer, new customer, the same deal on upgrades, which they really like as well. So that's the first piece to it. The second is take out friction in the journey. And I think that's where AI has helped significantly. There are 5 journeys that make up almost 80% of all the friction we have in our process. It's things you would expect, it's authentication, account management, technical support activation. And we've done a lot of work using AI and generative AI to proactively identify some of those issues. For example, you order of phone, the phone gets lost somewhere in transit, we know it got lost in transit. We don't need the customer to call and tell us that. So how do we quickly get in front of that, intercept that and proactively solve for that. That's the number one. The third is the activation process, how smooth it is, how great the onboarding process is. So we've still got more work to do in the CX space, but I think AI has been a great enabler for us. And if we do that longer term, you'll see churn in a much better place. The last point I'll make is price value perception. This is an area where I think we have some opportunity. You can't be the best network and still not be expensive. I think that's the message we're going to have to convey to our customers more clearly, more crisply and we've got work to do that.

And I get the back office stuff like the better customer experience and all of that and reducing churn completely agree on that. We talked just last night a bit that this perception of Verizon amongst consumers that it's the high-end brand, it's expensive, I think [ BBG ] was a word used last night. And that's been a very persistent perception, right, even after you've made some changes to your value proposition and perks and everything else. So what do you think that Verizon has to do that you have to do to change that perception? Is it simply tweaking the marketing message? Or do you have to totally tear it down and rebuild the marketing message to go-to-market to change that perception and increase the gross adds side of that growth add churn equation.

I think we've done a lot of the work on getting our gross add machine in a very good place. You've seen 10 quarters of consistent gross add momentum. And that happens because our value prop is hunting. My Plan, My Home, the Verizon Best Value Guarantee, I think it's the most differentiated offering in the space. It also has some other collateral benefits in revenue that we can talk about. But overall, it's a very compelling value prop. We do have more work on price value perception. And I think that goes back to showing what value we are able to give customers. For example, we don't do promotion roll-offs. So we don't bring you at a teaser rate and then bring you up in year 1 and year 2. Customers find that extremely annoying, we don't do that. They want flexibility. Different members of the family can take different types of plan. We have no problem with that. Choice, you can start and stop any time. So I think we have a lot of the different elements. We're going to have to do a better job of convincing our customers that we do give you more value than our peers do, but we do have the sales machine to go with it.

Okay. And then in the past, you gave us a pretty detailed buildup of how you thought about industry net additions, right? There was this humungous population growth. There was -- they was immigration, that was prepaid to postpaid. And obviously, that never has been inflated the last few years by the immigration element, which will likely be lower in 2026. So can you give us your thoughts on what your model is spitting out or at least maybe the piece parts for 2026 as you think about industry net adds? And then with that same question, how you're thinking about the switcher pool, right, evolving over time?

I think in 2025, we had an estimate of between $8 million and $8.5 million for the whole ecosystem -- the wireless ecosystem. Q1 was a little softer. Q2 was slightly better. So when you net those 2, we are largely on plan for that. Over a period of time, as immigration comes down, there tends to be a 6-, 7-month lag in that. As immigration comes down, that number will lower over a period of time. I don't have a great sense for what '26, '27 look like. But between now and the end of the year, we will get a better handle on that. The switcher pool is driven by 2 things: net adds coming into the market, new -- what I call new to the wireless category, pre to post migration and customers switching within existing carriers as well. So there are 3 different elements of the switcher pool. Interestingly, the new-to-Verizon portion is new to the wireless category portion, is actually the smallest portion of the switcher pool. A lot has to do from pre to post as well as people just switching amongst themselves. So those 2 will continue to remain healthy, which will give us opportunities to continue taking gross add and eventually net add share in the market.

Okay. I wanted to shift for a moment to Frontier Fiber and Fixed Wireless. So you've kept your fiber passing target for a while now. Obviously, you have the Frontier deal expected to close, I think, in first quarter of '26 is still the target date. And then the last maybe lever to pull is the CPUC, right? So just help us think about how you're approaching your thoughts on fiber, the right fiber passing target and then also FWA fits into your broadband strategy? And also any thoughts on the CPUC and what they're asking for would be helpful.

Yes. We are working through our planning of the integration. It's going on in full swing right now. And we feel pretty confident that in Q1 2026, we'll be able to close the transaction, which is what we've said all along. We've gotten the DOJ and the FCC in a very comfortable place. They've signed off on the transaction. We are working with the 13 states right now that require us to get approval from the local POCs that we have. We have work to do in a few of the states, but it is typical of any transaction. We know the states very well. We have worked with them for many years. We have presence there. We have large employee pools there. We operate networks there. And we also took the TracFone transaction through as well. So we know what it takes. So putting all that together, we still remain confident that Q1 2026 is when we'll close on the Frontier transaction, and it's all hedged down in integration planning to do that. When we close in Q1 2026, we think about sources of value on the particular transaction. There are a couple of them. One is bringing Mobility to the Frontier base. We have less than our fair share of Mobility in the Frontier base. If you look at our Fios base today, we have 400 to 500 basis points higher than average share. So we do expect the Frontier base to catch up on that. So there's some upside for us in the Mobility. Second is for our Mobility base there, bring the Frontier offering to that base of cross-sell. Third is our really low churn. In Q1 2025, our Fios churn was 1%. We want to bring that level of operational rigor to the Frontier base as well. Last is new products and services that we have, whether it's perks, whether it's some of our insurance products, bring that to the Frontier base. So we have a really compelling value prop on synergies, both on the cost side and on the revenue side for the Frontier base that we work on. We're going to have to come back, Hans and Tony and myself in some combination, going to have to come back and talk about how we think about our build plans beyond Frontier close. Right now, we've said it's 1 million plus, but that's the work that we have to do between now and close and come back and share what our long-term fiber aspirations are. We remain extremely bullish about fiber. What we are seeing is our ARPU is growing nicely. Our churn is at all-time lows. And our year 1 penetration always seems to be better in the next year than the previous year. Every new cohort we bring in seems to have better penetration. All of that really bodes well for a good long-term franchise in fiber. We've been in it for 21 years. We know fiber really well and the added benefit of convergence. Michael, if you look at it, around 18% of our Mobility base is converged right now. That number a year ago was around 16%. So we've had 200 basis points improvement in convergence in a single year. And we think that number could probably go to double and eventually go to top out at 40% if our base is converged. So we have all the benefits from convergence in the transaction as well that we've planned. That brings us to the conversation of FWA. We've said we want to get to 8 million to 9 million customers in FWA. When we said 4 million to 5 million on the first tranche, we got there a year earlier. We're working extremely hard on the 8 million to 9 million as well. What we are finding is the NPS of FWA is really, really strong. It's as good as fiber. Part has to do with the customer experience, the value prop, the price point at which we sell and how quick we are able to turn up customers in the space. The business is so good. We have some of our competitors who historically have not been in the FW space get super excited about FWA. I think it just validates our FWA strategy. So what we are finding is we're also now getting into MDUs with our FWA offering. That's going a little slower than what we had anticipated. Just classic operational issues when you scale up a new technology and a new operational framework, it's going a little slower. So you'll see us slightly slower on FWA, but it's a moment in time piece as we scale up our MDU solution. But we remain extremely bullish about that piece. The convergence benefits holds well.

And I'll go back to the fiber in a second, but I want to stick to MDU comment while we're on it. When you say a little slower in FWA, do you mean just on the MDU side than you anticipated? Or do you mean lower net adds you have been posting in FWA?

Yes. Look, we've always want -- we said between 350,000 and 400,000 our total overall broadband will be on the lower end of that. But a lot of it is by design because we want our MDU product to have gig capability. We want it to be almost between fiber and FWA the way we think about it. So we're doing a lot of work from a technology and operational perspective to build that plant up to do that. It's going to take a little while. We know that. Second is we are also rolling out FWA in Tier 2, Tier 3 markets where the density is less. So it just takes longer to get there. But what we are finding is customers are extremely happy. The NPS is really high. We are really bullish about FWA and the economics are great. We're also driving better ARPU, better premium mix than even we had anticipated a year ago. So it's a very compelling value prop for FWA. We're just doubling down on that even more.

And for the MDU solution, is the friction simply an installation issue where getting approval from building owners and then, I guess, dropping plant down risers, whatever you're doing, right? Or is it a technology issue where the technology is not working the way that you thought it would?

We have a lot of experience in footprint in the Fios footprint working with building owners because to get fiber into our Fios into buildings, you have to work with building owners, landlords and management companies to get in and build it through the risers. So we have that experience. We're just taking that same experience and scaling it to out of footprint in places where we don't have a local like franchise. That takes a little while. And it's also point to multipoint on millimeter wave is a new technology. We are working to fine-tune it. We're talking to get to the right parameters on RF that give us consistency, but also I want to get to near gig speeds in every single apartment in the MDU as well. So those 2 things are working its way through the machine. And we're very bullish about the opportunity long term because in FWA, look, we've committed to 60 million homes of FWA over a period of time. And a good portion of that is going to be MDUs where typically competition tends to be lower. So we'll go in and be able to take share there. Okay.

Thank you for that clarification. And so it sounds like as we get closer to the Frontier deal close, we might get an update on the fiber strategy, at least how you're thinking about fiber. And you mentioned the 1 million-plus target today. What are the practical limitations, though, for fiber passings per year? Obviously, you have labor, you have provisioning, you have permitting. So what's the upper bound practically, for how much -- how many homes a Verizon could pass per year?