Verizon Communications Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
January 24, 2023

There are 14 speakers on the call.

Operator

Good morning, and welcome to the Verizon 4th Quarter 2022 Earnings Conference Call. 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.

Speaker 1

Thanks, Brad. Good morning and welcome to our Q4 earnings conference call. I'm Brady Connor and I'm joined by our Chairman and Chief Executive Officer, Hans Vestberg and Matt Ellis, our Chief Financial Officer. 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.

Speaker 1

Discussion 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 will be conducting a detailed review of our Q4 and full year results. I hope you all had a chance to read the material.

Speaker 1

I am going to briefly discuss the financial highlights before turning the call over to Hans to lead a discussion on our strategy, guidance and forward looking view of the business. Slide 3 shows a summary of our results. Consolidated total operating revenue was $35,300,000,000 in the 4th quarter, up 3.5% year over year. Wireless service revenue grew 5.9% year over year in the 4th quarter benefiting from unlimited plan migrations, are best 4th quarter total postpaid net additions in 7 years, pricing actions that we began implementing in June of 2022 are in a full quarter contribution from TracFone. Consolidated adjusted EBITDA was $11,700,000,000 for the 4th quarter, are down 0.2% year over year.

Speaker 1

Wireless service revenue growth was offset by higher promotional expense, participants are in the range of $1.19 adjusted earnings per share in the Q4 was $1.19 a decrease of 10.5% compared to the similar period in 2021, driven by higher interest expense, will be in the full year 2022 and exited the year with a net unsecured debt to adjusted EBITDA ratio of 2.7 times. With that, I'll now turn the call over to Hans. Thank you, Brady, and good morning, everyone. On today's earnings call,

Speaker 2

I will focus on our strategy, guidance, expectation for the business and why I'm so excited about the opportunities for the year ahead. Let me start by saying that we delivered against all of our revised at August provided in July, including 8.6% wireless service revenue growth, dollars 47,900,000,000 of adjusted EBITDA and adjusted earnings per share of $5.18 I'm pleased that the momentum built during the 3rd quarter continued into the Q4. Last quarter, we set expectation of a positive consumer phone net adds in the 4th quarter and we delivered against that expectation. Although we have more work to do, I'm encouraged by the improvement and expect to build on are in 2020 3. The improvement in the consumer performance was complemented by yet another strong mobility quarter in Verizon Business Group as well as continued success in fixed wireless access with net adds up sequentially in both consumer and business.

Speaker 2

Together with Fios' result, we added 416,000 broadband subscribers in the quarter, our best have a total broadband performance in over a decade and approximately 1,300,000 total broadband net adds for the year. Regarding our guidance, we have positioned ourselves to improve on our performance in 2023 and expect to build a good underlying operational momentum, although that will be offset by the impacts of the non cash factors such as promo amortization in our revenue growth and adjusted EBITDA. Additionally, we're seeing some impact of high interest rates. At the same time, we expect our capital spending to reduce significantly in 2023 as we reach the end of our incremental participants are in the

Speaker 3

range of $1,000,000,000 of C

Speaker 2

band spending, which will be a tailwind for free cash flow. We are striving to make further improvements and take even more action that will ultimately lead to

Speaker 3

better performance than the guidance

Speaker 2

we have outlined today. Will lead to better performance than the guidance we have outlined today. Matt will discuss the guidance in more detail later in the call. The industry enters 2,003 with continued macroeconomic uncertainty as elevated inflation and interest rates impact the broader economy. Still demand for our service remains strong given the growing importance of mobility and broadband to both consumers and businesses.

Speaker 2

The combination of our network reliability, diverse portfolio of products and services and the industry's strongest customer base provides us the flexibility to meet the changing customer needs even in difficult economic environment. We measure our success in maximizing value across stakeholders by our ability to grow service revenue, EBITDA and cash flow. Taking these three metrics together is how we hold ourselves accountable. We're well positioned to improve our performance can accelerate growth on a go forward basis with network quality as the foundation for our strategy and growth. We expect the wireless mobility and nationwide broadband will be the most significant contributors to Verizon's growth for the next will be driven by extending our network advantage using our C band spectrum, which we expect will strengthen our network leadership in the coming years.

Speaker 2

Are taking a balanced approach on how we run our business. Adding the right customers and generating ongoing profit from them is How we maximize value. We remain focused on our cost reduction and efficiency actions, while also maximizing our return on invested capital via better monetizing our assets to put us on track to improve free cash flow going forward. We're proud of being the strongest in the industry in terms of generating cash and want to preserve that while also continuing to strengthen our balance sheet. Are executing with discipline and will continue driving a strategy which produces sustainable long term growth and profitability.

Speaker 2

As connectivity plays an increasingly important role for consumers and businesses, it is the quality of the connectivity that matters the most. Not all networks are architected and built the same nor have the same quality. We have seen these differences in the past and expect that 5 d will be no different. Our engineers have the best track record for designing and building networks Our network will continue to evolve with a relentless commitment to quality and reliability, are adding capacity where needed and filling service gaps where they exist, even as capital intensity declines in the coming years. In the shift to 5 gs, we have been rapidly building out our C band spectrum with the most aggressive deployment plan in our company's history.

Speaker 2

Are tracking to 200,000,000 POPs this quarter and are well ahead of schedule to reach our 250,000,000 POP targeted by year end are in 2020 4. C band propagation is very similar to that of AWS and PCS spectrum, which covers more than 300,000,000 POPs today. This gives us a clear path to scale C band quickly and efficiency including in the 3 30 markets where we expect to gain complete access to the C band spectrum later this year. Due to the timing of spectrum availability, our deployment strategy targets the highest user areas first with the capability to deliver the most distinguished experience in places where the majority of customers consume mobile services. As additional spectrum is clear, we will have access to many new markets.

Speaker 2

As with prior generations of wireless technology, customers in all areas can expect to receive the best network experience. And where we have built out the C band, we're only getting started. Early deployments have limited to 60 megahertz or 100 megahertz in some early clearance markets. Consumer performance in this market has been encouraging as it evidenced by better retention, more favorable gross ad trends and higher premium uptake. Expected to be available in late 2023.

Speaker 2

We can deploy an average of 161 megahertz and up to 200 megahertz in certain markets across The entire continental U. S. When we turn on the full breadth of spectrum, we expect peak download speed to reach 2.4 gigabits per second, are up from the 900 megabits per second we see with 60 megahertz deployed, all while supporting far more users and applications. At the same time, we're also deploying our 5 gs stand alone core. So by the end of the year, you should see a network with incredible speeds, both downlink and uplink and position deliver 5 gs capabilities such as network slicing, voice over 5 gs We believe our network will allow us to maintain our premium position with our wireless mobility customers and provide reliable fixed wireless access services to consumers and businesses across the country.

Speaker 2

This is an example how we can monetize our multipurpose network by scaling several revenue stream on the same infrastructure to enhance our return on investment. We're adding far more capacity to our network than the peak usage increase we're expecting in fixed wireless markets. We continue to expect that we'll have 4000000 to 5000000 fixed wireless subscribers by the end of 2025, and those subscribers will be enabled by our current build and capital plans. Our mobility and broadband plans are supported by our deep fiber position and ongoing are in fiber investments. Approximately 50% of our sites are now served by our own fiber, up from 45% last We believe we are the only provider serving the level of its widest network with its own fiber.

Speaker 2

This supports superior quality of services and end to end owners' economics. That means better reliability and higher margins and look for us to continue to expand the percentage of sites on our own fiber. We also expanded our Fios footprint by over 500 and are in 50,000 locations in 2022, extending our Fios open for sales to more than 70,000,000 locations. You can expect continued fiber expansion in the years ahead. In summary, network quality is the foundation for our strategy and growth.

Speaker 2

And all of the moves we're making are focused on ensuring we continue our network leadership in the future. As I mentioned earlier, Verizon's success should be measured against 3 important metrics: service revenue, are in the range of $1,000,000 EBITDA and free cash flow. Let me now cover each of these in detail and tell you why I'm so confident in our ability will deliver against all three of these benchmarks. We expect that our network differentiation will be the cornerstone of our service revenue growth And that it will allow us to continue to attract the highest quality customer base in the industry and maintain our market leading share of the B2B market. Our fixed wireless access is also expected to contribute more meaningfully to service revenue as we enter the year growing rapidly with a base of more than 1 point are 4,000,000 subscribers.

Speaker 2

2022 demonstrated us that we need to be even more agile and responsive in the consumer market. This is one of the reasons I assume leadership of the business late last year. We are moving into 2023 with momentum and are in the range of $1,000,000,000 in the range of $1,000,000,000 in the range of $1,000,000,000

Speaker 3

in the range of $1,000,000,000 in the range of $1,000,000 in the range of $1,000,000 in the range of $1,000,000 in the range of

Speaker 2

$1,000,000 in the range of of offerings from entry level prepaid all the way up to premium unlimited postpaid plans for the first time in our history. This will enable us to better attract new customers while also retaining customers through their mobile journey. You have already seen us take more segmented approach to the market through the Wellcome Unlimited and One Unlimited plans in postpaid and the launch of total by Verizon in prepaid. We're already seeing the benefit from these actions. In 2023, our plans will continue to evolve as we look for the best ways to cater to our customers, participants and ensure they receive the plan that best fits their needs.

Speaker 2

We remain disciplined around our core pricing and continue to perform well with our premium customers on retention and step up activity. As we move into 2023, we're taking a more localized approach with our network and go to market strategy, providing greater autonomy to the teams on the front line and speeding up the pace of decision making. This will allow us to compete more effectively across geographies, particularly where dynamics may differ by individual market. Finally, we continue to revise our sales compensation structure ensuring we have the right incentives in place to drive sales growth. The customers we have and continue to attract represent the highest quality customer base in the industry.

Speaker 2

Based on our customer payment We continue to see only a limited impact from the macroeconomic environment on our customers. While we are watching this closely, we have a lot of confidence in the resilience of our customer base. Scaling of new business such as private 5 and edge computing will also be a strategic focus in 2023. Our funnel is strong and we're making the appropriate investment to ensure such services provide a meaningful contribution to future growth in the years ahead, which differentiates us in the industry. You can expect Verizon to compete, but I want to underline again that we will not sacrifice financial for volumes.

Speaker 2

We continue to focus on improving our cost of acquisition and retention and believe current promotion incentives are not sustainable for the industry in the long run. Although we have participated to some extent in this dynamic, expect us to pursue more ways to move away from the aggressive handset subsidies with offers like Welcome Unlimited Plan, which offers attractive headline pricing for are participating in the business while reducing device subsidies. We manage the business for profitability and such actions drive healthy lifetime value for the business. Moving to Business Wireline. We're taking several actions to reduce the financial impact of the unit and are scaling back on pursuing low are in order to again drive improved profitability.

Speaker 2

While this may result in missing out some revenue, It is right move and one that will lead to higher margin and cash flow over time. At the same time, we're focused on further improving the cost structure through greater efficiencies. You may recall that we embarked on a new cost cutting initiative late last year. A component of this initiative is the formation of Verizon Global Services. This organization is accelerating efforts to drive cross functional efficiencies, enabling us will reinvest savings in network superiority and customer growth while contributing the long term profitability.

Speaker 2

Additional opportunity exists in sourcing, sales and marketing and corporate system among others. The heavy lifting is are now underway as we execute against our goal to deliver $2,000,000,000 to $3,000,000,000 of run rate savings by 2025. So our EBITDA strategy is clear. Grow profitable volumes in both consumer and business based on our increasingly differentiated network and manage our expenses the way you would expect us to do. By growing service revenue in VIDA, we believe that we will be able to provide our are in the range of $1,000,000,000 with increasingly healthy free cash flow, which will support the strength of our balance sheet and fund our dividend growth.

Speaker 2

Our current streak of raising the dividend 16 years in a row is unmatched in the industry, and we intend to be able to continue that trend. Because our mobility and fixed water actions products leverage the same infrastructure, they provide a capital efficient path to future cash flow growth. We believe that we will become increasingly efficient with our capital, using less capital to generate every dollar revenue for years to come. That will enable us to produce expanding cash flow that we can both reinvest in our business and return to our shareholders. And as you know, we're doing all of this as our capital spending budget is expected to decline from $23,100,000,000 in 2022 So on the $19,000,000,000 at the midpoint of our guidance range this year, a reduction of nearly 20% year over year.

Speaker 2

In 2024, we expect our CapEx to be around $17,000,000,000 which we expect to represent the lowest capital intensity in over a decade are among the lowest in the industry. We expect we will deliver a best in class network experience while reducing our 2022 CapEx are diversed by more than €5,000,000,000 over the next couple of years. With that, I turn it over to Matt to discuss guidance.

Speaker 4

Thank you, Hans, and good morning. I want to spend some time walking you through our 2023 guidance, while also commenting on our longer term outlook. Our 2023 guidance reflects momentum we have exiting 2022, which we expect to drive wireless service revenue growth. For 2023, we expect total wireless service revenues grow between 2.5% and 4.5%, Driven by increased penetration of premium unlimited plans, scaling of fixed wireless, continued growth in products and services such as content and device protection plans and the full year impact of our pricing actions taken in 2022. As noted in our earnings materials, Our wireless service revenue growth outlook includes an approximately 190 basis point benefit from a large allocation of our administrative and telco recovery fees, which partially recover network operating costs to wireless service revenue from other revenue.

Speaker 4

In addition, we expect promo amortization to be approximately $1,000,000,000 higher than last year. We expect adjusted EBITDA to be within a range of $47,000,000,000 to $48,500,000,000 This outlook reflects expected higher wireless service revenue offset by wireline and other revenue declines and higher marketing and network operating expenses. Full year adjusted earnings per share is expected to be $4.55 are expected to be approximately $4.85 As noted on our Q3 earnings call, high interest rates are expected to result in approximately $0.25 to 0.30 of interest expense pressure in 2023 due to higher floating rate debt costs and higher securitization costs for our growing device payment portfolio. We continue to believe we have the right debt structure for the long term and have managed the balance sheet appropriately by keeping short term maturities to a minimum in this higher interest rate environment. Higher rates of pension and OPEB in addition to the lower pension asset base resulted from negative returns in 2022 are also expected to impact our adjusted EPS by approximately $0.12 to $0.15 compared to 2022.

Speaker 4

This flows through other income and expense on our income statement. Finally, we expect approximately $0.03 to $0.05 of impact from higher depreciation expense, primarily driven by the C band equipment being put into service across 2022 and into 2023. Our adjusted effective income tax rate is expected to be in the range of 22.5% to 24.0% based on current legislation. Capital spending for the full year is expected to be between $18,250,000,000 $19,250,000,000 including the final are in the range of $1,750,000,000 of the incremental $10,000,000,000 of C band related capital spending and we continue to expect total capital spending to be approximately $17,000,000,000 in 2024. The reduction from the $23,100,000,000 CapEx in 2022 is expected to drive higher free cash flow in 2023 despite increases in cash interest and cash taxes.

Speaker 4

As previously discussed, we will complete our accelerated $10,000,000,000 C band program this year, after which C band capital expenditures will be part of our business as usual capital program. Looking beyond 2023, given our exit rate from 2022, we don't expect to hit the long range outlook as we projected at the Investor Day last year. However, due to the way we have positioned our network and service offerings coming into 2023, we do expect increasing growth in revenue and cash flow in are in the range of 2nd quarters.

Speaker 2

Thank you, Matt. Let me summarize the Verizon opportunity in a few key points. We're making the necessary improvements to drive better performance. We have the best network and it's only getting better even as capital intensity improves. We have the largest EBITDA base in the industry and a clear path to free cash flow expansion.

Speaker 2

And finally, we have one of the most attractive dividends in the market and we intend to be able to continue the trend of growing the dividend each year. By that, I hand it over to Brady to start the Q and A.

Speaker 1

Thanks Hans. Brad, we're ready to take questions.

Operator

Your first question comes from Simon Flannery of Morgan Stanley. Your line is open, sir.

Speaker 5

Thanks a lot and good morning. I had a couple of questions on the guidance. The first one is, how are you thinking about your confidence and the visibility of this guide as compared to a year ago? Obviously, We've had the war and stuff like that, but I think the reductions in guidance obviously were a concern for investors. So As you went through this process, was the deliberate conservatism that you were trying to bake in to make sure that you could hit and I think Hans you might have mentioned exceed have the guidance with additional steps.

Speaker 5

So that kind of setup would be great. And then I guess for Matt, you called out some of the pressures on the bottom line, but You had a $0.30 range on your EPS guide. I think it was $0.15 a year ago, and it sounded like on the items you gave, the range wasn't that wide. So perhaps you can just give us some color on what caused you to be as wide this year on the EPS? Thank you.

Speaker 2

Thank you, Simon. I can start. I mean, when it comes to the guidance, I mean, we of course, it's a little bit uncertain, as we said, coming into the year. But That's how we are running our business and that's how we take decisions. And as I said, I mean, our job is, of course, to see that we are meeting or exceeding the guidance we have given out.

Speaker 2

And that's how we're going to work all the year. And our teams are set up to work like that. We are in the beginning of the year, so we're going to see how are in the range of 2.5 times. Okay. And then just a follow-up on the As I said before, we have now all the assets, all the way from the network to our to are prepaid to the postpaid, all that.

Speaker 2

And from us, it's a lot of execution in a competitive market, but we definitely believe

Speaker 4

we can compete very well in that market. Matt? Thanks Hans. Good morning, Simon. So as you think about the guide for the year, obviously, there's a number of items in there.

Speaker 4

As I think about the range, we can get to the top end of the range there with strong execution, the activity around the cost program scaling, that Flywheel moving faster than our base assumption. And just if we see more volumes come through the business there, obviously, the low end will reflect The promo environment, the overall competitive environment and then we'll see items like inflation and so on. So the range of the EPS guide, I think very are similar to the EBITDA guide that we've given. And I think it reflects as we come into this year, when you think about some of the unknowns will play out here, so in the macro environment and the competitive environment we feel is the right range to have for 2023. As Hans said, there's a lot are ready for us to stay focused on and make sure we produce the best result possible.

Speaker 6

All right. Thank you.

Speaker 1

Thanks, Simon. We'll have it ready for the next question.

Operator

Thank you. The next question comes from John Hodulik of UBS. Your line is open, sir.

Speaker 7

Are ready to take questions. Great. Thanks, guys. Can we talk about consumer margins within the guidance? They were down about are almost 400 basis points in 2022.

Speaker 7

And Matt and Hans, you guys gave some good color on some puts and takes around promotions, around are in the range of $1,000,000 and I think, I guess, higher marketing and network operation costs. But I guess, any other puts and takes to call out? And as we look into 'twenty three as part of the guidance, should we expect the consumer margins to sort of flatten here and do you guys have visibility that as you guys a lot of these initiatives take hold that we can start to see some improving margins on the consumer side. Thanks.

Speaker 2

Thank you, Herman. I can I mean, of course, we're doing it quite a lot in the consumer segment right now, all the way from addressing areas where we have softness in our will welcome, for example, in order to create growth, but also we are regionalizing our business, both on the side and the consumer side in order to take quicker decision, but also that the network is so strong in local markets while we're building The C band, we won't take advantage of that? And as we said before, we have the chance to or we don't have a chance. We see the correlation in between C band deployment and step ups and of course, fixed wireless access and the majority of our fixed wireless access customer coming on C band right now. So that's why.

Speaker 2

And finally, we have also worked with spending the consumer investment, I call it, all the way what we're doing Above the line on promo, what we're doing below the line on retention and how much we do in media, we're doing that much more agile. I think that will help us to manage participants continue our clear path and a clear target of growing our top line and expanding That's our job. Then there are some headwinds that Matt has talked about, but obviously, the underlying should be improving with the cost cuts and the way we're working in the consumer group. Matt?

Speaker 4

Yes. Thanks Hans. Good morning, John. So if you think about participants are in the range of $1,000,000,000. The year over year reduction in 2022, remember at the start of the year, we said that we expected about a 200 basis point impact because of the inclusion of are in the business for the year.

Speaker 4

Obviously, accretive and absolute terms, but from a margin standpoint, we did expect to see that. So then obviously, there's some other items in there. We talked a little bit about the inflation impact last year, obviously, synergies from within TracFone as we move more customers over to our own network will be an upside. But then as we mentioned in the prepared remarks, obviously, the promo amortization expected to be up on a year over year basis as the delay between being at these higher levels from a cash basis and then that flowing through on an accounting basis. So when you net those things out, move forward into subsequent years.

Speaker 7

Great. Thanks, guys.

Speaker 1

Yes. Thanks, John. Brad, we're ready for the next question.

Operator

Thank you. The next question comes from Brett Feldman of Goldman Sachs. Your line is open, sir.

Speaker 8

Thanks. I'm actually going to stick with are in the range of $1,000,000,000 and I was hoping we could get a little more insight into 2 different tools you're using to go to market. The first is BOKEM Unlimited. You've been advertising it quite a bit and you've mentioned a couple of times during your prepared remarks. I'm wondering to what extent are you finding that Welcome Unlimited is indeed a popular plan with new consumers versus the extent to which it's driving wireless shoppers into your channels where you're actually more frequently converting them into Higher tiered plans, that's the first question.

Speaker 8

And then it seems like you have been reluctant to make greater use of device promos, obviously, you were using them to some extent last year. How are you thinking about the role of device promos as you go to market this year and you look to sort of sustain these positive consumer phone net adds. Thank you.

Speaker 2

Thanks. The Welcome Unlimited is working Exactly as we wanted. I mean, it creates the store traffic. We bring our customers in, and we see that the customer gets the plans they want. Participants We have not seen any step downs of that is coming from that.

Speaker 2

We have more seen an opportunity for our customers to have a conversation with them. And of course, remember, that's a bring your own device. It's for 4 lines, and that's the way we have been dealing. And we learned a lot from The first welcome we started with somewhere in the Q3, I remember, or beginning or end of the second When we saw a little bit and that was an area where we were soft. That's where we clearly saw that customers were going to others.

Speaker 2

This will now have the burden and then come to us. And if you then add that, you see our Premium Unlimited continue to do well. We went up now to 45 participants are actually from 41% in the 3rd quarter, I think. So we added 4% more on unlimited premium. So that is working for us.

Speaker 2

Just need to be agile, stay close to see which segment and then be aggressive in the segment we need and the segment we're performing well in, we'll let them continue to perform well. And when it comes to device promos, yes, we understand that part of the competition and in part of the market. We will be in part in that as well. But we will continue to be cautious and see that we actually are using device promos in the right moment for the right customers. And You saw us last year coming in and out, sometimes we're a little bit more aggressive and others we were actually the least aggressive.

Speaker 2

And I think that's how will continue this year depending on where the market is going. But what you can expect from us in the consumer unit is to be agile, take quick decisions And see if they're working, then we'll continue. If they're not working, we're pulling them. That's why I'm into this basically every day myself nowadays. And I think this is have proven that we get the momentum with the team and the team is actually executing well.

Speaker 2

We have more to do. I mean, I always say that. I mean, it's going to take a long time before I feel that I'm 100% satisfied or happy, but definitely it's a work to do here, but I've seen the good momentum.

Speaker 6

Thank you.

Speaker 1

Yes. Thanks, Brett. Brad, we're ready for the next question.

Operator

The next question comes from Phil Cusick of JPMorgan. Your line is open.

Speaker 3

Participants are ready to take questions.

Speaker 7

Hi, guys. Thank you. Thinking with wireless, on service revenue, when I pull out the definition change from other to service revenue. You're guiding to roughly 1% to 2% wireless service revenue growth in 2023, which is a big deceleration from almost 6% this quarter. How should we think about this in regards to phone ads and ARPU and the impact of promotions on service revenue, can you just put the pieces together for us?

Speaker 7

And do you expect that service revenue will stay positive each quarter this year or actually flips to negative at some point? And just on top of that, typically, we see things much slower in terms of subscribers from 4Q to 1Q. While I don't expect you to guide on subscribers, do you think we'll see sort of typical seasonality this quarter or do you anticipate sort of better performance? Thank you very much.

Speaker 2

I can start and then Matt can break down the numbers you're talking about. I mean, yes, participants We on the premium segment, there is seasonality in the Q1, and I don't think that's going to be different this year. However, our work is to keep up the momentum that we had from the Q4 into this year, where we had good store traffic year Quarter over quarter and also high conversion rate, but it also means that we need to agile and see what's happening in the market. And it's a little bit are willing to do any guidance or something like that, which we're not doing on net adds. But clearly, there is going to be seasonality, But we have good momentum and we're going to continue to execute and be very close to the market.

Speaker 2

Matt?

Speaker 4

Yes, Phil, so kind of unpacking some of the piece answers your question there. So seasonality, absolutely, we expect that to look reasonably as you would expect throughout the year from an overall standpoint, in terms of the service revenue guide, your math is correct. When you think about the Q4, you said close to 6%. Remember that included a full quarter of owning track in 4Q this year versus only part of 4Q last Yes. So as we get into 2023, finally on a year over year basis, we'll talk about stuff on an apples to apples basis and not with and without M and A items, which is nice.

Speaker 4

Once you remove that very similar. In terms of the piece parts within wireless service revenue guide, think about you got the positive impacts of the price ups. Obviously, we had 6 months impact last year approximately. You had a full year impact this year. Also the benefit of the FWA momentum we had and having 1,400,000 subscribers in the base at the start of this year that we're billing throughout the year.

Speaker 4

But that's offset by the promo amortization, which as I mentioned in the upfront comments will be higher in the income statement year over year With the timing of the recognition of that and then also the impact of the volumes last year offsetting some of the ARPA benefit we had. So the task for the team going forward is to continue the momentum That we started to see in the second half of last year as Hans mentioned, and that will put us in a position to continue to push service revenue in the positive direction going forward.

Speaker 7

Thanks, guys.

Speaker 1

Are ready to take the next question.

Operator

Thank you. The next question is from David Barden of Bank of America. Your line is open.

Speaker 9

Hey, guys. Good morning. Thanks for taking the questions. The first one, maybe Matt, could we refresh The free cash flow outlook for 2023, I think the midpoint was 21,000,000,000 are up $1,000,000,000 the CapEx, which is down $4,000,000,000 It feels like it should be roughly $17,000,000,000 Unless there's other things in taxes and working capital related to some of these promotions. So if you could kind of refresh that a little bit, that would be awesome.

Speaker 9

And then Hans, You called out 3 things as it relates to the C band deployment and this has been is a big success for Verizon is getting this build done. I think that some people have been asking themselves like where the return is From all the money that's been spent. And you highlighted higher retention, better gross adds and higher premium Hey, great. Are there numbers that you can put around that, that we could grab on to and say, oh, when in 2024 Verizon doubles their footprint in C band, with the new spectrum getting cleared, we can put a number on that and say, oh, this is going to be the return that Verizon gets from this build. Thank you so much.

Speaker 2

Why don't you start, Matt and I take the second question on the C band? Yes.

Speaker 4

So on the free cash flow, David, obviously, last year, we said We expect you had the right number expectation, where we said free cash flow might be for 2023. As I think about what we see the business today versus where it was a year ago, couple of factors that are different. Your CapEx very much in line with where we thought it would be at this point. The team did a great job last year deploying C band. And obviously, we spent most of the $10,000,000,000 So you could have nice year over year benefit.

Speaker 4

Offsetting that, cash taxes will be higher this year as we have less benefit from a higher CapEx number and also Both depreciation dropping down, that was in our expectation last year. Interest rates were obviously very different than we expected last year. You touched on those. And then the jump off point from the EBITDA in the business at the end of 2022 to 20 We're not guiding specifically to a cash flow number. We historically haven't.

Speaker 4

But you got the right moving pieces in there. So net net, the CapEx reduction year over year gives us a good tailwind to think about cash flow for this year. So with that, I'll I know, Hans, you took out the C band question. Yes.

Speaker 2

And it's, of course, a focus for us to continue to grow the cash flow, as I said so many times. So will continue on that work. When it comes to the C band, first of all, we have said from the beginning that the C band acquisition we did is a multi decade spectrum. It's going to it's so much and in so many years. And of course, that was a deliberate decision because we believe we're going to be in wireless business for the eternity of the of Horizon's history.

Speaker 2

So that's very important. However, when it comes to see impacts, and I think I mentioned some of them, If you think about fixed wireless access, the majority of all new customers are coming on the C band right now. That's a clear indication. Without the C band, we couldn't grow the broadband right now. We did a history high 1,400,000,000 net adds in the year of broadband subscribers.

Speaker 2

So Of course, a lot of contributor to C band, and that's a clear metric you have. The other metrics you have is, of course, unlimited premium, where we say that Actually, we're performing very well where we have deployed the C band in order to get customers to step up. And the step up is very important. We are in a multi subscription business participants are in a subscription business. And the more you can see that you're upgrading the price, the P on that quantity, It's enormously important for long term value for our customers.

Speaker 2

The third one that is coming and I mentioned also when I open this, of course, private 5 gs Networks, Mobile Edge Compute, all that is, of course, going to be very much supported by the C band as well. There we will come back and start the We feel that, that is coming into the play from a more significant portion. But mobility, and remember also that we have the wireless are

Speaker 3

on the

Speaker 2

business side. The business side is actually growing because of the reliability of our network and the resilience of our network, which How our enterprise customers are buying from us when it comes to wireless business. So I think there are many metrics that you can see already now That is really connected to C band. Then I just want to remind you, it's almost less I think it's 1 year since we got since we launched the C band, it's only 1 year and we're going to cross 200,000,000 POPs. We have never built so fast in the entire history of the company, and we're well ahead of the plan to hit the 250,000,000 POPs that we said at the Investor Day by end of 2024.

Speaker 2

So I think that this is really a game changer in the market and we see performance wise, we outperformed and we have the most resilient 5 gs network in the nation And we're just starting. You're starting with 60 and 100 megahertz. And as you heard me talking, we have 160 in average. It's going to be 200 later on. It is a game changer and we can already see it right now and we see already metrics right now that is proving it.

Speaker 2

Good.

Speaker 9

Thanks Hans. Thank you.

Speaker 1

Yes. Thanks, Dave. Brad, we're ready for the next question.

Operator

The next question comes from Craig Moffett of MoffettNathanson. Your line is open. I'm sorry, Michael Rollins of Citibank. Your line is open.

Speaker 10

Hi, good morning. Two questions, if I could. The first one, as you mentioned earlier in the discussion, that you pulled back from some of those longer term targets that you had previously added the 3 plus percent service revenue and other growth for this year and 4 plus at or above the plan from a few years ago? And then the areas of shortfall, and if those areas, do you view those as temporary or more permanent changes in the opportunity for Verizon. Thanks.

Speaker 2

Okay. I can start. I mean, first of all, We're more confident than ever that we have the right strategy and we have the 5 vectors of growth. All of them are going along. Some are are exceeding our expectations.

Speaker 2

Some are a little bit slower and some have a little bit different jump off points. That's where we are. There's no difference how we see the market and how we believe we can compete in all the 5 vectors of growth that we outlined in the last time. It's more a push in time than something else because of this year or this year, 2022, I guess, I should say had some jump off that is not really helping us. But all in all, The whole strategy, where we're going, I have a lot of confidence in our team.

Speaker 2

The team has a lot of confidence that we're executing. We're eliminating the things that have been distracting us, all the rates from Verizon Media Group, etcetera. Then we have some headwinds that we constantly work with as well that we don't talk so much about. On the wireline side, I talked about that today. I mean everything from the cost out, but not only that, we're going to be even more prudent what type of business we're taking, which will reduce our top line probably, but it will improve our profitability and cash flow.

Speaker 2

So you're going to see you're taking many actions to see that we're delivering on the plans, The long term plans, but there are some shifts in it. Matt?

Speaker 4

Yes. Thanks Hans. So, Mike, as you think about the conversation we had last and we talked about the long term outlook. We provided the piece parts. Maybe if I go through some of those and where we are.

Speaker 4

Some of them were absolutely where we expected to be, think about nationwide broadband with the year we had on FWA, but also Fios and the expectation to continue to see very good progress there. That's very much in line with the expectations we outlined a year ago. Also business segment mobility results with 6 consecutive quarters above 150,000 net adds, are very much in line with the expectations that we had at the Investor Day. Couple of areas where we are behind participants You're talking about the technology adoption there on a new technology, that adoption curve, a little are lower than maybe we would like, but as you heard from Hans in the prepared remarks, feeling that we're starting to see some momentum there. So still feel good about are interested in the opportunity there, but the pace of the adoption curve, a little different than we hoped it might be, but the upside there participants are 2020 than where we ended up.

Speaker 4

Obviously, a lot of that variance occurred in the are part of the year and you saw the actions taken. But if you think about the piece parts of the long term outlook that we described a year ago and then how those have played out in the past 12 months. Hopefully, that gives you a little more color in terms of where things are moving along very much in line where we also saw some areas where we've had to we have opportunity will see further improvement as we go forward.

Speaker 10

Thanks.

Speaker 1

Great. Yes. Thanks, Mike. Brad, we're ready for the next question.

Operator

Thank you. The next question comes from Craig Moffett of MoffettNathanson. Your line is open.

Speaker 7

Yes. Hi. Sorry, I hope you can hear me. So Hans, I wonder if you could just talk a bit about your bundling strategy, Particularly on the consumer side, with both the strength now in fixed wireless, but also Fios, Is it your view that going forward, the consumer is going to buy wireless and wireline or

Speaker 2

Hey, Craig. No, I think it's a really good question. Of course, we have seen this as a very Strong consumer movement in Europe that is to a high degree have convergence. In the U. S, we're, are, I would say, much lower.

Speaker 2

But clearly, it is something that our customers are asking for. So it's actually consumer And I spent a lot of time in the stores meeting a lot of our consumers, and they see a clear advantage to have the Same provider on the broadband as on the wireless. I don't think we'll get into any European levels, But clearly, this is a movement. And Verizon is super good position here. We have owner's economics on our broadband and on our are wireless nationwide, both of them.

Speaker 2

And that's, of course, we're going to meet the customers here. If the customer thinks that is what they need, we're going to offer it, and that's why we have this balance in the market. If they want to have them separate, we can do that as well. We have all these economics on both of them. But I think that trend will continue given how The consumer research we're doing and the consumers we're talking to, that's something that exactly.

Speaker 2

And it's not only consumers. You need to think about small and medium business as well. Make it convenient from them both having the wireless and the broadband because any SMB today and we spend we probably serve So half of the SMBs in the country, any SMB today need a digital front door and then being mobile first. So this is really good for us. And if you look at our numbers this year on both on fixed wireless access and mobility in the business segment, SMB has been very important for us.

Speaker 2

So Yes. I think there's something in there definitely and it's a consumer desire and we're going to meet that desire as we continue.

Speaker 7

And are there big differences between the way you think about it in Fios versus non Fios markets?

Speaker 2

No, it's not different. We see it in the same way if the customer of course, we're much more mature historically in the Fios footprint. On the other side, when we do fixed wireless access, it's a much more natural discussion with the customer As we have it from the beginning, so I would say that we probably have a big opportunity on the Fios segment to have Customers both on the fixed and the mobile. On the fixed wireless access, I think that there you start actually on a strong position when you start offering fixed wireless access Many of the customers sort of coming in either or a cable provider and have our wireless and that's how they move over to us.

Speaker 4

Got it.

Speaker 1

Are ready for the next question.

Operator

Thank you. The next question comes from Kannan Venkateshwar

Speaker 11

are interested in the ability to see the growth of the unit growth versus pricing. Obviously, you guys have made a deliberate choice not to chase unit growth Near term. But could you help us think through how you think about this longer term? Because once you receive market share. Obviously, it can be pretty expensive to get it back.

Speaker 11

And so when we think about this balance between pricing and unit growth, How important is unit growth, not just for short term as you look at 2023, but also longer term, especially in when it comes to postpaid phone growth? Thank you.

Speaker 2

Thank you. Good question. I think that as you heard us at least, I mean, we think that profitable growth is the most important, both to have the right customers Retained with us and the ones we're getting. So that's an overarching measurement we need to have. Then of course, It's always going to be new customers that are important for our base.

Speaker 2

But remember also, This market right now, if you talk about the premium segment, there are, of course, a certain amount of switchers in the market and then there are a certain amount of people going from pre to postpaid. Participants There is no infusion of new customers in the system. So they're coming from 2 sources, And you need to think about how you do that. And I think we have great opportunities right now with the TracFone brands we have to see and total wireless To see that we are taking care of that pre to post migration, which we have not been part of before, we still have some work with the IT stacks and all of that. But clearly, today, we are running on both sides.

Speaker 2

And on the switcher pool, yes, there we're going to be are seeing that we're prudent and disciplined, but we will go for the units we think are the right. So but it's a This is long term that you stay with the customers to get the long term value from them. But it's a balance of it all the time and that we'll continue to have.

Speaker 11

All right. Thank you.

Speaker 1

Yes. Great. Thanks, Kannan. Brad, we're ready for the next question.

Operator

The next question comes from Doug Mitchelson of Credit Suisse. Your line is open.

Speaker 12

Thanks so much. You talked about amortization being up $1,000,000,000 for phone subsidies to catch up with cash spending. Embedded in all your guidance, is cash spending at Peak levels, is there a scope for it still to go higher? I know it depends on the competitive environment that it could eventually improve. But Are we at peak levels?

Speaker 12

It's just a question of amortization catching up. And I'm curious when you think about the service revenue guide for wireless, participants are there any price increases anticipated in that guide and kind of what level of price increase? I know it's sensitive topic, but just curious how we should think about that revenue growth. Thank you.

Speaker 2

Thank you. Now if we talk The price increases, I just want to come back to what I said before. I mean, we will be surgical and segmented in our approach. There are certain segment we need to be more aggressive on. There might be areas where we see opportunities for price increases.

Speaker 2

There are no major price increases included at this moment. We need to see where the market are going and also where cost levels are going. But we will always look at that, but it's nothing right now that we have in our plans. Participants.

Speaker 4

Yes. On the promotion piece, you've got the understanding of the accounting treatment versus the cash there Doug. And certainly, our assumption is that the marketplace will continue to be competitive, but we're We're not going to go into this 100% details of what's in the guide there. We but we do assume that we'll continue to see competitive level in line with the past participants are in a couple of years and then, as Hans said, we'll continue to look for ways to put plans in the marketplace that reduce the level of subsidy out there as well and we'll continue to push for those opportunities.

Speaker 10

Great.

Speaker 12

Thank you.

Speaker 1

Yes. Thanks, Doug. Brad Ray for the next question.

Operator

The next question comes from Tim Horan of Oppenheimer. Your line is open, sir.

Speaker 13

Thanks, guys. Matt, can you talk about your goals for free cash flow? And Specifically, how much do you think you can reduce the debt by per year kind of going forward at this point? And then secondly, can you talk about It seems like you're implying with your 2025 guidance that this is kind of a good run rate, but yet Your speeds are going to be increasing threefold and coverage you're going to basically get a massive amount of capacity kind of going out there. But do you think this is a good run rate for fixed wireless or can accelerate?

Speaker 2

I can start with Fixed Wireless Access. First of all, we just reiterated what you said in Investor Day, 4000000 to 5000000 subscribers on Fixed Wireless Access, our job is always to try to beat that, but that was we just reiterated that and we are well ahead on that plan. Then the second is, of course, when it comes to our capacity, we have definitely capacity for that and much more. And again, we have a multi usage of our network that has been sort of the basis for this, meaning the same radio based stations are serving mobility, fixed voice access and mobile edge compute, And we're not doing separate. In the distant future, way above the 4% and 5%, we can always come into sort of decisions of splitting sales in order to get more fixed wireless access, but that's very far away from now.

Speaker 2

We have ample capacity for the guide and much more than that. So and of course, our team is doing everything to see that we can continue to exceed our targets.

Speaker 4

Hey, Tim. On the free cash flow question. So absolutely, one of our goals is to continue to grow cash flow. Hans mentioned that participants you should measure us on revenue growth, EBITDA growth and cash flow growth. And that cash flow growth is something we expect to be able to continue to generate going forward.

Speaker 4

Obviously, the capital reduction from the high point in are in the range of $22,000,000 to the guide we gave for this year and then an even lower amount next year will be a positive are towards that as we continue to obviously make progress on the income statement as well. You should see that contribute there as well. So that puts us in a position where we can start to see accelerated levels of debt reduction are in the same period versus what you've seen in the past year or so. So that's the targets we have ahead of us and look forward to are discussing progress against as we go forward here.

Speaker 10

Thank you.

Speaker 1

Yes, great. Thanks, Tim. Brad, we've got time for one more question.

Operator

Thank you. The final question for today will come from Brian Kraft of Deutsche Bank. Your line is open.

Speaker 6

Hi, good morning. I wanted to ask you about business postpaid phone net adds. They seem to be a bit lighter this quarter than they've been in the past are in the range of 4 or 5 quarters. And I'm just wondering if you're seeing trends that are softened due to macroeconomic factors such as corporate staff reductions Or if it's competitive reasons or is it any slowdown in the secular trend toward company issued devices? And then related to that, Can you talk about what you're assuming in the guidance at a high level for the macroeconomic environment?

Speaker 6

For example, are you assuming soft are in a more protracted downturn in the guidance? Thank you.

Speaker 2

Thank you. Yes, so this is a multifaceted question on the Q4, of course. On the business to business side, SMBs continue very strong. And as I said, they need a store a digital storefront and And the mobile first strategy in today's world after COVID. So I think that we have been performing very well participants On the enterprise side, it's a little bit different, but we see that Bring Your Own Device is going are down and we see more companies saying that they want the company phone, which is, of course, helping us here.

Speaker 2

So and that trend we have seen for a couple of quarters. So I think both of them are pretty solid. On the consumer side, as I said, we had positive net adds. We have also, as I said before, a little bit spillover from the churn from the price increase at the beginning of the quarter. And then there There was actually fewer days of sales in the Q4 than in a normal quarter.

Speaker 2

So I don't think there are any new are more than what I said. Customers were a little bit later in the holiday season to do. They had higher intent when it comes to consumers, But it was nothing macroeconomically different. And I talked about Matt and I talked about the bad debt and the delinquency being Like pre COVID or equal or better than pre COVID. So no, there's nothing there.

Speaker 2

We are, of course, watching it, but so We continue to progress well.

Speaker 4

Yes. Just to add on a couple of points. So as you think about the VPG net adds, you're always going to see a little bit of Volatility up and down from 1 quarter to the next just because of the size of some of the transactions there. Numbers that we produce throughout the year and look forward to continuing to have best in class market share within the

Speaker 3

will be in the

Speaker 4

Verizon Business Group space as we go forward. In terms of the macroeconomic assumptions in the guide, I wouldn't say we have anything too dissimilar to what you've heard from a number of other people during earnings season. But one of the things I come back to is the resiliency of our customer base. We've been through different types of economic environments in the past. We know customers pay their phone bills before they pay other bills and other outgoings.

Speaker 4

We'd fully expect that to continue. And so we're obviously watching the macroeconomic environment. But as Hans said, Payment patterns continue to be very strong and we'll stay close to that, but so far so good.

Speaker 3

Are ready. Great.

Speaker 7

Thank you.

Speaker 1

Thanks, Brian. Brad, that's all the time we have today.

Operator

Ladies and gentlemen, this does conclude the conference for today. Thank you for your participation and for using Verizon Conference Services. You may now disconnect.

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Earnings Conference Call
Verizon Communications Q4 2022
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