Verizon Communications Q2 2023 Earnings Call Transcript

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Provided by Quartr
July 25, 2023

Key Takeaways

  • Q2 Financial Highlights: Wireless service revenue rose 3.8% year-over-year to $19.1 billion, consolidated adjusted EBITDA reached $12 billion, and free cash flow was $5.6 billion while reaffirming full-year 2023 guidance.
  • Consumer Wireless Momentum: The new MyPlan offering boosted postpaid ARPA by 6.2%, drove gross adds higher, and helped improve churn sequentially under a disciplined promotional strategy.
  • Broadband Growth Trajectory: Verizon delivered 418,000 broadband net adds (third straight quarter above 400,000), growing its FWA base to nearly 2.3 million and maintaining a 4–5 million FWA subscriber target by 2025.
  • Lead Cable Investigation: A small percentage of legacy lead-sheathed copper remains in Verizon’s network; independent testing is underway and potential remediation costs are currently unknown.
  • Efficiency and Savings: Verizon is on track to achieve $200–300 million in savings in 2023 and $2–3 billion annually by 2025 through IT transformation, AI, real estate rationalization, and supply-chain improvements.
AI Generated. May Contain Errors.
Earnings Conference Call
Verizon Communications Q2 2023
00:00 / 00:00

There are 14 speakers on the call.

Operator

Welcome to the Verizon Second 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. 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.

Operator

Brady Connor, Senior Vice President, Investor Relations.

Speaker 1

Thanks, Brad. Good morning, everyone, and welcome to our Q2 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 Sciattis. 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 And financial results that are forward looking and subject to risks and uncertainties.

Speaker 1

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 2nd quarter results. You will find additional detail in the earnings materials on our Investor Relations website.

Speaker 1

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

Speaker 2

Thank you, Brady, and good morning, everyone, and welcome to our 2nd quarter earnings call. Me and my team are pleased to report another solid quarter as we continue to advance across all of our strategic Key performance indicators. Our newly appointed leadership team remains committed to delivering on our key metrics: Growth on wireless service revenue and expansion on consolidated adjusted EBITDA and free cash flow. We're Seeing operational improvements throughout our business and our results are strong. Wireless service revenue was up 3.8% year over year And adjusted EBITDA was $12,000,000,000 for the quarter.

Speaker 2

Cash flow from operation was very strong in the quarter at $9,700,000,000 and free cash flow was $5,600,000,000 The actions we are taking to accelerate growth, improve operations and ensure solid balance sheet are working. Our results today Illustrate our ability to adapt, innovate and excel even in times of economic uncertainty. And we're encouraged By the growing importance of mobility, broadband and cloud services in the 5 gs era in all customer segments. Based on our results this quarter and what we see ahead, I'm confident that we will deliver on our 2023 financial guidance. This is a testament to the hard work and the dedication of our team.

Speaker 2

Now let's look more closely at the performance in Mobility, Private Networks and National Broadband. Our consumer wireless strategy of segmentation and financial discipline is paying off. This quarter, we saw a year over year growth in postpaid phone gross adds, significantly lower promo upgrade levels and a sequential improvement in postpaid churn, all according to our strategy. This work is a continuous process, and we're always looking for ways to do better. In May, we launched MyPlan, a first of its kind customized offering that gives our customers The value, control and simplicity they want.

Speaker 2

This aligns with our strategy of bringing our customer the best value on America's best Network. While we're still on early days, my plan has already helped our Verizon Consumer Group deliver notable operational improvements by Encouraging customers to take on premium plans, which is driving higher ARPA. We're really excited for what's to come from our new platform for selling Tumor wireless services, and we're constantly evolving our offerings to fit customers' needs. We will also continue to invest in prepaid To improve performance and expect sequential improvements in the second half of the year, as we reported in previous quarters, customer Our ongoing and effective strategy execution by Sampath and the consumer team support a stronger Where we are the premium provider with elements like the new MyPlan, strategic regionalization, Persistent cost transformation and a reinforced focus on customer satisfaction. We are strengthening our operational blueprint with a local emphasis and effectively positioning ourselves for sustainable growth.

Speaker 2

Verizon Business Group had yet another strong quarter driven by Continued solid phone and fixed wireless access performance even as the secular decline in wireline continues. For the 8th quarter in a row, Verizon Business This contributed more than 125,000 postpaid phone net adds, demonstrating the resiliency of our service Spring to all types of businesses and the value of our world class network. On private networks, we won a mandate from the U. S. Department of Veterans Affairs, And we recently completed work to launch a next generation private networking solution at the Cleveland Clinic that will support their mission for years to come.

Speaker 2

As a trusted partner to enterprise businesses and federal government, we work closely to transform the networks and bring Stations onto the leading edge of technology development. The total addressable market of private wireless is expected to grow significantly And Verizon is well positioned to capture meaningful share. Our broadband strategy delivered more than 400,000 net adds In the quarter on Fios and Fixed Wireless Access, marking another quarter of remarkable broadband performance. This represents the 3rd consecutive quarter With more than 400,000 net adds demonstrating the momentum of our growth trajectory, we have established a high pace of customer growth. It's clear, Fixed Wireless Access is here to stay as a proven competitive broadband product.

Speaker 2

We're well on track to meet our target Of 4000000 to 5000000 Fixed Wireless Access subscribers by the end of 2025 from a current base of nearly 2,300,000 subscribers. We also now have an opportunity to segment the fixed wireless access market based on price and speed tiers so that our customers can choose the service that best suit them. Further, we continue to see Net Promoter Scores of Fios and Fixed Wireless Access that significantly exceed those of traditional cable offerings. We have the best network in the market. And in the next couple of quarters, We will extend our lead with a last tranche on the C band spectrum.

Speaker 2

For the 31st time in a row, Verizon was the most awarded brand for wireless network quality in J. D. Power's U. S. Wireless network quality study.

Speaker 2

No other wireless provider has achieved this. And for 2023, we received top scores among all J. D. Power study factors in all six regions. Additionally, our team continues to innovate within our network, upgrading our infrastructure around the country and successfully testing our ability to slice our 5 gs network.

Speaker 2

Slicing will allow us to serve We dedicated 5 gs service on a large scale and to meet the diverse needs of the largest base of wireless customers in the United States. Next, I want to address the recent news about the legacy lead cable in our network. We take this matter seriously. And to be very clear, Lead infrastructure makes up a small percentage of our copper network and we began phasing away from installing new lead cable by the 1950s. At Verizon, the communities we serve and our employees are at the heart of everything we do and we're using a fact And science based approached in our assessment.

Speaker 2

You'll hear more on the topic from Tony later on. Our accelerated plans for efficiency with our new structure, which we put in place over the last couple of quarters are already paying off. Verizon Global Services has taken action on a number of opportunities company wide, realizing significant savings by focusing on IT platform transformation, leveraging artificial intelligence, rationalizing our real estate portfolio and improving our supply chains. We're on track to achieve our forecasted $2,000,000,000 to $3,000,000,000 in annual savings by 2025. These savings In combination with the completion of the $10,000,000,000 C band spend, position us to generate strong cash flow and continue to invest in our business and pursue

Speaker 3

dividend increases as we New dividend increases as we execute on our capital allocation strategy. Now I will turn the call over to Tony to discuss our operations and financial performance in more detail. Thanks Hans and good morning. Our results for the 2nd quarter demonstrate our Progress towards our 3 priorities of growing wireless service revenue, delivering healthy consolidated adjusted EBITDA and increasing free cash Our focus on execution is working and we remain on track to meet our financial guidance for 2023. We are happy with our progress, but we have more work to do.

Speaker 3

We are focused on continuing to improve our performance while remaining financially disciplined. In the Q2, our consumer segment demonstrated better operating results both sequentially and year over year in postpaid phone net adds. Additionally, we experienced continued strong performance within our business segment both in terms of mobility And FWA subscriber growth. The results reflect the benefits of our ongoing C band deployment and improved go to market execution. Consumer postpaid phone net losses totaled $136,000 for the quarter compared to $215,000 net losses in the Q2 of 2022.

Speaker 3

Consumer postpaid phone gross adds were strong once again, up 6.9% year over year driven by new to Verizon gross adds, which increased approximately 19% over the prior year period. We also saw notable growth in consumer post paid ARPA, which was up 6.2% year over year. The recent launch of MyPlan reflects a more segmented and targeted approach. While it's still early, MyPlan is driving a significantly higher premium mix with nearly 70% of MyPlan customers taking the unlimited plus option. We are also encouraged by the step activity we are seeing.

Speaker 3

Consumer postpaid phone churn for the quarter was 0.76%, up one basis point compared with the same period last year. Higher involuntary churn drove the year over year increase offsetting a modest improvement in voluntary churn. Our involuntary churn rates remain at pre pandemic levels and we're flat for the 3rd consecutive quarter. It is important to note our performance in existing C band markets. In the 46 markets where we initially deployed C band, postpaid phone gross add growth was more than 100 basis points higher in the quarter And our premium mix in C band markets was 11 percentage points higher.

Speaker 3

Let's now look at our business results. Verizon Business once again delivered solid performance and continues to expand on this industry leading wireless market share. Demand continues to be strong in all three customer groups, resulting in 144,000 phone net adds for the 2nd quarter compared to 227,000 for the same period last year, which benefited from some large deals. As Hans mentioned, this marks the 8th consecutive quarter where we have delivered over 125,000 business phone net adds. We continue to win high value business based on the strength of our network performance and value proposition.

Speaker 3

Notably, We had a recent government contract win where we took share from 2 of our competitors at attractive ARPUs. Moving on to broadband, We maintain our strong performance with 418,000 total broadband net additions in the 2nd quarter. In the past 4 quarters, we've added more than 1,600,000 broadband subscribers, growing our total broadband subscriber base by more than 21% during that time. Growth in FWA remained healthy with 384,000 net adds up from 256,000 in the prior year period. We now have nearly 2,300,000 customers on our FWA product and we expect growth to continue at a fairly similar pace in the Q3.

Speaker 3

On the Fios side, Internet net adds for the Q2 were 54,000 up from 36,000 in the Q2 of last year. Despite continued softness in household move activity, gross adds rose year over year and our retention levels continue to be strong. Our value market team continues to take steps to address some of the softness we saw in the first half of the year. Prepaid net losses totaled $304,000 in the second quarter. Our year to date net ad performance should represent a low point as we continue to make progress integrating TracFone, while taking actions to better position us for growth, including scaling our Visible and Total by Verizon brands.

Speaker 3

As Hans mentioned, we expect to see sequential improvements beginning in the Q3. Let's now look at our financials starting with consolidated revenue for the quarter, which was $32,600,000,000 down 3.5% year over year. The decline can be attributed to reduced wireless equipment revenue, which was nearly 21% lower than the prior year as postpaid phone upgrade activity declined 34% versus the same period last year. Service and other revenue grew 0.8% driven by wireless service revenue growth. Total wireless service revenue was $19,100,000,000 Up 3.8% year over year and more than $200,000,000 sequentially.

Speaker 3

In the Q2, we continue to benefit from pricing actions, including a recent change to our Verizon Mobile Protect offering. Additionally, the larger allocation of our administrative and telco recovery fees from other into wireless service revenue and growth in fixed wireless access drove revenue improvements. These benefits were partially offset by continued pressure from the amortization of handset promotions. We are on track to deliver our wireless service revenue guidance for the year. We continue to assess opportunities to take targeted pricing actions to better monetize our products and services as we deliver great value for our customers.

Speaker 3

For example, we recently announced an increase in our FWA bundle pricing for new customers, which we expect will provide service revenue in the second half of the year. Additionally, we expect less pressure from the amortization of promotional costs in the second half of the year given the softer upgrade environment and our disciplined approach to promotional spending. Consolidated adjusted EBITDA in the quarter was $12,000,000,000 up 0.8% compared to the prior year. Adjusted EBITDA margin improved by 160 basis points over the prior year, primarily driven by lower consumer postpaid upgrade volumes and improved service revenue. These benefits were partially offset by higher marketing expenses in the quarter related to the MyPlan launch as well as a $194,000,000 increase in bad debt year over year.

Speaker 3

Bad debt was relatively flat from the prior quarter and payment trends remain consistent with recent quarters and pre pandemic levels. Operating expenses excluding depreciation And special items were down 5.9% year over year, primarily due to lower cost of equipment from reduced upgrade volumes. As Hans mentioned, we continue to execute on our cost savings program including through initiatives within our Verizon Global Services organization. During the quarter, we took actions to rationalize our workforce as we continue to see benefits from rationalizing certain legacy wireline products. We are on track to deliver $200,000,000 to $300,000,000 of savings this year from our transformation efforts and continue to make progress towards achieving our goal of $2,000,000,000 to $3,000,000,000 of annual cost savings by 2025.

Speaker 3

Cash flow from operating activities for the 2nd Quarter was $9,700,000,000 and for the first half of the year totaled $18,000,000,000 compared to $17,700,000,000 in the prior year period. The increase continues to be related to working capital improvements associated with lower inventory levels and fewer upgrades, which were offset in part by higher cash income taxes and interest expense. CapEx for the quarter came in at $4,100,000,000 which reflects The completion of our $10,000,000,000 accelerated C band program. Capital spending for the first half of the year totaled $10,100,000,000

Operator

which This is

Speaker 3

over $400,000,000 less than last year. We continue to expect 2023 capital spending to be within our guidance of 18.25 to $19,250,000,000 Our peak capital spend is behind us and we are now at a business as usual run rate for CapEx, which we expect will continue into 2024. The net result of cash flow from operations and capital spending is free cash flow for the quarter of 5.6 $1,000,000,000 Free cash flow for the first half of the year is $8,000,000,000 a nearly $800,000,000 improvement from the previous year driven by a combination of our lower CapEx spend compared to the prior year and operating cash flow benefits previously mentioned. While we do not normally guide on free cash flow, our strong results give us a clear line of sight to more than $17,000,000,000 of free cash flow for the full year. Net unsecured debt at the end of the quarter was $126,600,000,000 an improvement of $3,200,000,000 compared to the end of the previous quarter and $4,100,000,000 lower year over year.

Speaker 3

We ended the quarter with $4,800,000,000 of cash on hand. We are well positioned with respect to our unsecured debt maturities with no remaining obligations for the rest of the year. Our net unsecured debt The consolidated adjusted EBITDA ratio was 2.6 times as of the end of the second quarter, a 0.1 time improvement both sequentially and year over year. We continue to monitor the current interest rate environment closely given recent comments from the Federal Reserve on planned rate increases later in the year. As previously stated, we expect higher interest expense to impact our full year earnings per share by 0 point $0 and there's no change to that view.

Speaker 3

Our strong second quarter results support our capital allocation priorities, which remain unchanged. Before I hand the call back to Hans, I'd like to address the recent media reports on lead sheath cables in our network. Here is what we currently know. We still have some legacy lead sheath cable in our copper network. As a result of the age of this infrastructure and the history of the Records are incomplete as to exactly how much of the cable at our network has led sheathing.

Speaker 3

However, to give you a sense of the scale of the infrastructure we Talking about our copper network is comprised of less than 540,000 miles of cable, roughly half of which is aerial And lead sheath cable makes up a small percentage of our copper network. This number excludes the network elements previously owned by MCI And XO Communications because we are still reviewing the historical records of those companies. When not disturbed, the likelihood of exposure to lead In addition, because the lead sheath cable was used as a feeder and distribution cable and does not run into individual homes or apartments, it is generally in locations that minimize the potential for public contact. We are working with a 3rd party expert to conduct our own testing at our sites that were identified by the media. We will not have the results of our testing for several weeks.

Speaker 3

When we have the results of our testing, we will work closely with our industry and others to address any concerns and Now, I think it's important to address a question we've received from a lot of investors, which is about the Process 4 and potential cost of removal of the lead sheet cable in our network. Given where we are in this process, it is far too soon to make any projection on what the potential financial impact might be to the company. There are a number of unknowns in this area, including whether there is a health risk presented by We won't be able to provide any additional color during the Q and A session. As we have more information we can share on the topic, we will certainly do that. I will now turn the call back to Hans for his closing thoughts before we open it up to your questions.

Speaker 2

Thank you, Tony. As we pass the midpoint of 2023, I'm pleased by how we're effectively delivering on our priorities, And I'm confident that we will meet the financial goals we set for ourselves for the full year. To summarize, in Mobility, Our segmented and disciplined approach to the market is working, and our efforts to improve the consumer group's Performance will continue throughout the second half of the year. In broadband, the combination Fixed Wireless Access and Fiber is winning as we capitalize on the unique strength and capabilities of both technologies. We continue to have the best network in the market and our leadership position will only get stronger as we continue to roll out While we're encouraged by the quarter's results, there's more work to be done.

Speaker 2

My leadership team and I are laser By that, I hand it over to Brady for questions.

Speaker 1

Okay. Thanks Hans. Brad, we're ready to take the first question.

Operator

Thank you. We will now begin the question and answer And our first question will come from John Hodulik of UBS. Your line is open, sir.

Speaker 4

Great. Thanks and good morning, guys. It looks like a nice beat On the consumer side, really driven by the postpaid ARPA growth of about 6%. Could you guys sort of pull that apart a little bit and maybe talk about the Sustainability of that and the service revenue growth you saw as we head into the second half. I mean, I think you've got some you lapped some price increases, but you've got some other And then maybe just quickly on the lead, obviously you guys can't quantify it, but When you guys say low single low exposure of the 540,000 miles of copper, is that single digit?

Speaker 4

Can you guys tighten up that number for us a little That'd be great.

Speaker 2

Thanks. Thank you, John. Let me start with the service revenue. I think we have been extremely focused on the service revenue. As you have See, in this quarter, we are expanding the growth from the Q1, but as many components, I understand you want to know a little bit more about the ARPA expansion, but We definitely see the broadband is adding to our growth.

Speaker 2

And then, of course, our wireless Business side is doing extremely well as well. I mean, 8 quarters more than 125,000. So we're actually doing a lot of things in different areas. But then if you go to the consumer group, they have been really good the last couple of quarters right now to be segmenting, targeting The right offering with the right pricing for the customers and my plan has been playing in very well to that. And as you heard Tony Talking about 70% of taking the premium plan.

Speaker 2

So but that's just the start of it. We're not done. But clearly, I'm confident that the Team knows how to manage this given how much we invested in research on the consumer side to understand our consumers better, and that's why we Launched my plan. So all in all, I have to say the guys are doing well. I'm confident we will continue on this stride.

Speaker 2

But maybe Tony can give you some more on that and then we can come back to the lead.

Speaker 3

Yes. Thanks Hans. Good morning, John. So on the service revenue, we're very Confident in the guide. You mentioned tough comps that we face in the second half.

Speaker 3

When you think about the second half of the year, let me unpack some of the drivers for you. As you know, we executed a number of targeted pricing actions between the price ups on the legacy unlimited plans that we did earlier in the quarter As well as most recently changes to our handset insurance program and price changes on FWA bundles. Secondly, we had the introduction of MyPlan Back in May, that's helped with premium mix and you heard that we're roughly 70% taking the unlimited plus plan. As Hans mentioned, we see an increasing contribution from fixed wireless access. We have 2,300,000 subs in the base and we have great momentum on the FWA.

Speaker 3

And then 4th, we see continued improvements in year over year consumer postpaid volumes and you saw that in the quarter. And then lastly, when you think about The promo amortization, the revenue impact from promotions and the promo amortization has decelerated in recent quarters and that's it's Basically a function of our disciplined approach to promotions and retention. So when you put that all together, we're very confident that all the initiatives here will continue Drive the meaningful revenue growth in the second half.

Speaker 2

On the lead, as I said, we take this matter very seriously. And we're doing exactly what you expect from Verizon. We're doing this scientific and fact based. As Tony said, we're going Over the different places that we pointed out by media and doing our own measurements with internal and external experts. And that's where we are.

Speaker 2

And we will do this very thorough. We are always doing things thorough. We do it fact based, scientific, And that's how we're going to do and that's what you should expect from us.

Speaker 3

Yes. And to add on to that John, we're still reviewing the records and we mentioned that we're still reviewing the historical records of the The former MCI and XO network, so that work is still ongoing as well. So we still have more work to do there. And as we learn more, we'll keep you updated.

Speaker 4

Okay, great. Thank you.

Speaker 1

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

Operator

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

Speaker 5

Thanks for taking the question. And I think I'll follow-up on consumer volumes you alluded to in responding To John, it was great to see the consumer phone losses improve year over year, but I know your ambition is to do better than that. How do you think about the path Getting back to net growth in consumer postpaid phones, do you think you're going to need to take further actions in terms of the product mix or pricing or even any additional internal adjustments? Or do you think you have the places and pieces in place and it's really just a matter of driving better execution against that framework? Thank you.

Speaker 2

I think it's about execution on the framework we have built right now. The guys have everything. Sampat and the team together with Toll and me with the full support, we have a new platform in MyPlan, we're segmented up the market. We work with financial discipline. The target we have for our team is continue to do sequential growth.

Speaker 2

And as Sampelet team said before, We ultimately, we want our fair share also on the net adds, but ultimately, we measure ourselves on service revenue growth. And As you can see, we continue to improve that. So it's more about now executing on this, being patient and see that both The network is the best in the market, but it's just improving. And some of the numbers that Tony talked about, you see the impact we have when the C band is coming out. And then the My Plan, you see also see that is now initially what we have talked about is actually giving us really good confidence that we're on the right place.

Speaker 2

So all that is In place and then we do the regionalization as well at the same time. So a lot of things is in place. It's more about execution and doing it with That's a discipline that you should expect from Verizon.

Speaker 5

And how do we think about a timeline for getting to sustainably positive Net adds and consumer, is that something that would be a reasonable expectation once you have C band fully deployed?

Speaker 3

Yes. Hi, Brett, it's Tony. So Volumes are important to the business. And as we said before, we're going to be very disciplined on how we approach the market. Our focus is on volumes that drive profitable revenue growth.

Speaker 3

It's too soon to call Q3 positive for consumer, but as we said, we expect improvements year over year in consumer net adds and the team and SanPath and the team are Very focused on

Speaker 5

that. Thank you.

Speaker 1

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

Operator

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

Speaker 6

Thank you very much. Good morning. I wanted to come back to the 2nd phase of C band was helpful to get those statistics. Could you just help us a little bit more in terms of what this is going to mean in terms of your footprint, both on the wireless side and on the Fixed wireless side, how do we think that's going to help both coverage and also capacity? I know there's concerns in some quarters about fixed Wireless facing congestion, it would be great to let us know what your experience has been with usage and how you feel good about handling that $4,000,000 to $5,000,000 and beyond over the next few years.

Speaker 6

And then Maybe a quick one for Tony. Obviously, the stock has been under some pressure here, pretty high yield. Perhaps remind us about how you're thinking about potentially Going to buybacks, you're seeing some deleveraging now, strong free cash flow. Is that going to be an option here in the not too distant future? Thank you.

Speaker 2

Thank you, Simon. When it comes to the C band, I said we're ahead of the plan. As soon as we get hold of the next tranche of spectrum, Trem, the team is ready to continue to deploy that. That's going to give us both more capacity, but of course, more coverage as well. So it gave us both.

Speaker 2

And As you have seen the numbers we talk about here, as soon as we deploy C band, we get better uptake from our wireless customers. And of course, we'll open up fixed wireless access. So that should be positive over time for us. And when it comes to this lingering question about capacity, We don't have any capacity problems. I mean, the guys are doing an enormous good job as always when it comes to Verizon and capacity network planning.

Speaker 2

Joe and the team are on it all the time and seeing that we're doing the right for our customers. And remember, we are building a multipurpose Network, that means that we have one radio that serve multiple opportunities, wireless, fixed wireless access, in some cases private networks. So all that is in So all that is in one and that's the efficiency and the scale we're bringing right now, which we expected when we start with 5 gs and the C band to see that we get the leverage model over time. But of course, it's going to roll out on the next year. So I'm confident that this will create more opportunities for us now when we get hold of the next tranche of the C band spectrum.

Speaker 3

Okay, Simon. And then on your question on the cash generation, we're very pleased with the cash generation of the business. Cash on hand at the end of the quarter was $4,800,000,000 which was very Strong and reflective of

Speaker 1

our

Speaker 3

strong free cash flow results that it is higher running higher than normal. As a reminder, We do have about $4,500,000,000 of the C band clearing obligations remaining and due soon and that's obviously a priority for us. The cash generation as I said is strong, gives us optionality and supports a much improved dividend payout ratio. Our capital allocation priorities are unchanged. We We said first we would invest in the business.

Speaker 3

The second priority is our commitment to the dividend. Our third priority is to delever and you'll see us be focused on that. And then once we get to the leverage metric of 2.25, we will consider buybacks at that time.

Speaker 1

Great. Thanks so much. Yes. Thanks, Simon. Brad, we're ready for the next question.

Operator

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

Speaker 4

Hi, guys. Thanks. With the price increases and the impact of the new pricing structure, it looks like you're trending above the midpoint of service revenue growth. I mean, it could be closer to the high end. Any reason to think it decelerates from here?

Speaker 4

And then second, Hans, you spoke on private wireless. Can you dig into the market opportunity there And how long it takes for that to be a $1,000,000,000 business? Thank you.

Speaker 2

I'll start with the second question and Tony can come back on the first. On the private wireless, What we have found out during the work we've been doing is that private 5 ID Networks is something really, really valuable for enterprises and SMBs. And the main reason is that the capacity on it, The speed and the security. It basically starts as a Wi Fi replacement on And then you start adding on to it. It usually start with one factory and if you see that you're working there, they do it in all the factories.

Speaker 2

We have a growing list of new customers coming in, in the first phase. I would say this is a new business for us That again is building on the same investment, the same Verizon, Intelligent Edge Network. I don't think we should expect that it's a $1,000,000,000 business this year, but a definite little bit time. This is a very important lever for Kyle and his team for growth in the service revenue and actually doing even better in the with enterprises. So it's going to take some time, but I'm really pleased what I've seen in the last couple of quarters, how this is turning out.

Speaker 2

And I would say we have now an ecosystem with devices, with radio based stations, With integrators and all of that, which we haven't had before. So I'm more optimistic than a long time that private networks will be something. As you know, I mean, we were way ahead of anybody else on this field and that's why I feel really confident we will take more than our fair share.

Speaker 3

Yes. Good morning, Phil. And then on the service revenue, as we mentioned upfront, we have some tough comps as we lap the price up from last year. We do expect sequential improvements in the Still improvements in the Q3. One thing to note just on the prepaid revenue, we did see a headwind in the quarter of about $125,000,000 I would Expect that to be at a similar level in the Q3 before it eases up in the Q4.

Speaker 3

That's probably one additional data point for you.

Speaker 4

Thanks, Tony. Makes sense.

Speaker 1

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

Operator

The next question comes from Frank Louthan of Raymond James. Your line is open, sir.

Speaker 3

Great. Thank you. Can you walk

Speaker 7

us through the correlation between the broadband ads and the business wireless ads, including both the Fios and And then you mentioned expecting some softer upgrades. Are you anticipating having to subsidize anymore for handsets to get ads as the year goes on? Thanks.

Speaker 2

On the broadband side, I think I got the question like that, the correlation between the fixed wireless access and the Fios. I mean, Let me say that, Wazim, on the fixed wireless access right now, we are growing that base, of course, mainly outside the ILEC because that's just It is because the Fios is so strong, so we're doing great on the Fios business. And as you have seen, even though it's a softer housing movement season than before, we We're doing great. I mean over 50,000 again on Fios. So Fios is doing really well.

Speaker 2

And then of course, we have a portion of Converged customers that is now growing. It's not growing that to come to European levels or something, But it's growing. The good thing for us is we have owners' economics on everything, fixed wireless access, wireless, Fios. We have 1 network, we have our own fiber. And that, of course, gives us opportunity to meet customer demand, see if they want convergence or not and that nobody else has in the industry.

Speaker 2

So Really pleased with the development of broadband for us. We outlined this as one of the most important 5 gs innovations we've done. We add substantial new customers here. So now this is a great opportunity. And as you saw right now, We continue doing as we have done.

Speaker 2

I mean, we have now 2,300,000,000 customers on the fixed wireless access. We can now start with different tiers, different pricings, so we can meet customer demands that have different requirements. And that's just good for us, But it's also really good for our customers because they can choose between different models depending on what needs to have.

Speaker 3

Yes. The only other thing I would add, Hans, is that We have a great rhythm at 400,000 broadband net adds in the quarter and again another the 3rd consecutive quarter of over 400,000 broadband net adds. And we You see good momentum with customers taking wireless customers taking FWA and we see great progress there as well.

Speaker 2

And then you had a question on upgrades. And as you have seen in promos, That is clearly down in the Q2 and the Q1 as well. There are many reasons for it. Some are, of course, that we are much more financially disciplined. That's very important.

Speaker 2

But it also haven't been any major new devices coming out. It will probably come on in the second half. It usually So we're going to see that, but I don't foresee that we will come back to the levels we have seen before from a point of view of Verizon. We think that we're going to be disciplined. We're going to offer devices and promos and upgrades where there's the best for the segment and The customer, but we'll not come back to the levels that we saw before.

Speaker 7

All right, great. Thank you.

Speaker 1

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

Operator

The next question comes from David Barden of Bank of America. You may go ahead, sir.

Speaker 8

Hey, guys. Thanks for taking the questions. So I wanted to come back to the relationship between Verizon and the cable industry. Before the lead, This was the big issue. And if there were 2 pillars to the idea behind the relationship between Verizon and the cable industry, one was that somehow Verizon had negotiated a deal with the cable industry that they would guarantee to money no matter how much data cable consumers took.

Speaker 8

And the second was that, that deal would never end. It was going to be forever. And so I feel like the messaging on that has started to change from Verizon a little bit. And that maybe that the idea that cable industry is guaranteed to make money in the relationship between Verizon and Cable regardless of data consumption. That's not true.

Speaker 8

And that this deal isn't permanent. It could change, at some future time, even though the DOJ, Obviously, you need to have a sum deal, but it doesn't have to be this deal. And I was wondering if you could kind of just address that for us right now. Thank you.

Speaker 2

David, thank you for the question. This is a complex area. And remember, many of these things we I'll talk about we have NDAs when it comes to our contract. The only thing that I'm securing is that Verizon is making money on That I can tell you. And we think this is an important business.

Speaker 2

These are important customers to us. And again, I go back to what I talked about before. We build the network once. The more connections, the more usage and the more revenue we have on it, the better return on capital it is. And as long as we see that happening, we will continue the work we're doing.

Speaker 2

However, I Cannot go into specifics on the contracts, because first of all, I'm not allowed to do it. So But clearly, you should feel confident that Verizon is doing that with the best interest of our stakeholders and our shareholders. So And we want to get the best return on our invested capital in the network.

Speaker 8

Thank you.

Speaker 1

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

Operator

The next question comes from Michael Rollins of Citi. Your line is open, sir.

Speaker 9

Thanks and good morning. Two questions if I could. First, just following up on the Around tiering of fixed wireless and potentially on speed. Is there also an opportunity to begin tiering mobile 5 gs wireless in terms of megabits per second rather than a historical way of tiering on gigabytes And then just secondly, you mentioned that the cash CapEx is tracking to guidance. But just curious, As you're deploying the mid band spectrum, the depth of it and seeing what the propagation is, are there opportunities to get further Efficiencies in capital and potentially go below the business as usual indication of CapEx for 2024?

Speaker 9

Thanks.

Speaker 2

Hey, Mike. Thank you for the question. On the question about different models over time, how we Can charge for a 5 gs. I think we're finding a good model within MyPlan right now with different type of network options. Then you can take your perks.

Speaker 2

All of it is accretive for us. You should just see the first sort of launch here as the first time we come out with a platform. We see multiple opportunities how you can sort of diverse that one in different ways to meet different customer demands. So you would probably see more of that going forward, how we'll do that. So clearly, very important to us that we continue to meet our customers with new plans and Things like that.

Speaker 2

But now we have a great base that is my plan. On the CapEx side, I think we have Gone over sort of a fairly long hump here coming from Verizon Intelligent Edge Network, In fiber, investing to in all the parts on millimeter wave and coming into the hump of C band. Now we come into the BAU. As far as we can see right now is BAU is around 17 to 7.5 And that's going to see that we can deploy the C band, getting all the benefits we talked about. 4 gs is coming down.

Speaker 2

Fiber is more success based. So there's a lot of things happening in there, but we're really confident that we can be on those levels and our team is really doing a great job.

Speaker 1

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

Operator

The next question comes from Craig Moffett of MoffettNathanson. You may go ahead, sir. Hi.

Speaker 4

Two questions, if I could. First, if I could return to the lead topic for one moment. Can you just talk about the extent to which you use, overlapping of fiber to, what might potentially be Lead cables, particularly in your aerial plant, in the Northeast. And then second, I just wonder if you could just Help us think about the trajectory going forward of fixed wireless, which has seemingly sort of steadied out To a relatively stable number, is that what we should expect because that would take us a bit higher than your guidance by the end of 2025. So I'm just wondering how we think about the pacing of fixed wireless.

Speaker 2

Thank you, Craig. I'll start with the fixed wireless access question because I think that is an important one. And the lead, we will hear from Tony on that one. On the fixed Twice access, you're right. I mean, we are now running on a fairly high level adding broadband subscriber quarter.

Speaker 2

Remember, We have defined we are roughly in, I would say, a little bit over 70 of the PEAs of C band so far out of 402. So that's, of course, is how many OFS are open for sales we can do right now. So That is a little bit the next step is going to be the next tranche coming in. And I said, we're well ahead for the EUR 4000000 to EUR 5000000. The team is doing a great job.

Speaker 2

You also saw that we now are doing some great work on how we can address MDUs in a very efficient way. We're in the beginning of that. So all in all, I think that fixed wireless access and how we're managing our network is going great. And of course, as ambitious leader as I am, I expect that we can do better, of course. But right now, that's the forecast we have, $4,000,000 to $5,000,000 And we are really doing well.

Speaker 2

And the customer satisfaction of fixed wireless access is so good. It's so Simple, you install it yourself, you get broadband immediately. So we're just meeting a consumer demand that no one else is doing basically. So I'm really pleased with the product. We talked about this being one of the most important 5 gs applications and now you can see what it means to us and how Important it's going to be over time.

Speaker 3

And then Craig, on the lead, as we said earlier, it's a small part of our network. It's about 50% aerial. We said we're still reviewing the historical records both the former MCI network and the former XO Copper network. So we still have We're going to take a very methodical approach, very fact based, very scientific based approach. And as we know everyone wants more information And as we learn more, we'll keep you updated.

Speaker 3

Yes.

Speaker 1

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

Operator

The next question comes from Brian Kraft of Deutsche Bank. Your line is open, sir.

Speaker 10

Hi, good morning. I want to ask 2, if I could. I guess, first, just on the lead issue, I was wondering if you thought this might lead to an acceleration And copper network retirements and therefore an accelerated reduction in fixed costs for legacy networks. It seems like an opportunity in cases where communities might Want to not have lead cable in their communities even if it isn't actually shedding any lead? And then secondly, I just had a follow-up to Simon's Question earlier, can you talk about how the remaining C band deployments will affect the fixed wireless opportunity in rural areas?

Speaker 10

Specifically, how much of an expansion in the rural footprint will that represent versus the available footprint today for fixed wireless? And would that include a lot of areas that aren't served by anything today except for copper infrastructure, so kind of the true rural areas? Thank you.

Speaker 2

So on the first one, we have always a plan for network transformation that we We continue to ongoing that has not changed. When it comes to this led sheeted cables Discussion, I said, I mean, we're going to go through the scientific, we're going to do test, we're going to do it fact based and then we'll come back. But we have a normal The natural transformation that we constantly do because Kyle and team are doing that in order to keep up with the pressure of the secular decline in wireline. So he will continue to do that, and we do that all the time. On the second question on fixed wireless access, yes, of course, when we The first seventy, I would say ish, C Bandmark PEs that is called, they are mainly in urban areas.

Speaker 2

And that's where we have that good traction on fixed wireless access. In the next step, it's going to be much more suburban and rural. And of course, That's great opportunity because usually there are even less different options for customers in those areas. So of course that's going to create opportunities for us. That doesn't mean that we're changing our guidance.

Speaker 2

We still say SEK 4,000,000 to SEK 5,000,000 by 2025. Of course, the team is always driving hard here And I'm driving hard. We always want to achieve. We want to show our stakeholders that we're a great company and we execute well, which I think we're doing. So definitely, We see opportunities to be coming with the next trans of Cbap.

Speaker 2

Great.

Speaker 10

Thank you very much, Hans.

Speaker 1

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

Operator

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

Speaker 11

Thanks, Ben. On the wholesale on the cable side, maybe just discuss wholesale wireless ARPUs broadly speaking. Do you think you can grow wholesale wireless ARPUs? And then, the $10 increase in fixed wireless pricing, do you think that would slow kind of sub growth Quarterly, we've seen obviously good strength there. And then lastly, on the lead side, can you just qualitatively talk how often are your workers exposed The lead, I'm sure you have to log that.

Speaker 11

And what do you do to kind of protect workers? And have you ever seen any claims from workers on lead poisoning? Thanks.

Speaker 2

There were many questions in all there. So let me start by with

Speaker 1

the change of discounts that we did on fixed wireless access. Again, we

Speaker 2

have a premium Counts that we did on fixed wireless access. Again, we have a premium product. We have different type of optionalities for our customers in order to pick and choose with the best So we think that this is just natural when you have passed over 2,000,000 subscribers on Fixed Wireless Access. And I think You just think about when we started with unlimited, you start with one plan and then you start to work with different segmentation because ultimately we are in a Very, very big consumer business where so many differentiated customers that needs different type of services. So just think about it as a very natural step for us in order to serve our customers in a good way.

Speaker 2

Then I hand it over to Tony for the next question.

Speaker 3

Yes. On the cable partnership, I mean, as Hans mentioned, we don't go into the details. I mean, we continue to see Volume growth in the relationship and we're very satisfied with the relationship and we continue to monetize the network as Hod said earlier.

Speaker 11

And then on worker led exposure?

Speaker 3

We continue to work Across the company and continue to take a methodical approach. We're not going to get into any specifics around employees or anything. But as

Speaker 2

we said, we'll Keep you

Speaker 3

posted as we learn more.

Speaker 1

Yes. Thanks, Tim. Brad, ready for the next question.

Operator

The next question comes from Peter Cioppino of Wolfe Research. Sir, you may go ahead.

Speaker 12

Hi, thank you. I wanted to ask 2 questions, one on upgrade rates and the other on FWA. On upgrade rates, I wondered if you could discuss why they've fallen much and Whether it's sustainable, what the risks are to recent trend? And on FWA, just wondering if you could discuss the service price increase that we learned about this week? Thanks.

Speaker 2

Yes. On the upgrade rates, as I said before, I mean, first of all, we at Verizon has We're very disciplined in how to offer sort of products and services with the right Price at the right time. So definitely that has been that we are actually doing less promos and less upgrades. That has not hampered our Way of growing our business or taking customers, and we will continue to work with that. Then of course, hasn't been any Major products coming out in the market.

Speaker 2

We expect there's going to be a product coming out in the second half. We're excited over that. And of course, that's going to drive upgrades and promos, of course. But again, we will continue to be very So discipline, but of course, we're excited for these type of things as it attracts store traffic. And when store traffic comes, we are really good and having good conversion rates, adding things to it to our customers, which is really, really important.

Speaker 2

And second on the fixed voice access, taking away the discount, again, we come to The level of 2,300,000 fixed wireless access customer, there are so many different type of customers and consumers. So of course, Having different tiers and pricings becomes very normal in order to meet customer demands. So this is How we do and that we'll continue to do and see how the market is developing.

Operator

Thank you.

Speaker 1

Okay. Hey, Brad, we have time for one more question.

Operator

The final question for today will come from Walter Piecyk of LifeShed. Your line is open, sir.

Speaker 13

Thanks, Hans. I just want to actually do a follow-up to that upgrade question.

Operator

Walter, please check-in the ears.

Speaker 3

We can hear you Walt. We can hear you Walt. Go.

Speaker 13

You can hear me?

Speaker 3

Yes.

Operator

Okay. I don't

Speaker 13

know why you're telling me to check. The last maybe he was trying to mute me. The last of the last 2 years, Hans, the upgrade rate has actually declined in

Operator

the Q3. So I just want

Speaker 13

to kind of piecemeal together, Like you said, you're not going to do handset promotions earlier in the call. Obviously, everyone knows Apple comes out with a new product. But In the last answer, it sounded like you thought people would upgrade more, but what seasonal trends should we see here? I assume You're still expecting it to be down year on year, but what about sequentially because it's been typically down sequentially in the Q3 for the last two quarters, maybe COVID had some I don't know. And then my second question on CapEx, there's some debate, I think a lot of the tower companies specifically Are trying to drive this narrative of like, oh, your C band is going to get deployed, but they're doing fixed wireless and all these things.

Speaker 13

You're going to have to come back And do densification very quickly, so any lull in CapEx will be short lived. I'm just curious, I mean, obviously, we saw the CapEx Drop very quickly here in this quarter. How long do you think this kind of CapEx holiday will exist before you need to come back And use densification in the absence of additional spectrum sourced by the FCC? Thanks.

Speaker 2

Yes. Thank you. Thank you. On the upgrade, I cannot I don't know anything about Any launch of the product, how exciting it's going to be, but ultimately that usually drive more upgrades. So let's see what's going to happen this time and when it comes out.

Speaker 2

But We're always excited to see Apple coming out with a new phone. Hopefully, they're coming in this half. I cannot What they are doing, but clearly we're excited for that. On the CapEx, yes, you should talk to us. We know more about this than other companies.

Speaker 2

I would say we have a really good sustainable level of this. Densification is Part of our strategy already, so and many of the things that we're already are deploying on Sea Ban, we deploy sort of For the full spectrum already from the beginning, then we turn on when we get those tranches. So there's a lot of things that my team has done over years in order to be as efficient as possible CapEx. That's why I feel really good on our sort of DAU around 17 to 17.5. I feel really good about that because we go through these extremely detailed.

Speaker 2

So we feel confident. Great.

Speaker 13

Great. Thank you.

Speaker 1

Yes. Thanks, Walt. Brad, that was all the time we had for today.

Operator

Ladies and gentlemen, this does conclude today's conference call.

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