Verizon (VZ) Q2 2021 Earnings Call Transcript

Brad: (00:01) Good morning and welcome to the Verizon Second Quarter 2021 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode and the floor will be open for questions following the presentation. To ask a question, press star one on your touch-tone phone. If at any point your question has been answered. You may remove yourself by pressing star two. Today's conference is being recorded. If you have any objections, you may disconnect at this time. It is now my pleasure to turn the call over to your host, Mr. Brady Connor, Senior Vice-President Investor Relations. Brady Connor: (00:39) Thanks, Brad. Good morning, and welcome to our Second Quarter Earnings Conference Call. This is Brady Connor, and I'm here with our Chairman and Chief Executive Officer Hans Vestberg and Matt Ellis, our Chief Financial Officer. Brady Connor: (00:51) As a reminder, our earnings release, financial and operating information, and the presentation slides are available on our investor relations website. A replay and transcript of this call will also be made available on our website. Before we get started, I'd like to draw your attention to our Safe. Harbor statement on slide two information in this presentation contains statements about expected future events and financial results that are forward-looking and subject to risks and uncertainties. Discussions of factors that may affect future results is contained in Verizon's filings with the SEC, which are available on our website. This presentation contains certain non-gap financial measures. Reconciliations of these non-gap measures to the most directly comparable gap measures are included in the financial materials posted on our website. Brady Connor: (01:41) Now let's take a look at consolidated earnings for the second quarter. In the second quarter, we reported earnings of $1.40 per share on a gap basis. Reported second quarter earnings, including net pre-tax gain, from special items of $182 million consisting of a pre-tax gain of approximately $1.3 billion related to a pension remeasured credit, as well as a pre-tax loss of $1.1 billion from early debt redemption costs. Excluding the effects of these special items, adjusted earnings per share was $1.37 in the second quarter. Brady Connor: (02:18) In May, we announced an agreement to sell Verizon Media to Apollo Funds with an expected close date in the second half of 2021. Upon the announcement, certain assets of the Verizon Media business were classified as an asset held for sale. As a result, we no longer depreciate or amortize these assets, which resulted in a partial quarter benefit of 3 cents per share in the second quarter. And this benefit will continue until the deal closes. With that, I'll now turn the call over to Hans to take us through a recap of the second quarter. Hans Vestberg: (02:52) Thank you, Brady, and thank you for joining our second quarter earnings call. It is remarkable the difference a year can make. We're quickly resuming pre-pandemic norms and at Verizon, our network and install traffic is almost back to pre-pandemic volumes and our office employees are gradually coming back to office. Of course, some behaviors are changed permanently. The mass shift toward online activity, speed up the timeline for work from home, distant learning, banking, entertainment, telemedicine, et cetera. All of these societal behavior shifts have had an impact on the business and they reaffirm our network as a service strategy and our focus on delivering on our five vectors of growth. Finally, after a year of virtual meetings, I've been spending time in the field with customers and partners and importantly, our frontline workers who have done such heroic work throughout the past year serving on customers. All in all, we're enthusiastic and cautiously optimistic stakeholder base. Hans Vestberg: (03:58) As we conclude the first half of 2021, I have to say I'm extremely proud of the achievements we have made to strengthen Verizon in all aspects. Let me mention a couple of the milestones. We strengthened our strategic focus with our divest on the Verizon Media Group, which we believe we closed around the end of the quarter. We invested in the best portion of the C band in order to accelerate and amplify our multipurpose network and service model. We have also improved our [inaudible 00:04:30] organizational structure and we brought in a diverse slate of top leaders. Our finance and treasury team did an outstanding job of strengthening our balance sheet with low cost of borrowing and maturity for our debt. We also laid out a long-term financial goal with focus on growth. Hans Vestberg: (04:51) All of this focus on strategy execution and to deliver profit growth where our teams have paved the way for a continued great financial performance. And in the second quarter, we not only generated our strongest earnings on record, we also produced good growth and profitability in all or units and segments. We demonstrated continued strength in a wider service revenue growth, and combined with our scale and operation efficiency, we produced 5.6% adjusted to beat the growth. Given the strength on our first half assaults, we're raising our four year guide and Matt will provide deepest later in the cal. Hans Vestberg: (05:32) When it comes to our operations, our recent investments in our customers to the biggest 5G upgrade promotion and innovative trading, coupled with a Mix & Match for both wireless and [inaudible 00:05:47] customers had led to strong performance across both our offerings. On the network side, we just continue to offer our customer the industry's best network experience. For the 16th consecutive time, RootMetrics awarded Verizon the best overall network performance. And for 27th consecutive time, J.D. Power named us the number one network quality. Hans Vestberg: (06:15) Our C-band build, we're on track to build 7,000 to 8,000 sites by year end. And we're on plan to launch the first 46 markets. And we're also strengthening our network by expanding our fixed wireless access reach. If we look to the traffic in the network, the customer activity is near pre-COVID levels and as mobility traffic comes back, we have seen millimeter wave uses increase 290% [inaudible 00:06:46] near to date. And as we continue to deploy millimeter wave sites, and we get more device penetration, we expect these numbers to continue to increase fast and track towards five to 10% of traffic in most dense urban areas by year end. We are making progress in executing across all our five vectors of growth. On the 5G adoption, approximate 20% of our wireless phone base are now on 5D devices with the majority of them C band capable. Hans Vestberg: (07:24) In the second quarter, the step-by rates were very, very healthy and these reflects value and differentiate experience for our customers. We also had the record high new accounts that opted for a premium unlimited plan. The next generation based on application, we launched the first commercial available private 5G network solution in the US. It's an on-site private 5G that brings on premise 5G capabilities to large enterprises and public sector customers. Hans Vestberg: (07:58) The team in Verizon Business Group continue to make very important partnership, and one of them in the quarter was with MasterCard where we will work together with MasterCard on 5G mobile edge compute, transforming the contactless payment for consumer as well as small and medium-sized businesses. The customer differentiation that we continue to develop further strengthened in the quarter with new content and experience to our Mix & Match platform with a broken device trading, the biggest upgrade ever promotion. And we also added two partnership content with Apple Arcade and Google Play Pass. Hans Vestberg: (08:41) Expansion into new markets. We have been focusing on and continue to have broadband nationwide, and we expanded our five-year home services, which is now available across 47 markets. On the forger homes, we expanded to more suburban and urban areas, and it's now available in parts of all 50 states. At the same time, we launched a new home router, which is compatible with a C-band. Finally, we have recently expanded our 5G business internet also to parts of 42 [inaudible 00:09:12]. Hans Vestberg: (09:12) This in summary, our strategy's working and it's more relevant than ever, driving value for investors and to our customers and society as they embrace new ways of living and working. We have great momentum on all five factors of growth, delivering on profit growth with alignment for longterm growth targets. With that, I now turn it over to Matt to discuss the financial results. Matt Ellis: (09:40) Thank you, Hans and good morning, everyone. Second quarter results were exceptional, both financially and operationally. We continue to execute on our strategy, driving contributions from all five growth factors. We attracted new customers and accounts and delivered low churn, amid strong upgrade activity. All of which serves to accelerate 5G adoption in advance to our C-band deployment later this year. Accelerating volumes contributed to another quarter of strong sequential wireless service revenue growth building off our industry leading performance in recent quarters. At the same time, our disciplined approach is driving profitability and strong earnings results. Let's go through the details beginning on slide six. Matt Ellis: (10:26) In the second quarter, consolidated operating revenue was $33. 8 billion up 10.9% year over year. Service and other revenue rose 5.7% driven by strength in wireless, Fios and media. Equipment revenue rose 47.6% year over year given COVID impacted sales a year ago and was up more than 17% from second quarter 2019 levels driven by healthy upgrade activity. Total wireless service revenues were up 5. 9% year over year and 4.0% compared to second quarter of 2019. The results represent sequential growth of $139 million, nearly double our industry leading sequential growth reported in the first quarter. Total Fios revenues are up 5.4% year over year driven by continued broad brand subscriber growth. Adjusted EBITDA of $12.2 billion grew 5.6% over the prior year in line with our service and other revenue growth despite absorbing approximately 60 million of incremental tallies costs related to the updated agreements to accelerate the deployment of our C-band spectrum. Matt Ellis: (11:41) As Brady and Hans highlighted, adjusted EPS for the second quarter was $1.37, the best on record. The execution of our strategy is translating to record earnings results and we are well positioned to continue the momentum into the second half of the year. Matt Ellis: (11:58) Now, let's review our operating second results starting with consumer on slide seven. Momentum built throughout the quarter, and we timed out promotions to take full advantage of the economic recovery and increased customer activity. The result was one of our strongest net new wireless account quarters. With stores fully opened and consumer behavior closer to pre pandemic levels, we delivered 1.7 million postpaid phone gross ads in the quarter, up from 1.2 million in second quarter 2020, and almost identical to 2019 levels. Phone churn of 0.65% remains favorable throughout the quarter and benefited from new offers in the marketplace. This result was a record low for a non-COVID impacted quarter. As a result phone net ads of 197,000 were our best second quarter of a consumer. Matt Ellis: (12:55) The response to our differentiated customer proposition, including the broken device trading and the biggest upgrade ever promotion was terrific. Device upgrades, which was significantly higher compared to both second quarter of 2020 and 2019 drove 5G adoption and step-ups to premium unlimited plans, a strong indicator that our strategy is working. We exited the second quarter with approximately 20% of our phone base using 5G capable devices with the vast majority supporting C-band. In addition, step-up rates were historically high, and nearly 60% of new accounts opted for a premium unlimited plan, a record high. At quarter end, approximately 69% of our account base was on unlimited plans with nearly 27% of our account base on premium unlimited plans. Matt Ellis: (13:51) The quality and reliability of our Fios service combined with the simplicity of our Mix & Match offerings continues to drive strong demand for broadband. Fios internet net ads totaled 92,000 in the quarter supported by strong customer retention. And our Fios internet customer base is more than 7% higher than a year ago. Our trailing 12 month total Fios internet net ad performance is the highest since 2015. Matt Ellis: (14:20) Now, let's move to slide eight to discuss the consumer financial performance. The improved customer activity translated to impressive top-line trends. Total revenue for the quarter grew 11.2% year over year, and was also 6.7% higher versus second quarter 2019. Equipment revenue was the biggest driver, rebounding above pre-COVID levels from higher activations, aided by our customer value proposition. Wireless service momentum translated to 5.4% year over year growth and 2.5% growth compared to second quarter 2019. Service revenue was driven by customer growth, step ups, products such as content as well as reseller and prepaid. This growth comes despite minimal contributions from international roaming, which we expect should provide a further uptake to growth in future quarters. Matt Ellis: (15:17) Momentum in files continues with revenues of $2.9 billion surpassing pre-COVID levels driven by the continued uptake of gigabit speeds. The results represent our highest revenue result ever. We remain encouraged by the continued margin improvement within files driven by the adoption of Mix & Match plans and a greater contribution from broadband. Consumer segment EBITDA for the quarter grew 4.9% over 2020 representing an EBITDA margin of 44.3%, down from the prior year, primarily resulting from higher activations. Matt Ellis: (15:54) Now, let's move to our business segment on slide nine. Business wireless activity was highlighted by postpaid gross ads of 1.2 million, up 6.3% over the second quarter 2020, and up 2.1% over second quarter 2019. Segment postpaid phone churn was 1.07% up 17 basis points year over year reflecting elevated disconnects from COVID related purchases in 2020, particularly within the education vertical of public sector. As schools plan for more in- person learning this fall, we expect disconnects to remain elevated in public sector in the third quarter. Despite the disconnect pressures, phone net ads was strong at 78,000 with improving trends in both SMB and enterprise, both of which posted their strongest phone net ads in over a year offset in the disconnection public sector. Matt Ellis: (16:53) Let's now move to slide 10 to review the business financial performance. The business segment delivered strong top line growth with total revenue up 3.7% year over year. Matt Ellis: (17:03) ... strong top-line growth with total revenue up 3.7% year-over-year. Equipment revenue, which was up approximately 47%, was the primary driver of the increase. Wireless service revenue growth of 8.0% was driven by strong momentum in small and medium business and the first quarter of enterprise growth since the onset of the pandemic. Public sector continued to show strong growth over 2020, though it's pressured by COVID-related churn in education. The wireless strengths were partially offset by declines in business wireline, which returned to a more normal trajectory after elevated COVID-related demand. Business segment EBITDA margin was 24.1% in the quarter, down approximately 210 basis points year-over-year, mostly driven by higher equipment volumes and wireline pressure. While pressures likely persist in the near term, the economic reopening, business transformation initiatives, and 5G for enterprise provide opportunities to drive margin. Matt Ellis: (18:05) Now, let's move on to Slide 11 to discuss Verizon Media Group. Verizon Media Group continued its recent trends and delivered strong performance, driven by high customer engagement with our brands and demand for our advertising platforms. Total revenue for the quarter was $2.1 billion, up approximately 50% from a year ago and up 13% from second quarter 2019. Let's now move to our cash flow results on Slide 12. Cash flow from operating activities for the first half of 2021 totaled $20.4 billion, compared with $23.6 billion from the prior year. The change was primarily driven by higher cash taxes and higher working capital requirements due to greater volumes. The cash tax impact was a result of a one-time benefit received in the second quarter of 2020, as well as a COVID-related postponements of payments in the year ago period. These expected headwinds were offset by our strong operational results. Matt Ellis: (19:10) Capital spending for the first half of 2021 totaled $8.7 billion as we continued to support traffic growth on our 4G LTE network, while expanding the reach and capacity of our 5G Ultra Wideband network. C-Band CapEx was more than $160 million in the first half, and we have placed orders for approximately $1.4 billion of related equipment year-to-date, giving us a confidence that we will be within the previously provided two to $3 billion range for the year. The net result of cash flow from operations and capital spending is free cash flow for the first half of the year of $11.7 billion. . Matt Ellis: (19:52) During the quarter, we began to normalize our cash balance closer to the pre-pandemic levels, given the macro environment, and we ended the period with $4.8 billion of cash on the balance sheet, a sequential change of $5.4 billion. We exited the quarter with unsecured debt of $141.6 billion, a sequential improvement of $6 billion, as we continue to focus on optimizing our debt footprint. Our total borrowing cost in the second quarter were $1.4 billion, which was relatively flat to second quarter 2019 levels, despite having approximately $40 billion in additional debt this year. Net unsecured debt at the end of the first half was $136.8 billion, and our net unsecured debt to adjusted EBITDA ratio was approximately 2.9 times. Matt Ellis: (20:45) Now, let's review our annual guidance targets on Slide 13. Our strong first half performance and the momentum in our business gives us the confidence to raise guidance. Please note that the updated guidance reflects the planning assumption that the Verizon Media sale closes at the end of the third quarter. Starting with revenue, we are raising our wireless service revenue growth outlook to 3.5% to 4%, up from the prior 3% plus. The drivers of the revised outlook are broad-based, and include positive trends we have seen for customer acquisition, premium plan adoption, products and services, such as cloud and content, as well as prepaid and reseller growth. The anticipated timing of the Verizon Media sale means we would not recognize any revenue from that business in the fourth quarter. As a result, service and other revenue is no longer an apples-to-apples comparison with 2020, and we are withdrawing that growth guidance at this time. Matt Ellis: (21:44) Turning to earnings, we now expect an adjusted EPS range of $5.25 to $5.35, up from the prior range of $5 to $5.15. The increase is driven by the improved wireless service revenue outlook, the aforementioned Media D&A benefit, and a reduction in the expected interest expense related to the C-Band investment. Our guidance for the effective tax rate and CapEx are unchanged. In summary, we are competing effectively and delivering strong volumes, growing accounts, driving healthy step-ups, and positioning our base to capitalize long-term as we grow 5G adoption. Our customer performance has led to quality financial results as demonstrated by the sequential wireless service revenue growth, while also flow to the bottom-line with best-on-record adjusted EPS. We enter the second half with a lot of momentum, and I'm confident we will continue to execute our strategy and deliver strong operational and financial results throughout the remainder of the year. With that, I will now turn the call back over to Hans to discuss our priorities for the remainder of 2021. Hans: (22:58) Thank you, Matt. At our Investor Day, we laid out commitments for 2021 and beyond to scale our Network-as-a-Service strategy and generate GDP plus growth. We made transformational investment over the last 12 months through acquisitions, divestiture, and customer innovation, and creating a strong platform for growth in the second half of 2021 and beyond. Our priorities for the second half. Continue to build on our current network and customer initiatives to further amplify and accelerate 5G adoption, further cement our network leadership through industry-leading millimeter wave and C-Band assets. We expect to close our TracFone and VMG transaction later this year, increasing our focus on what we do best and bringing innovation and best-in-class customer experience to the value segment. And overall, drive growth across our five vectors with disciplined and customer-focused execution. At the end, the great transform in the first half, we competed very well in the marketplace and we're very confident and excited on our opportunities ahead. With that, I turn it over to Brady for the Q&A. Brady: (24:13) Thank you, Hans. Brad, we're now ready to take questions. Brad: (24:17) Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star one. Please unmute your phone and record your name clearly when prompted. Your name is required to introduce your question. To withdraw your request, please press star two. One moment, please, for the first question. Your first question comes from Brett Feldman of Goldman Sachs. Sir, please go ahead. Brett Feldman: (24:44) Yeah, thanks for taking the question. And two, if you don't mind, first, I just want to go back to some of the color Matt was giving on the improved outlook for wireless service revenue growth this year. At the high end, that's actually a pretty significant improvement. I know you outlined a number of things that were behind it, but I was hoping you can maybe just dig into that a bit more. I'm particularly interested in what you're doing to outperform as it relates to plan mix. And then are you seeing a return of any of the fees that had come out of the run rate last year? Is that something you've seen already or is that embedded in the outlook? And then just on the improved EPS guidance, if we just look to the $0.03 benefit you got from moving away from the D&A in Media in the recent quarter, that would imply that the improvement to your outlook this year maybe captures seven, eight cents just from that accounting shift with the rest of it being operational. But if it's more nuanced than that, I think we'd all appreciate that insight. Thank you. Hans: (25:36) I can just start and Matt will fill in. But I think that on the service revenue, I think you have seen the last four quarters right now, how the team has done a fantastic job to differentiate our offerings, all the way to see that our customers are doing step-ups, they are taking the unlimited premium. As Matt said, 60% of the new accounts in the quarter has taken unlimited premium, and the penetration of 5G is happening. So we just continue to team with Ronan on the consumer side, if we talk about that. They have this model and we have had it for several years, where we do the Mix and Match, we have a differentiation, and it is clearly resonating in the market. And at the same time, we see, of course, the economy coming back, the stores are getting almost back to pre-pandemic. So, all in all, it's a good timing for us and that's also why we feel good about our guidance and how the service revenue is growing. Hans: (26:32) And remember, we are always focused on profitable growth. That's what the team is doing. And if Matt and I see opportunities, we support the team to do it, but as long as it's going to be a profitable growth. And that's what we're seeing right now with all the momentum in the market. The team is taking advantage of that and that also translate back to the guidance. But all in all, I would say this is our strategy we've been having for a couple of years and has been very successful. Matt? Matt Ellis: (26:58) Yeah. Thanks, Hans. And thanks for the question, Brett. So starting with the question about wireless service revenue growth, and as Hans mentioned, it's really building on the momentum that we've seen in the first half of the year, the continuation of the sequential service revenue growth. We saw that the prior couple of quarters. We saw that increase even further in the second quarter. We expect that trend to continue as we get into the second half of the year because of the operational momentum that Hans mentioned. More step ups to higher price plans, et cetera, et cetera. In terms of the fees, obviously the year-over-year component is rather unique. This time as second quarter, last year was the most heavily impacted by COVID. And more specifically, for us, of course, we had the Keep Americans Connected pledge that was in place for all of the second quarter, that, as you said, impacted some of the fees. Matt Ellis: (27:57) As you think about the numbers this year, a good chunk of those back in. We're more at a BAU level. A couple of items though that aren't in the numbers yet. Obviously, international travel is not back to anywhere close to pre-pandemic levels. I don't expect that to be there for the bounce of this year. Hope there will be a tailwind as we get into next year. But the guide doesn't make any assumption about an acceleration of a return of those fees in the second half of '21. Matt Ellis: (28:29) One other thing I'd draw attention to as well when you look at our numbers and you think about return of fees, one of the things that's been very strong in the first half of the year is customer payment patterns, which is a great thing to see. And certainly with all the stimulus payments out there, there's a lot of money in the system, and customers are actually paying more frequently. So even though we're back to normal in terms of things like late fees, we're actually significantly less than we were in second quarter of '19 because more of our customers are paying on time at this point, which is certainly a trend that we're very happy to see. Matt Ellis: (29:04) So some of the fees are back, but not all of them are back when you think about it. And when not assuming there'll be back in for the balance of the year. The guide is based off of the strong operational momentum in the business, customers stepping up to those higher price plans. And we see that momentum continuing. Your second question about the EPS guidance. Obviously, I'm glad to be able to raise the guidance that's based off having a very healthy business that is performing exceptionally well. As you mentioned, some of the upside to the guidance comes from the media depreciation amortization, probably about six to eight cents, depending on the timing of the close, but the majority of it's coming from cash items, whether that be the wireless service revenue guide, we were just discussing, but also related to improve the expectation around cash interest expense, lower than anticipated at the start of the year. Most of the guide is driven by cash related items, and that's a cost based off the strong momentum you see in the business, both operationally and financially. Brett Feldman: (30:19) Thanks for that color. Brady: (30:21) Great. Yeah. Thanks, Brett. Brad, we're ready for the next question. Brad: (30:25) The next question is from John Hodulik of UBS. Sir, your line is open. John Hodulik: (30:30) Great, thanks and good morning, guys. Just a question on the upgrade rate. Obviously it's up, not just year-over-year, even over the '19 levels. Do you expect that trend to continue and maybe even accelerate as we move into the second half of the year. And then if you could comment on the impact on margins, I would imagine that it helps incentivize people to move into those higher price premium plans, but with the higher mix of equipment revenues may put, put pressure on margins. So just how you foresee the margin trends in the second half of these volumes built would be great. Thanks. Hans: (31:08) Yeah. As I said before, we have this formula right now that we had for since we launched unlimited with both Mix and Match and then our value proposition that we have done. And you saw in the second quarter that now we added also gaming with good traction with both Google and Apple gaming, and this is a unique model for us. At the same time, of course, we have an excitement around 5G, what we have, and our network is performing extremely well. So I think that our team, they have a very, very good model for continuing this. And I think I said it in the first quarter, there will come more of this value proposition and differentiation. And yes, it came. We went into gaming. Hans: (31:50) So I'd say it again. I have a lot of confidence in the team, in Ronan's team to continue to come up with things that our customer loves and using our distribution, our network and our brand to continue to grow this. And that is the whole strategy and remember the five vectors of growth. We are playing in all five of them and that's why we're also confident of our long-term guidance over that done and you see parts of that in this quarter, that we already are executing on all of these vectors. Matt Ellis: (32:18) Hey, John. So as you mentioned, obviously, the higher mix of equipment revenues shows up in the margin percentage, but I think you also have to look at the margin dollars which are up sequentially and also up significantly year-over-year. So very happy with that performance at the margin line. As you say, once we hit, when we have a higher equipment revenue, it has an impact on the margin, but I like the combination of volumes and margin that we had in the second quarter, as we head to the second half of the year, where the outline of the offers we have in place at Hahn's mentioned combined with new devices coming into the market as we get closer to 5G launch, the underlying strength in the economy. I would expect that we will see good equipment volumes in the second half of the year. And I would also expect to see good EBITDA dollars in the second half of the year to go along with that. John Hodulik: (33:16) Great. Thanks, guys. Brady: (33:19) Yeah. Thanks, John, Brad, we're ready for the next question. Brad: (33:22) The next question comes from Phil Cusick of JP Morgan. Your line is open. Phil Cusick: (33:28) Hey guys, thanks. Two, if I can. Consumer wireless broadbands were strong. Did home broadband drive that? And how many home 4G, 5G customers do you have now? And second, a lot happening in MVNO land these days with boost going after AT&T after they couldn't yield cable away last year. Did you look at that deal? How do you think about the potential for new competition from all these channels? Thanks. Hans: (33:54) Thanks. When it comes to money in general... I will start. Our vision as we have outlined, we want to be a nationwide broadband provider. Hans: (34:03) ... outlined. We want to be a nationwide broadband provider and we're going to use the access technology that is best suited for our customers in a mix of everything from fiber to 4G to 5G, millimeter wave, C-Band and all of that. And this quarter, so we opened up even more opportunities for that, we opened more 5G Home markets, we opened more 4G Home markets, and then, of course, as Matt outlined as well, we took more Fios subscribers than ever in the last three, four quarters, so this is playing out well for us. We're opening up all of that, we are very excited about what's going to happen in the second half with the new CPE that has C-Band as well, so we executed everything we said we should do in the Investor Day in the second quarter and we look forward to the second half of this year, and we will continue to report out what we're doing. Hans: (34:58) The second question, I think that ... I mean, we are open for business, but we don't comment on any particular deals in the market or something like that. But we are happy with the customers we have on our MVNO. Speaker 1: (35:15) Great. Thanks, Phil. Brad, we're ready for the next question. Brad: (35:19) The next question is from Simon Flannery of Morgan Stanley. Your line is open, sir. Simon Flannery: (35:24) Thanks so much. Just a quick one on TracFone. You said, closing second half of the year, any more color on the process or the more timing expectations would be great. And then on the C-Band, I think you said previously you wanted to deploy about 7,000 to 8,000 towers later this year. I see you reiterated the capex guide. But any color on getting the equipment supply chain and the ability to hit those targets in terms of rolling out? And any updates to your longer-term targets of $175 million on C-Band? How are you thinking beyond that? Thank you. Hans: (36:00) So on the TracFone, I think nothing has changed since we outlined or we proposed the acquisition. It's tracking according to plan with the process that we need to go through. The team is responding to all the questions asked, so it's going to be in the latter part of the second half of the 2021 as we thought all the time. So nothing strange, it's actually on track, but that's where we are. Second question was ... Simon Flannery: (36:29) C-Band. Hans: (36:30) C-Band. Yeah, the 7,000 to 8,000 sites. Yeah, we can definitely say we are on track. When we reported in the first quarter, we had just started everything. Now, we see we have a full $5 million of supply chain. The guys in our supply chain done a great job with our partners. We have all the gears we need to deploy to 7,000 to 8,000 and then our team are executing very well, so we feel very good about being able to have 7,000 to 8,000 sites up by year-end. And when it comes to the long term, I mean, we have the same ambitions as before. We haven't changed those, and we continue to execute. So we will do it as fast as we can, given the different type of milestones that are involved in the spectrum. But so far, we are executing on that plan and we are on or ahead of the plan of executing right now for the end of the year. Matt: (37:22) Yeah, Simon, one other data point for you. The vast majority of the radios that we need to turn on those 7,000 to 8.000 sites are already sitting in our warehouses. So the supply chain is robust, working very well with our partners and, obviously, a lot of work still to do. But the network teams have, from where we were in March, after we came out of the auctions, to where we are today, they have detailed plans in place and they're executing strongly against it. [crosstalk 00:37:53] by the end of the year. Simon Flannery: (37:53) And the spectrum clearing is working okay? Matt: (37:56) Spectrum clearing is also on track. I mean, we stay close to the folks doing. Everything, we hear from them, that's completely on track as well. Simon Flannery: (38:05) Sounds good. Thanks a lot. Speaker 1: (38:07) Great. Yeah, yeah. Thanks, Simon. Brad, we're ready for the next question. Brad: (38:11) The next question comes from David Barden of Bank of America. Sir, your line is open. David Barden: (38:17) Hey, guys. Thanks so much. In the first quarter, you guys talked about how the second half of the year would be an improvement for Verizon in the consumer business. We've seen, obviously, some of the new promotions come out, margins have drifted down to the 44% range. Does Ronan have permission from you, Hans, to take that down further if you see some more gains opportunistically in the second half with either the current kind of 5G handset upgrade promotions or new stuff coming down the pipe? And then the second question is, consumer cost of service has been up pretty significantly for the last couple of quarters relative to the past year. Is that related to C-Band pre-positioning or is there something else going on? And what's the outlook for that? Thank you. Hans: (39:09) When it comes to the consumer Group, and Matt explained a little bit why the margin is lower because the whole report is included there and we think that's a good sign of what's happening in the market. I would say, I mean, we constantly think about profitable growth and that has been our strategy as long as I've been here. And Ronan and team, they think about that, but, of course, if they see an opportunity, as we saw when the traffic came back in the stores and the economy is coming back, we did some offerings in this quarter which was good timing, and we will continue to support Ronan when we see he has a good solution for the market and our customers are going to love it. Hans: (39:49) I can tell you, our differentiation is really resonating with the market and that's what you see in the second quarter, and we will come back and see if there's something he wants to do in the second half, but clearly we are focused on profitable growth and we are writing high-quality business in high quantity. That's what we want to do, and I think you see that coming through in these results. Matt: (40:15) Yeah, so just adding to that, Hans, so obviously the margin percent will be impacted by the volumes. We saw good volumes in the second quarter, but, as Hans said, what we're focused on is if you also look in there, sequential service revenue growth continue to lead the industry in that, because not all net adds are created equal and that also coming with EBITDA dollars increasing. So the margin percentage will play out where it does, based off the volumes, but we're focused on you're seeing that sequential revenue increase and also the EBITDA dollars flowing in the right direction. Matt: (40:53) In terms of your question around the cost of service predominantly in consumer, don't forget, one of the items that we had in the second quarter was a step-up in the network rents and lease of about $60 million a quarter as a result of the new lease payments we put in place. As you know, under the accounting, you look at the total payments over the life of the lease and kind of flatline it irrespective of how the natural cash flow payments flows. So that was obviously a significant upgrade to our lease agreements, and that was a one-time step-up in the quarterly rate there that flow through the books at, let's say, about $60 million, close to a penny a share impact from that. That should be the same going forward now, so that's the biggest driver you're seeing on the cost of service. David Barden: (41:47) And so, Matt, just maybe a follow-up on that. So... Speaker 1: (41:50) Okay. Thanks, Dave. Okay. Go ahead. Go ahead, Dave. David Barden: (41:55) Thanks. So that's all in consumer? Matt: (42:00) The vast majority of the wireless network costs are allocated to consumer. Some of that is in Business, but the majority is in consumer. Obviously, the majority of the customers, the majority of the wireless service revenue is in consumer, and so the costs are going to be allocated largely in line on a similar basis to that. So, yes, most of it is in consumer. David Barden: (42:23) And then probably worth noting that then your EPS guidance includes negative $0.03 for the two, three, 4Q impact of that increased tower expense? Matt: (42:34) Absolutely. That's fully baked into the guidance, that step-up in that cost, so that comes back to the underlying strength of the business that we have, even with that baked in as well. David Barden: (42:45) Thanks. Speaker 1: (42:48) Great. Thanks, Dave. Brad, we're ready for the next question. Brad: (42:50) The next question comes from Michael Rollins of Citi. Your line is open. Michael Rollins: (42:57) Thanks and good morning. Curious what you learned during the pandemic, and now the reopening about where customers want to transact for wireless, whether it's upgrading phones or changing service providers, and are a large portion of wireless transactions simply destined to remain in physical locations versus a virtual or online channel? And then just a follow-up, you mentioned a number of markets that you've been focused on for Ultra Wideband and 5G Home and just curious if you could share some population and household coverage numbers for Ultra Wideband and Home for the end of '21 and the target for the end of '22. Thanks. Hans: (43:44) Thank you. No, of course, we see some changes in behavior when it comes to our customers, but we had already started building our omnichannel that our customer can start on the web and they can end in the store or they can start in the store and end on the phone and all of that in order to see that we do this as seamless as possible. But clearly we see much more digital than before. But also when the economy came back and the vaccinations in the United States were coming up on high levels, we also saw the traffic coming back in the stores, and so we have had, I would say, all our stores open in the second quarter and we see much more foot traffic than we have seen in the previous quarters, not really back to pre-pandemic days but clearly fairly close. Hans: (44:36) So, we think our customer is still going to want to come into a store and see our technology and our products, but we might be wanting to finish the delivery and the purchase in a digital form, and that's how we build our stores. So, we are working very closely to see that the new behaviors that we can meet, that's what our customers really feel good about dealing with us, and I think that our team are doing a great job in that area. Matt: (45:07) Yeah, Mike. In terms of your question around the millimeter wave coverage, we don't really talk about the millimeter wave coverage in terms of POPs. You heard Hans mentioned upfront that we are on track to seeing 5% to 10% of dense urban usage on our millimeter wave by the end of the year. That's a combination of more customers having 5G devices in their hands, customer activity moving back to more pre-pandemic levels and then obviously building out more millimeter wave sites. We said we would do 14,000 sites this year, be it over 30,000 by the end of the year. I can tell you we are running well ahead of schedule for the 14,000 sites through the first half of the year, and so as we do that, we continue to add coverage. And then we said we'd expect to cover one million to two million homes with millimeter wave open for sale by the end of the year, and we're on track with all of those items. Michael Rollins: (46:13) Thanks. Any early look toward 2022? Matt: (46:19) The build continues. Obviously, we're not going to give guidance for 2022. But everything the network team is doing, whether on millimeter wave, whether on C-Band, and remember we said we'd be at around 100 million POPs during the first quarter next year, and we expect to still on track to be at that level. So at this point in time, I can't speak more highly about the work the network team is doing as they build, whether it's the fiber that obviously is important to the network, the millimeter wave expansion, the C-Band expansion and continuing to have the best 4G network out there as well. So, they're doing a tremendous amount of activity and they continue to be on both our 2021 plans and our longer term plans too. Michael Rollins: (47:07) Thanks. Speaker 1: (47:08) Great. Thanks, Mike. Brad, we're ready for the next question. Brad: (47:13) The next question comes from Craig Moffett of MoffettNathanson. Your line is open, sir. Craig Moffett: (47:18) Yes, hi. Thank you. Two quick questions. First of all, I will return to a question that Phil asked, I didn't hear the discussion. Can you talk about the Dish wholesale deal with AT&T, what your observations are and whether you were part of that negotiation? And then separately, if you could just comment on whether you saw any significant impacts from the EBBP program during the quarter, either in your wireline business with Fios or your wireless business? Hans: (47:50) Hey. When it comes to specific deals in the market, we don't comment on that and apparently this is something that AT&T won from T- Mobile, so I cannot comment on our involvement in itself or not. But I said we are open for business, we have a network and a strategy model which is paying off well for us with the five vectors of growth and part of that is monetization, all the MVNOs and we are very happy with what we have. Matt: (48:21) Yeah, Craig, to your second question, we saw some of our customer base certainly participate in that during the course of the second quarter. I wouldn't say it was a significant impact in our numbers, but we did certainly see our customers participating. Craig Moffett: (48:37) Thank you. Speaker 1: (48:38) Great. Thanks, Craig. Brad, we're ready for the next question. Brad: (48:42) The next question is from Doug Mitchelson of Credit Suisse. Sir, your line is open. Matt Ellis: (48:47) Oh, great, thank you. Two questions from me as well. I mean, first, AT&T moved to 30 and 36-month handset EIPs periods this quarter, and your churn is even lower than theirs, your customers stick around even longer on average. Have you thought about going longer than 24 months, and if not, why is 24 months sort of right period? And I'm just sort of curious on C-Band. As we try to figure out how to model 2022 and you get the licenses cleared and you flip the switch and light that up for customers as you go into 2022, how has your go-to-market strategy changed, if at all, and what do consumers sort of see in terms of their experience that's going to be materially different? Obviously, it was a big investment, and I'm just sort of thinking through, on a practical basis, what happens if that starts to kick in. Hans: (49:33) Yeah, I can start with the C-Band. For obvious reason we think it's an important moment. We are both amplifying and accelerating our 5G in the network, amplifying the opportunity. However, giving away our commercial ideas, when we're going to launch this, right now, we wouldn't do that. But of course we're excited over it. We think it's going to be great for our customers, it's going to be fantastic performance and it expands our 5G mobility options, our 5G fixed Fios access options and it also expands our 5G Mobile Edge Compute options, so it's just playing straight into our strategy. So we're excited over it and we will come back, how we will bring that to our customers, so they are equally delighted after all with our network today, but just getting something that is so much superior than anybody else. Matt: (50:31) Yeah. Hey, Doug, on your first question about the handset device payment period, we're very comfortable with the offers we have in the marketplace, it's 24 months for a lot of items. Some of the higher-priced items it's a little bit longer just to manage that, but as you mentioned, the churn is very, very strong. 0.65% in Consumer for phone churn shows that what we're doing with customers is working very, very effectively. If we feel the need to adjust it ... Matt: (51:03) ... working very, very effectively. If we feel the need to adjust it, we will do so, but it will be based off of what we see customers need and not be focused on any impact on the accounting treatment associated with it. So we will continue to be focused on finding the right offers for our customers, and I think you'll see from the results in the second quarter, what we're doing is resonating with customers, both from an ad standpoint and also a [inaudible 00:51:31] standpoint too. Doug: (51:33) Great. Thank you. Speaker 2: (51:35) Yeah. Thanks Doug. Brad, we're ready for the next question. Brad: (51:39) The next question comes from Peter Sapeno of Bernstein. Your line is open, sir. Peter Sapeno: (51:45) Hi, thank you. A couple of related questions. The first is one of your competitors has talked repeatedly about the network capacity improvements that come from 5G. If you adjust that company's target for M&A, you could infer that their capacity is up about seven times for their 5G expansion. And so I'm wondering if you could suggest that a similar number for Verizon's capacity and our growth potential, considering the wonderful investment in the C-band. And then on a related note, as relates to the home business, I'm curious if you could describe how you think about allocating the cost of spectrum. Hans: (52:35) Okay. On the first one, if you've been listening to what I've talked about around 5G before, first of all, 5G as a technology is better to handle data than 4G. And that's obvious. 3G is better than 4G as well. So that's happening. Then you need to add to that, you're not only talking about spectrum, you're talking about how you engineer and how you build the network. So in our case, well, of course, we see great opportunities for being able to handle much more data. Hans: (53:05) And remember I'm in today on the millimeter way, we might use 400, sometimes 800 megahertz, but not more. And we have 1,600 megahertz nationwide. There's so much more we can do. And as Kyle showed at Investor Day, our headroom in the network is bigger than before. And that's before we start building what we're building right now. So we feel really confident how many [inaudible 00:53:31] we are doing. And remember, our 4G is already the best in the nation. And then we're adding up right now what we're doing in 5G. That is also extraordinarily good. So others can talk and we usually execute. And we will continue with that. Matt: (53:48) Hey, Peter, on the second part of your question, the allocating cost of the spectrum, I'd reframe that and actually view it from the standpoint of, this is the first time that we've had wireless technology where we can drive multiple revenue streams off of the same network build, whether that be the mobility, which has obviously been the foundation of 4G, 3G, and everything since the start of wireless. But then the ability to also have fixed wireless access, to also have the public Mobile Edge Compute, all coming off of that same network build, that same network investment, we think gives us the opportunity to provide a very good return on the investment that we've made in both C-Band and millimeter wave. Peter Sapeno: (54:35) Thank you very much. Speaker 2: (54:35) Great. Thanks Peter. Yep. Hey, Brad, we're we're ready for the next question. Brad: (54:40) The next question comes from Kannan Venkateshwar from Barclays. Your line is open, sir. Kannan Venkateshwar: (54:48) Thank you. A couple, if I could. Firstly, on the non-paid churn front, obviously, I think you guys noted the benefit because of some of the subsidy programs, but at some point that will probably reverse for the industry as a whole. So could you help us understand how big of an impact that typically is in a normalized year, non-paid churn, and how much of a tailwind that is right now to get a sense for what that might do when things normalize? And then secondly, you have a lot of content bundles now. You also have the new deal with Apple Arcade. Could you give us some sense for how this impacts your cost of service? How much of the increase in cost of service is on account of this? You did quantify the lease number, but it will be good to get some sense for what this is doing overall to cost versus ARPA trends. Thanks. Hans: (55:50) I can, and Matt will talk about non-paid churn. When it comes to the content deals, I think I've said it a couple of times now, our whole idea is to offering exclusive offers for our wireless customers, and we also want to offer that partnership to brands that we really think resonate with us. And the model as we have spoken about before is that this is incremental revenue for us. It's not only loyalty. It's actually incremental profit for us. So it's a totally different model that might sometimes not been in the market before because certainly we use the best network, the best distribution, and the best brand to work with companies like Disney+, etc, to give our customers a premium experience on top of the differentiation we're going to have with the Mix and Match. And ultimately, when we make these customer to paying customers, we get our fair share on that because we, with our assets, have created it together with the assets for Disney+, discovery, or gaming, etc. So that's how the model is working. Hans: (56:54) And as I said before, we are very pleased with... I think we have six or seven of these offerings in the market right now and all of them are very positive to us and to our customers, and we will continue to see if we can find more. And I think it's a unique model that we have created that nobody else has in the market. And I said, again, it goes back to Ronan and the team being very, very innovative and creative to see that we bring the best to our customer, not only the best network, but also the differentiation in offering. So I have to say I'm very pleased with that. And I said, we are more in the funnel. Matt: (57:33) Hey, Kannan, on your other question around the churn, I would say it's a very small number of basis points of benefit coming from the reduction in, what we call, involuntary churn, and what you're also seeing in the total churn number is actually the benefits of the engagement with the customer, the experience the customer has on the network, the other experiences we bring to that relationship, that Hans has touched on, being a bigger piece of the strength in the overall phone churn number that we reported, especially on the Consumer side. And in terms of the impact of cost of sales, obviously, the content cost associated with the items that Hans mentioned do flow through there. And you should expect to see that number continue to be a contributor of that line. But when we look at the overall profitability of bringing that together, the overall customer proposition, it's EBITDA additive to the business and also brings a better experience for the customers. We see that as a win-win. Kannan Venkateshwar: (58:44) Thank you, both. Speaker 2: (58:45) Great. Thanks Kennan. Brad. We've got time for one more question. Let's go to the one last question, please. Brad: (58:51) Certainly. Your last question is from Colby Synesael of Cowen. Your line is open. Colby Synesael: (58:55) Great, thank you. Two, if I may. First off, on business EBITDA margins, at your Analyst Day back in March, you'd guided to sustaining north of 25% and we saw that below that in the second quarter, also in the first quarter, although there is that one-time impact. And it sounds like you're guiding for that to continue to be below 25%. I'm just curious what's changed so quickly that you're targeting below that target, at least it looks like for 2021. And then also as it relates to the biggest upgrade ever promotion, when we look at process space competitively, obviously AT&T has been doing something similar since the fourth quarter, even T-Mobile did something just yesterday. Do you really look at this as a promotion, implying at some point there is an expiration and you pull back from the market? Or is this really just the new way of competing in today's competitive market and really something that investors should assume, in some form or the other, is going to be with us for a long period, if not permanently? Thank you. Hans: (01:00:05) I can make a quick answer on the promotions and Matt will come back. We have already pulled the biggest 5G upgrade from the market that we need- Matt: (01:00:15) Today. Hans: (01:00:15) Today. Matt: (01:00:16) Today's the last day. Hans: (01:00:17) Yeah. So yes, we see it is coming in and out when it's the right moment, but Matt will probably comment a little bit more on it. On the business side, in Q4 2018, Matt and I talked about that we think that this is one of the great opportunities we have over time with the business side. Remember, we had never consolidated our business side. It was compartmentalized in between all the different business we have. Tami and the team have, during that moment, and remember we said we're going to invest in order to see that we have the platforms of products on CX and UX for our customers to be harmonized in order to be able to scale this to be a good business, and that they are doing and probably are halfway through it. They're doing a lot of transformation in the business. Hans: (01:01:08) At the same time, there are some headwinds, as we have seen before. That would be the wireline, cyclical... Or no, it's not cyclical. It's a sustained decline. And then we have a wireless business where we take more than our fair share. We are leading in all segments. And that balance, of course, is coming into this quarter. Of course, we had more hardware this quarter as well. And then we are building for the new opportunities with 5G Mobile Edge Compute, five private 5G networks, the 5G Business Internet, which is using fixed wireless access. So we have a lot of new products coming out as we are building, and we have the same ambitions when it comes to financials.. Hans: (01:01:52) Then we will be realistic what's happening in market and how the team... But I'm proud of the team of what they're transforming to and what we're aspiring for. And seeing the progress on Mobile Edge Compute, and Business Internet, that's, of course, new opportunities that we have not seen coming into the P&L yet, but we're building it together with the transformation we're doing. Matt: (01:02:16) Yeah, so just a couple other comments on the business margin there, Colby. Hans mentioned the higher volumes, we mentioned it upfront that the wireless volumes that we saw, the gross adds, were not just higher than 2Q last year, also higher than 2Q '19. So certainly seeing volumes come back, especially in enterprise and small medium business. So that's having some impact there, and then obviously the wireline pressure. I would expect second half margins to be reasonably similar to what we saw in the first half of the year. The business transformation work the team is doing is having a positive impact with more to come as we go forward here. So feel good about the direction the team's headed there, in spite of these secular wireline pressures that we see. Matt: (01:03:07) And then in terms of your question on promotions, as Hans said, it's a promotion. That means it has both a start date and an end date and today is the end date. We've run promotions since the beginning of the wireless industry. They have evolved over time. They will continue to do so. And the great position we're in is because of the strong operational results and financial results. It gives us the ability when the time's right in the marketplace to bring the right promotion out there. We felt this was the right promotion at this time with the economic reopening and wanting to get more customers with a 5G device in their hand as we're about to launch C-Band within the next six months. Matt: (01:03:48) We will continue to look at what is the right promotion for the right time. But the underlying operational performance of the business showing up in sequential wireless service revenue increase, yet again, gives us a position to have flexibility as we think about how we approach the market. Colby Synesael: (01:04:07) Thank you. Speaker 2: (01:04:07) Great. Thanks, Colby. That's all the time we have today for questions. Thanks, everybody, and be safe. Brad: (01:04:15) Ladies and gentlemen, this does conclude the conference call for today. Thank you for your participation and for using Verizon Conference Services. You may now disconnect.