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Verizon Communications Inc. (VZ) Q3 2023 Earnings Call Transcript

Verizon Communications Inc. (VZ)

Q3 2023 Earnings Conference Call

Company Participants

Hans Vestberg - Chairman & CEO

Tony Skiadas - EVP & CFO

Brady Connor - SVP, IR

Conference Call Participants

Phil Cusick - JPMorgan

Simon Flannery - Morgan Stanley

John Hodulik - UBS

Brett Feldman - Goldman Sachs

Michael Rollins - Citigroup

Bryan Kraft - Deutsche Bank

Frank Louthan - Raymond James

David Barden - Bank of America

Craig Moffett - MoffettNathanson

Kannan Venkateshwar - Barclays

Greg Williams - TD Cowen

Tim Horan - Oppenheimer

Presentation

Operator

Good morning, and welcome to the Verizon Third Quarter 2023 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode and the floor will be opened for questions following the presentation. [Operator Instructions] 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

Thanks, Brad. Good morning, everyone, and welcome to our third quarter earnings conference call. I'm Brady Connor, and I'm joined by our Chairman and Chief Executive Officer, Hans Vestberg, as well as our Chief Financial Officer, Tony Skiadas.

Before we begin, I’d like to draw your attention to our Safe Harbor statement which can be found on Slide 2 of the presentation. 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-GAAP financial measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are included in the financial materials posted on our website.

Earlier this morning, we posted to our Investor Relations website, a detailed review of our third quarter results. You will find additional details in the earnings materials on our Investor Relations website.

With that, I'll turn the call over to Hans.

Hans Vestberg

Thank you, Brady, and good morning, to everyone. I am pleased to share our strong third quarter results making out the quarter with solid growth and improving profitability. It is clear that our strategy is working. In both the consumer and the business groups we are executing a segmented agile strategy that provides value to our customers and our bottom-line.

We have delivered growth in each of areas where on, wireless service revenue, EBITDA and free cash flow. This is evidence that we have the right strategy and are achieving our results in a financially disciplined way.

Now let me share our financials for the quarter. For the third quarter, wireless service revenue is up 3.9% year-over-year, driven by expanding and deepening our customer relationships. This revenue growth is a key driver for adjusted EBITDA of $12.2 billion for the quarter which is higher than both Q3 last year and sequentially.

Our year to-date free cash flow of $14.6 billion is already exceeding our full year free cash flow for 2022. Thanks to our focus on high quality revenue growth, disciplined promotion strategy, cost efficiency and CapEx reduction of the recent years of heightened capital-intensity driven by the C-band, and fiber investments.

I'm proud to share that my team and I have taken actions to further our position our financial strengths. Our strong cash generation enabled us to reduce net debt, strengthen our balance sheet, and deliver a higher dividend to our shareholders. We're working to bring our leverage ratio to the pre-Spectrum acquisition levels.

During the third quarter, we paid down $2.6 billion in debt and increased our dividend for the 17th consecutive year. A current industry record that we take pride in. Our dividend coverage is very healthy. Year to-date our free cash flow dividend payout ratio is approximately 56%, a significant improvement from a year ago.

In summary, in spite of an uncertain economic environment, we are on pace to finish 2023 strong. We are confident that we will deliver on the financial guidance that we issued to you at the start of the year and this morning are announcing higher free cash flow guidance for 2023. Tony will provide you more details in the few moments.

Now, let me share more on how our business units are driving our strategy forward. In the quarter, we delivered on our key growth areas, mobility, broadband and private networks. Thanks to our networks, scale and technology advantages.

In consumer mobility, we achieved sequential and year year-over-year improvement in postpaid phone net adds by continuing to put the customer at the center everything we do rather than engaging in aggressive promotional activity like others in the industry, we're offering our consumers optionality and flexibility to choose how they want to use our products and services.

Our differentiated approach or segmentation, financial discipline is paying off with growth in postpaid phone growth adds and lower promotional cash costs. There is more work to be done, but our responsible approach position us to grow subscribers profitably. Since its launch in May, myPlan continues to deliver a personalized experience, giving our customers the value, choice and control that they want.

During the third quarter,we enhanced myPlan by adding Ultimate Unlimited, a third tier with more value and services, further increasing our premium mix and ARPA growth. This is just one example of the flexibility and speed to market that myPlan provides. And I'm excited about what is to come. Our targeted and segmented market approach also serves as well during the iPhone 15 launch and we continue to execute with an iTunes meeting our customers’ needs while maintaining a disciplined approach.

Our competitive position is now stronger. And we’ve delivered positive consumer postpaid phone net adds in the month of September. We anticipate that momentum will continue as we are on track to exceed our postpaid phone net adds from Q4 of last year.

Postpaid phone shown levels are stable even with our targeted pricing actions throughout the year. We continue to see muted upgrade levels, which is something we are watching carefully and is a trend we expect will continue for the next few quarters.

Turning to business mobility. Verizon Business Group delivered 151,000, phone net ads and reached our ninth consecutive quarter above 125,000. Business in governments continue place an increased emphasis on best-in-class reliable connectivity that only Verizon provides. Across mobility, postpaid phone net adds were 100,000, compared to 8,000 last year. We have the largest customer base in the industry and are still finding new ways to add customers through innovation, service quality and a variety of offerings and partnerships that competitors cannot match.

As we discussed before, we’re seeking the optimal balance between price and quantity that allow us to grow our base profitability. In our value business we have had negative volumes, but I'm encouraged by our quarter-over-quarter improvements. As I’ve said before, the value business is a key part of our growth strategy, and we will continue to invest in it and adjust to the needs of the markets.

As we mentioned last quarter, we believe we're seeing the bottom for prepaid volumes and the team is committed and working daily to grow our value business.

Moving to broadband, we delivered another strong quarter with more than 400,000 new subscribers for the fourth quarter in a row. We finished Q3 with $10.3 million broadband subscribers, up by more than 1.7 million subscribers from a year ago, a 21% increase. Critical to the strengths of this key area is fixed wireless access, something you know we deeply believe in.

Our fixed wireless access net adds of 384,000 continue to be strong even with a recent $10 increase for new bundled customers, further evidence of the demand for our product. Where FWA is available, our customers take it and loving it as seen by the high net promoter score. I'm excited towards the share that on the Fios side we had 72,000 Internet net adds for the quarter, up, almost 20% year-over-year and one or best performances in seven years.

Fios remains a coveted, high quality service and we continue to take share and deliver strong numbers even in a lower mover environment. When it comes to private networks, we demand for the product continue to grow, especially those solutions built with licensed spectrum, which provides a more secure and differentiated experience for the end-users.

Businesses are increasingly looking to us for the private network solutions helping to grow our sales funnel and scale the number of installations each quarter.

Let me end by talking about the backbone of our business, our network. During the third quarter, we obtained early access to our remaining C-band spectrum. In urban markets, where C-band is already deployed, we're firing on all cylinders and leveraging its full potential through software upgrades, delivering two to three times more spectrum depth.

As a result, peak speeds go from 9 megabits per second to an amazing 2.4 gigabits per second enabling an even better experience for our customers. You’ve heard me say this before, but let me say it again. C-Band is a game change for our business, giving us better customer attention and step up, as well as a strong broadband opportunity with fixed wireless access.

Every day we see the benefits of our generation investment in C-band spectrum and the impact it will have for our customers for years to come. And our network is winning. This quarter, we received J.D. Power awards in all six US regions, receiving the most awards for wireless network quality for the 31st time in a row.

We have the best networks in the market and we will extend our lead as we complete our C-band deployment, first augmenting urban areas, and next year in suburban and rural markets. This is our key differentiator and the center of everything we do. And we're doing all of this in a responsible way. We're optimizing our network while returning to business as usual levels of CapEx.

We're finding cost efficiencies across our business both as a result of our a new structure, and by emphasizing profitability, when evaluating new opportunities like within business wireline. Our cost efficiency program remains on track to meet our savings goal of $2 billion to $3 billion annually by 2025.

Now let me turn the call over to Tony to discuss our financial and operational performance in more detail.

Tony Skiadas

Thanks, Hans and good morning. Our results for the third quarter continue to demonstrate our progress towards our three priorities, growing wireless service revenue, and driving EBITDA and free cash flow. As Hans said, we are executing on our plan and remain on track to meet our financial guidance for 2023. We've talked about improving our operational performance while maintaining financial discipline with the third quarter results representing another proof point that demonstrates we can deliver improving key metrics and strong financials.

Consumer postpaid phone net losses totaled $51,000 for the quarter, an improvement of $85,000, sequentially and $138,000 compared to the prior year. During the quarter, we executed well in a low switcher environment, enabling postpaid phone gross add growth of 2.3% year-over-year. Our postpaid phone churn of 0.85% represents a stable result even after implementing over $1 billion of annualized pricing actions in 2023.

Our segmented approach to the market and the structure and discipline of our promotional strategy helped to deliver strong postpaid phone gross adds and lower postpaid upgrades. The third quarter’s consumer upgrade rate of 3.6% is down 150 basis points year-over-year. The quality of the business we are writing in consumer remains high as myPlan continues to drive an elevated premium mix.

Consumer ARPA of $133.47 increased sequentially by 1.2% and year-over-year by 4.5%. We expect to deliver further ARPA growth as a result of the innovations of myPlan, as well as our most recent pricing actions. Verizon Business delivered another strong quarter with 151,000 phone net adds, which as Hans mentioned is our ninth consecutive quarter above 125,000.

While the macroeconomic environment is uncertain and businesses are more cautious than a year ago, mobility continues to be a top investment priority for our Business customers. We expect to continue to deliver strong volumes and expand their relationships by leveraging our position as the wireless market share leader for small and medium businesses, large enterprises and public sector customers.

Moving on to broadband, we delivered 434,000 net additions continuing the pace of over 400,000 net adds for the fourth quarter in a row. Customers are drawn to the quality of our service and overall value proposition for both FWA and Fios. For fixed wireless, gross add expansions grew 384,00 net adds for the quarter growing the base to nearly 2.7 million subscribers.

The addition of the second tranche of C-band spectrum will help us continue our FWA momentum as we work to build a long-term sustainable business. Fios Internet net adds were 72,000, up 11,000 year-over-year. ...

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