Verizon Communications Citi Global TMT Conference

Morning, and welcome to day 2 of our Global TMT Conference. Before we begin, disclosures are available at the registration desk. For those of you that I haven't met, I'm Michael Rollins, and I cover communication services and infrastructure for Citi. We're pleased to welcome Tony Skiadas, CFO of Verizon. Tony, great to see you. Thank you so much for being with us today.

Thanks, Mike, and great to be here. Before we get started, I need to point you to Verizon's safe harbor statement and our SEC filings, which can be found on our investor relations website. My comments may include forward-looking statements that are subject to risks and uncertainties. With that, Mike, we can get started.

Wonderful. Well, as typical, it's been an extremely busy year for Verizon. Maybe busier than some. What are you focused on right now, and how should investors think about your priorities for the balance of the year?

Sure. It has been a busy year and an exciting year, and let me frame it for you. At a macro level, the team's very focused on four things. First, growing our mobility and broadband business and doing it in a fiscally responsible way. You've heard us talk about that. Our second priority is investing in the business and in the customer. We've seen our evolution with our value proposition. Third is delivering on our guidance for the full year, and we'll talk about that as well. Then fourth is generating strong cash flows, paying down debt, and returning capital to shareholders. Evidence of that is our first half results were very strong. Let me just share a few highlights from the first half of the year.

From an operational perspective, our mobility and broadband net add growth, we added over 1 million net adds for mobility and broadband net adds. Underneath that, our phone net adds improved by over 500,000 this year. We are making great progress on volumes. From a financial perspective, in the second quarter, we had our highest ever adjusted EBITDA margin of 40.1%, which is the first time in a long time. Similarly, our adjusted EPS grew by 6.6%. Our cash flows were up 24% in the second quarter and up 16% for the first half of the year. We are generating strong cash flows. We returned $9.4 billion in capital to shareholders through dividends and share repurchases, and that is up 60% year-over-year.

As we said on the earnings call, this is a structural change and an inflection in our results and a step function change in what we have seen from prior years. The way I would frame it is what is happening inside the company, it is a growth transformation, not just a cost transformation. It all starts with the customer. As you know, you have seen our value proposition and the ongoing work we are doing there with simplicity and our loyalty programs. Those are performing well. We have a relentless focus on the customer. What we say is we put the customer at the center of everything we are doing. We are driving our growth through targeted retention. You see our churn down 5 basis points year-over-year. We will continue to make progress on retention and through segmentation. That is great to see.

We are also taking cost out of the business. We talked about at the beginning of the year a $9 billion cost program, $5 billion of operating expense savings, and $4 billion in CapEx savings, and that is proceeding on track. Also, we are leveraging AI, both from a cost efficiency perspective, but also from a revenue generation perspective with our Verizon AI Connect business. We announced a deal with Google recently, so we will talk more about that. Lastly, we have the Frontier integration, and that is proceeding on track. We are starting to see some of the benefits from that. We talked about our synergies, at least $1 billion of synergies by 2028, so that is pacing along as well. If you think about what is coming in the back half of the year, the focus is largely the same.

Growing our volumes, both mobility and broadband, in a responsible way. Doing that through retention, and we have said if we can get 5 basis points of churn improvements, that gets us more than halfway to our growth targets. That is what we are seeing. That is just an example, but we will continue to focus on that. Growing the top line and the bottom line as we outlined in our guidance. In the second quarter, we raised our EPS guidance, adjusted EPS guidance to 6%-7%. We also raised our free cash flow guidance to 9%-10%. The team is very focused. We are proud of the first half accomplishments. We still have more to do, and the team is executing with a lot of urgency right now.

We are excited. Great. This gives us a lot to unpack and dig deeper.

You talked about pivoting to grow as part of the strategy and transformation. As you've connected with your investors over the last number of months and recently, what are some of the underappreciated revenue opportunities for Verizon?

Sure. When I step back on revenue, what I would say is we're executing on our plan and driving volume growth as a catalyst for sustainable long-term revenue growth. As you saw in the second quarter, Mike, our mobility and broadband service revenue grew 2.8%. That's up 120 basis points sequentially. We talked about our outlook for the balance of the year with the third quarter growth rate approaching 3% and the fourth quarter approximately 4%. That's an acceleration in the growth rate. Underneath that, we also said that we expect a transitional year in revenue as we drive towards more volume-based growth. We talked about our wireless service revenue being around flat this year. That's still our expectation. We see an improving trajectory in the second half of the year, and we expect our wireless service revenue to grow in the second half of the year, which is great to see.

What gives us confidence around that are three facets. First is, as I mentioned, improving volume profile. We had a lot more net add, phone net adds, over 500,000 year-over-year, so we're starting to see the green shoots from that. The other thing is the promo amortization headwinds that we've been talking about for a couple of years. They've peaked, and now they're easing in the second half of the year.

That's a function of the work we're doing on simplicity. We continue to see great opportunities for revenue growth. Obviously, when you talk about conversions, that's the other area that we can continue to drive growth, particularly where we under-index in some of the Frontier markets in wireless. There's a lot of optionality. We have things like perks that are growing roughly 40%. That'll drive revenue growth and service revenue growth. Perks give us great revenue and also great margins.

Customers can also step up to premium plans as well. There's a lot of ways to get our growth rate up. Then to your question on some of the underappreciated areas. First, I would say is churn, and churn improvements and what that does to our business model. It allows us to be more efficient in growing our business and not relying on expensive subsidies and promos. We're starting to see that. Simplicity is the great. We did a lot of work and a lot of research around Simplicity, and it allows us to decouple the handset and the service pricing. We think that the financial benefits of that, we expect to accrue over time, and more and more customers are coming on to Simplicity.