Verizon Communications Inc (VZ) — Q2 2018 Earnings Call Transcript

Thanks, Brad. Good morning, and welcome to our second quarter earnings conference call. This is Brady Connor, and I'm here with Lowell McAdam, our Chairman and Chief Executive Officer; Hans Vestberg, our incoming Chief Executive Officer; and Matt Ellis, our Chief Financial Officer. As a reminder, our earnings release, financial and operating information, and the presentation slides are available on our Investor Relations website. A replay and a transcript of this call will also be made available on our website. Before I get started, I would like to draw your attention to our Safe Harbor statement on Slide 2. Information in this presentation contains statements about expected future events and financial results that are forward-looking and subject to risks and uncertainties. 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 which we have posted on our website. The quarterly growth rates disclosed in our presentation slides and during our formal remarks are on a year-over-year basis unless otherwise noted as sequential. Before I turn the call over to Lowell for his remarks, let me start with a walk through of the second quarter consolidated earnings on Slide 3. For the second quarter of 2018, we reported earnings of $1 per share on a GAAP basis. These reported results include a few special items that I would like to highlight. Our reported earnings this quarter included a charge for product realignment of $658 million, mainly related to the discontinuation of the go90 platform and associated content. Severance charges of $339 million, and acquisition integration related charges of $120 million, primarily consisting of costs pertaining to Oath. The net impact of these items after-tax was approximately $0.9 billion or $0.20 per share. Excluding the effect of these special items and the net effects of tax reform and the adoption of the revenue recognition standard, adjusted earnings per share was $0.99 in the second quarter compared to $0.96 a year ago. On a comparable basis, adjusted earnings per share before the impacts of tax reform and revenue recognition were up 3.1% year-over-year. Let's now turn to Slide 4. Consistent with the approach we established last quarter, we have provided a table that illustrates the ongoing effects from the adoption of the revenue recognition standard on our financial results. As a reminder, the adoption of the revenue recognition standard results in a reduction of the wireless service revenue offset by an increase in wireless equipment revenue, as well as the deferral of commission expense in both our wireless and wireline segments. The impact from this change has been fairly consistent throughout the first two quarters of 2018. On a year-to-date basis, the cumulative impact of revenue recognition was $0.14 per share. For the full year, we expect the impact of earnings per share to be between $0.27 and $0.31. The accretive benefit to operating income in 2018 is expected to moderate in 2019 and then become insignificant in 2020 as the timing impacts to revenue and commission costs converge. For the remainder of this call, financial results will exclude the impact of this accounting change to provide clear comparability with prior periods unless otherwise noted. With that, I will now turn the call over to Lowell.

Thank you, Brady, and good morning everyone. This is the last time I'll have to discuss Verizon's results with you, so I'd like to take a minute and offer some perspective after serving as Verizon's CEO for the past seven years. When I first took over from Ivan in 2011, the company was well positioned for the future. We were leading the charge in the wireless industry by pushing the ecosystem and driving new user experiences with our robust launch of 4G LTE service. We were growing our fiber to the home business, Fios, and expanding penetration in highly competitive markets. The company had a strong balance sheet and financial profile so that we had the flexibility to execute whatever strategy we chose. If I look at where we are today, once again the company is well positioned for the future. Our financial and operating results for the first half of 2018 are strong as evidenced by our service revenue, earnings and cash flow growth. Verizon has 100% ownership of our wireless business and its industry-leading network and customer base. We have driven the 5G ecosystem by pushing the industry to adopt the next generation several years ahead of original expectations. And we are positioned to be the clear leader in the deployment of 5G services based on our technological expertise, asset base, engineering talent and spectrum portfolio. This leadership position is attracting opportunities in areas such as over-the-top TV, smart cities, transportation, education and healthcare; just to name a few. I believe the impact of 5G on consumers will be much bigger than any previous generation; however, the biggest impact will be on businesses as we provide the platform for the fourth industrial revolution. We know the consumer requires a mobile-first digital information experience, and the new businesses that we have added such as Oath and our IoT platforms are poised to be at the forefront of enhancing our ability to meet this growing customer demand. Our Fios business and our recent one fiber expansion have proven that fiber-based network solutions will continue to be in high demand and can take significant share in mature markets. The cornerstone of our strategy will always be network leadership and customer experience. Verizon has an outstanding leadership team, a unique portfolio of assets, solid financial profile and a strong balance sheet that enables us to deliver on the promise of the digital world. I'm also pleased to mention our recently announced tentative agreement with our unions to extend our labor contracts through August 2023; this will give all of our employees the ability to focus on our customers and execute our strategies without disruption. One of my least fond memories as CEO was a strike five days after taking over; I'm glad Hans won't share that experience. What Brady didn't tell you when he started the call this morning is that the four of us are in Houston, Texas; it's an honor for us to be in Houston today to talk about our second quarter results, spend valuable time with our employees in the area and celebrate the quality of our customers in this great city. We have an excellent relationship with the city, with Mayor Turner, and with the greater Houston area, and we are very proud of our overall customer experience, network performance and community involvement, especially during some of the hardest times like Hurricane Harvey. Verizon and the nation's best wireless network worked tirelessly to provide customers, loved ones, and first responders with an unparalleled level of reliability and quality when it matters the most. It is with great pleasure that we announce here today Houston as the third of our four initial commercial launch markets for our 5G residential broadband service that will be rolled out later this year. This is an exciting time for our company and the industry; I couldn't be more pleased with the progress that Verizon is making and our recent appointment of Hans Vestberg as CEO solidifies the leadership of this great company for years to come. Matt will now take you through the details of our second quarter financial results which highlight the strength of Verizon. Hans will then outline our strategic priorities and talk about the opportunities that lie ahead. With that, I'll turn the call over to Matt.

Thank you, Lowell, for your many years of leadership and support to all of us. I want to begin by reviewing the consolidated results. We reported consolidated revenue of $32.2 billion, which takes into account revenue recognition impacts. Excluding Oath and divested businesses, consolidated revenue stands at $30.2 billion, reflecting an approximate increase of 2.6%. The wireless segment remains the key growth driver with robust service revenue results. On a GAAP reported basis, we anticipate low to mid-single digit percentage growth in consolidated revenue for the entire year. This update in our full year revenue guidance comes as a result of better-than-expected equipment revenue trends. Excluding special items, our second quarter adjusted EBITDA margin was 35.6%, down from last year's margin of 36.5%. We recorded an increase of $0.2 billion in adjusted EBITDA, thanks to our service revenue performance and continued operational efficiencies. Our strong revenue momentum and solid margins keep us on track for low single-digit growth and adjusted EPS in 2018, before accounting for the net effects of tax reform and revenue recognition. We expect the effective tax rate for the full year 2018 to be at the lower end of our guided range of 24% to 26%. Now, let’s shift our focus to cash flow outcomes and the balance sheet. Our business segments are producing significant cash flows. In the second quarter of 2018, cash flow from operating activities reached $9.8 billion, which is an increase of $1.9 billion from the previous year and $3.1 billion sequentially. This growth was driven by strong business results, benefits from tax reform, and the final phase of transitioning our device payment plan receivables to on-balance-sheet financing. Our capital spending in the second quarter was $3.3 billion, bringing the year-to-date total to $7.8 billion. We now expect our capital expenditures for the full year to be closer to the lower end of our guided range of $17 billion to $17.8 billion, driven by efficiencies achieved through our business excellence initiatives and CapEx management processes, in addition to our Intelligent Edge Network design. The 2018 capital expenditures include the deployment of 5G for both residential broadband and mobility launches. Our free cash flow for the second quarter was $6.5 billion. We wrapped up the quarter with total debt of $114.6 billion, made up of $106 billion from secured debt and $8.6 billion of unsecured debt. As indicated at the start of the year, we aim to utilize most of the tax reform benefits in 2018 to bolster our balance sheet. We began seeing these benefits in the second quarter, resulting in a $4.4 billion sequential decline in our total debt balance. Our capital allocation strategy remains consistent, concentrating on a strong balance sheet with improved credit metrics while simultaneously investing in our businesses and delivering value to our shareholders. Now, let’s examine the operating segments, starting with wireless. Total wireless operating revenue rose 4.7% to $22.3 billion in the second quarter. Service revenue continues to impress with a 2.5% increase, excluding revenue recognition impacts, driven by customers moving to higher access plans and an uptick in average connections per account. Sequentially, service revenue grew by 1.5%. On a reported basis that includes revenue recognition impacts, service revenue rose by 0.8% year-over-year. The migration to unsubsidized pricing is nearly at a steady state, currently at 82% for the quarter, compared to 75% a year ago and 81% in the first quarter. In the second quarter, equipment revenue rose by 6.8%, fueled by higher-priced handsets, which more than compensated for a drop in activation volumes. About 49% of our postpaid phone base had an outstanding device payment plan at the quarter's end, which is consistent with the previous year. Our wireless EBITDA for the second quarter was $10.3 billion, reflecting a 5.5% increase. The EBITDA margin as a percentage of total revenue was 46.2%, up from 45.8% a year ago and relatively flat sequentially. Now let’s turn to a closer examination of wireless operating metrics. Wireless continues to achieve solid results due to the quality of our network experience and high customer retention. In the second quarter, we had a net addition of 199,000 phones, which included 398,000 smartphones. Postpaid net additions reached 531,000, with tablet net losses of 37,000 being offset by 369,000 additions from other connected devices, mainly wearables. Our postpaid phone churn was 0.75%, which is attributed to our excellent customer experience on the best network in the country. This marks the fifth consecutive quarter of maintaining customer retention at or above 0.80%. Total retail postpaid churn rose slightly to 0.97%, up from 0.94% a year ago. In the quarter, postpaid device activations were 4.6% lower than the previous year, with around 80% consisting of phones. Our retail postpaid upgrade rate was recorded at 5.0% compared to 5.6% last year. During the quarter, 5.8 million phones were activated on device payment plans. In terms of prepaid activity, we experienced a net loss of 236,000 devices compared to 19,000 net adds in the prior year, with 150,000 of the losses being basic phones. Now let's move to our wireline segment on Slide 10. Total operating revenues for the wireline segment decreased 3.4% from the quarter due to ongoing secular pressures from legacy technologies and competition, partially offset by growth from our high-quality fiber-based products. Consumer markets revenue decreased 1.4% driven by legacy core declines partially offset by Fios growth. Fios consumer revenue increased by 1.7% primarily due to our broadband offerings. In Fios, we added 43,000 internet customers and had video losses of 37,000 in the quarter. Internet ads were driven by strong demand as customers value their broadband connection more than ever before. Video results continue to face macro pressures from cord-cutting. Enterprise Solutions revenue decreased 4.2% from the quarter driven by declines in legacy services partially offset by growth in our fiber-based products. On a constant currency basis, revenue is down 5.1%. Partner Solutions revenue declined 2.8%, the increasing customer demand for fiber access is a growth opportunity for this business and is mitigating declines in copper-based products. Within business markets, revenue decreased 7.4% mainly due to reductions in CPE sales and ongoing headwinds from legacy services. Fiber-based products continue to grow and are becoming a more significant component of recurring revenue. The wireline segment EBITDA margin was 19.6% excluding the impacts of revenue recognition. Price compression on legacy products, secular trends and increasing content costs continue to pressure wireline margin performance. Excluding the impact from revenue recognition, we expect margins to be around 20% for the near term. Let's now move on to Slide 11 to discuss our Media and IoT businesses. During the second quarter, the Oath team continued to build out and operationalize its content strategy and make progress towards the integration of Ad products into one interlinked cross platform and cross device solution. As we highlighted on our last call, the video platform became integrated in the first quarter. During the second quarter, half of the demand side platform for Ad inventory was integrated and Oath is on track to complete integrating the remaining components of the platform within the second half of the year. We expect to see momentum build after advertisers and content owners have the ability to come to us on a single platform. For the second quarter, Oath revenue is $1.9 billion which was relatively flat on a sequential basis. In our telematics business, total Verizon Connect revenue was $241 million. Total IoT revenue including Verizon Connect was up approximately 13%. Let's now move to Slide 12 to summarize our second quarter results. We delivered another strong quarter of financial results and our business is well positioned for growth into the future. Consolidated revenue growth was led by wireless service revenue turning positive, inclusive of the headwinds from revenue recognition. Our unlimited offerings are evolving to provide a new level of flexibility enabling people to customize their experience on the nation's best network. Churn rates remain low signaling excellent customer satisfaction and retention of the nation's best wireless customer base. Last year, we announced our goal to drive $10 billion in cumulative cash savings throughout the business over a four-year period. Our business excellence initiative, which includes zero-based budgeting, is off to a solid start in 2018; it has yielded approximately $500 million of cumulative cash savings on a year-to-date basis. Most of the incremental cash savings realized in the second quarter related to network activities and are reflected in the lower total capital spend. The program remains on track to deliver against our goals over the four-year period. Adjusted earnings per share for the quarter increased year-over-year driven by the strength of our revenue performance and operational efficiencies realized across the business. Finally, we are making significant strides in honoring our commitment to strengthen the balance sheet. We substantially reduced net debt within the quarter and the business is generating strong cash flows as we prepare for the upcoming launch of 5G. With that, I'll now turn the call over to Hans to discuss our strategic priorities.

Thank you, Matt and good morning everyone. First, let me say that it's a great honor to be named successor to Lowell, and I'm humbled by the opportunity to lead this great company. I'm looking forward to being part of leading the digitalization era into the more technologically advanced market in the world, which will have a significantly positive impact on consumers, industries, and our society for decades to come. During my tenure with Verizon, I've been actively involved in setting the strategy and priorities for the company alongside Lowell, the board, and the rest of the leadership team. We have laid our focus on execution on the fundamentals; we're positioning the business for future growth, maintaining a disciplined approach to capital allocation, and driving sustainable financial performance for long-term value creation. We remain committed to announcing our network leadership position, strengthening our customer relationships, and driving efficiencies throughout the business. Verizon has assets in place to develop and provide the most advanced next-generation network which we call Verizon's Intelligent Edge Network. We are positioned for growth in the current generation and we are leading the way to fully capture the significant opportunity that lies ahead in the transition to the fifth generation of wireless services. We continue to be the clear leader in 4G performance driving further innovation, growth opportunities, and implementing new network capabilities that will further enhance our customer's experience. We have made a strategic investment in millimeter wave spectrum that enables ultra-wideband 5G services. Our fiber build-out is underway in more than 50 markets outside of our higher ILEC footprint that will allow us to fully take advantage of the many use cases that will come to bear in 5G. Our Intelligent Edge Network design allows us to realize significant efficiencies by utilizing common infrastructure in the core and providing flexibility at the edge of the network to meet customer requirements. Our Oath and IoT assets will provide a platform for us to participate in the use cases that 5G will enable. We're rapidly approaching the launch of our first use case for 5G with a rollout of residential broadband services. As you know, Sacramento and Los Angeles are two of four initial commercial launch markets and you heard Lowell earlier announce Houston a few minutes ago. News and updates on our full market will be provided soon. Residential broadband is here as the first of many use cases for 5G that will be deployed on our multi-use network. Progress is well underway across all of the use cases and we remain focused on providing 5G mobility in 2019. I'm super excited for the future; we're on the cusp of the fourth industrial revolution, and we have the assets in place to take full advantage of the opportunities that lie ahead. Now I will turn the call back over to Brady so we can get to your questions.

Thank you, Hans. Brad, we are now ready to take questions.

Lowe, I want to congratulate you on your retirement and your career at Verizon; I have truly enjoyed working with you throughout the years. I’m also looking forward to working with Hans as he takes on his new role. Lowe, during your time as CEO, Verizon has focused on its core strength in wireless network leadership while other companies have sought to diversify. How confident are you that this approach is correct? As we consider the deployment and adoption of 5G, do you believe Verizon can expand its lead and establish a lasting advantage over other carriers?

I think your strategy is based on the assets that you have in your portfolio and where you think you can go with a high degree of success. We talk about competing to win; we don't want to play to play, we want to play to win. We've looked at the things that we've done; network leadership is at the core, it's part of the values of the company, and every individual here is proud of what we do on network leadership; and we've stayed close to that core, branching out though into things like Verizon Connect and Oath is a very logical near progression for us, and we see the advantages that will strengthen the core going forward. If I look at the things I'm proudest of, it's the initiatives we've done, and pushing the envelope on 5G and 4G are some of those. I also love to say with a smile on my face, I'm glad we didn't follow a lot of the directions that analysts and bankers told us we had to do, and that's put us in a position now that Matt outlined where we've got a strong balance sheet, we've got a clear strategy, and I think we are going to put a significant distance between us and the competition; and the first mover on the network generation changes usually gains a significant amount of market share, and with the assets that we have we think we're in that position with 5G.

I also wanted to share my best wishes to Lowell; good luck with your retirement. Good to hear the news about Houston; you've talked about a $30 million plus opportunity for the residential broadband; can you just help us think about the pacing of that? How are you thinking about the initial timing of the rollout? How many markets we'll see in terms of pops covered over the next 12-24 months? And then on the mobility side, you're starting to talk about that a bit more; we've heard some of your competitors talk about how many markets to launch this year; how rapidly do you think you're going to roll that out? And is that all going to be microwave or are you going to use some lower balance for the mobility 5G?

So when it comes to the fixed wireless access, we will have an initial commercial launch of four markets this year, that's going to be based on our software that we developed in the beginning calling TS. We are preparing the whole network with Intelligent Edge Network to be ready to launch 5G based on the 5G standard that is coming out right now, and vendors and equipment manufacturers are preparing right now. So we will be ready as soon as that has the majority to be released to our customers; so that they will come back when we'll go for the full 30 million households, which is our ambition that we have explained before. So that's where we are on the fixed wireless access. On the mobility, we do the same. Remember Intelligent Edge Network is a multi-use network, so it's the same base station that is going to provide our fixed wireless access as mobility. We are in the deployment on fiber in more than 50 cities, and we are preparing everything to be ready for the majority of the equipment and the software as well as having the CPE and handset market ready for launching those products. Right now, that's the ambition we see in 2019; we have not named the cities but we are deploying in 50 markets with fiber sales, and that's an important point.

And when should you launch the first of the Sacramento, LA, Houston? Is that going to be in the third quarter or more likely the fourth?

Good question. We will announce the exact date as soon as we have that information.

Hans, can you talk us through what's happening on the CapEx side to move towards the lower end of the guide; are you doing less this year than you expected or just getting more for it? And where are you in the shift of spending and focus from macro towers to more fiber and small cell?

This is a great question; remember when I came in, we decided together with Matt, Lowell and the whole management team to actually flip the whole network to the sort of the horizontal Intelligent Edge Network. There were two important factors we did that; first, we wanted to deliver new types of services based on a horizontal network, especially the ones coming from 5G and we want to see some of them coming up very shortly. The second was that we also could be so much more efficient with new technologies and multipurpose equipment. At the same time we put in the new process for capital efficiency that Matt and I are sharing, and I think that's what you're seeing right now; we are actually doing much more than before when it comes to deployment. We are already deploying 5G things at the moment, we're preparing all the network for it, so that is embedded in the numbers that you see. At the same time we also are making a big shift in our whole spending; if I look what we spend in 2017 in the capital result CapEx than in 2018 it's very different; so we're also making shift at all time.

If I can follow-up; anything you can tell us, given that efficiency about where 2019 CapEx might be upward or downward from 2018?

We'll stay consistent with what we've done in the past where we'll talk about 2019 we get closer to that but I think we've been pretty consistent in our commentary that we expect CapEx to be reasonably consistent, and as we see it to accelerate any spend on 5G as we see it but it's a little too early in the process to get there yet. I'll just remind you as Hans said, a lot of the spending that we've been doing around densification supports both 4G and 5G. The network really is in a great position to be preposition for us moving into 5G here without it requiring a significant step change in total spend. We've done this before, moving from one generation of technology to another, and keeping total CapEx spend fairly consistent and we're confident we'll do that again.

Matt, could you provide some insight into the finance side regarding the lower tax guidance? What are the reasons for this, and is it affecting our cash flow? Should we also consider this in our free cash flow number? Additionally, could you discuss the upcoming changes in the union contracts? How might these changes impact our cost structure? You indicated a 20% margin in the wireline segment for this year, but do the negotiations provide any potential for an increase in that margin for the wireline business?

So, as you look at the first half of the year, the effective tax rate was impacted certainly by tax reform but we had a couple of one-timers in there, especially related to the pension contribution we did in first quarter that you wouldn't see necessarily flow through to the second half of the year, so that’s why we're guiding towards the lower end of the 24% to 26% range for the year as a whole. In terms of it flowing through to the cash flow; you know, I would say certainly you should expect cash taxes to be positively impacted this year by tax reform. We didn’t have that in the first quarter because we had no scheduled payments; as you know, second quarter we had the first of two scheduled payments for the year and so started to see those flow through. Expect to see lower tax rate flow through to our cash tax payments in the rest of the year; that’s certainly behind the commentary that we gave around the ability to strengthen the balance sheet this year. So expect to continue to see the benefit from the lower tax rate. I'll let Lowell answer your question around the new union contract.

David, we are very happy with the relationship we have established with the union. During the last contract, we frequently met at the senior level and were able to address some issues that had been challenging for both the union leadership and its members, as well as the company. When we decided to negotiate a contract a year before its expiration, it marked a significant shift in our relationship, and I appreciate the union leadership for their approach during this process. Regarding your financial projections, I would suggest continuing with what you have seen. We do anticipate some increases and contributions, but there won’t be a significant change to the overall trajectory you observed after our last contract. The positive aspect of this situation is that management and all our employees can now concentrate on serving our customers, deploying 5G, and expanding fiber, allowing them to focus on their work, families, and customers rather than preparing for a strike. We are very pleased with this outcome.

Thanks. And I'd also like to extend my congrats to Lowell for a distinguished career, and to Hans for the opportunity that lies ahead. I was hoping I could ask about postpaid ARPA; that metric has been under pressure for the last several years although it's shown a lot of stabilization recently. And even though you don't breakout phone ARPU intrinsically, we all know that it was phone ARPU that was causing that pressure as subs moved into EIP, and more recently into the unlimited plans. It seems like the EIP transition or the unsubsidized transition is fully behind us, I'm not entirely sure we are in the migration to the new unlimited plan; so I guess I was just kind of hoping you could talk through the drivers of postpaid ARPA going forward. Do we still have any headwind on the phone side, is that becoming a tailwind? And then of course you've highlighted you are seeing a lot of other devices including wearables come into your accounts? Are we starting to get to the point where that's becoming a meaningful positive driver on ARPA as well?

As you look at ARPA, you're right that the transition to the device payment plans is essentially complete, the year-over-year difference in terms of the percentage of the base unsubsidized pricing is now in single digits as far as a year ago it was much more significant; so that shows up in ARPA. The other good things in the ARPA though is you continue to see the demand for our products and services, so we continued in the quarter to have our customers step up in terms of the plans they are on, whether that be from a metered plan to unlimited or even within our unlimited plans that we offer. And then we continue to see increases in connections per account whether that be wearables or additional phones on the account; those things are coming through to ARPA and you see the impact there on service revenue overall. So certainly ARPA is stabilizing and we think as we continue to offer the right plans to customers and we continue to give them the opportunities to add additional devices to their plans that it's an area where we can continue to help drive revenue growth going forward.

Have you broken out how many of your customers are on unlimited plans? I apologize if I missed that.

We have not. As we said previously between unlimited and our Verizon 2.0 plans where customers have the ability to control over Edge, that would be significantly above 50% and certainly the number of customers unlimited continues to grow but we haven't broken that out at this point but it's becoming certainly a larger and larger percentage at the base.

First on the strategic side, as I listen to the management commentary over the past year, is the underlying goal for Verizon to become a leading provider of broadband in the home and on the go across the country? If this is the direction, how long would it take and how much can be driven by internal investments versus possible acquisitions? Additionally, regarding business trends, postpaid phone growth at the industry level has outpaced population growth by more than double. Do you have any insights into what is driving this change and the sustainability of postpaid phones at this new growth level?

When I consider the assets we have, after being here for quite some time, I truly appreciate both our current assets and those we are developing, which will enable us to expand significantly. The announcement made today about our ongoing initiatives demonstrates our commitment, and we will keep updating you on the new cities where we will implement 5G. It's important to understand that 5G is merely an access technology; there's a lot more necessary to fully utilize it. We are working on a comprehensive strategy that includes everything from the data center with fiber unified transport to multi-service routers. This is a substantial endeavor, but we are already deep into it. As I have mentioned before, we have been focused on our Intelligent Edge Network for quite some time, and we are starting to see the benefits and opportunities arising from it. While it will take time to deploy it nationwide, we are currently rolling out fiber in 50 cities. We will provide more detailed updates, but we are preparing our network to maximize efficiency and capitalize on market opportunities, which is a crucial aspect of our strategy.

We continue to see strong consumer demand for postpaid phones and believe that customers will benefit from access to the nation's best network along with our competitive pricing plans. While I cannot comment on the overall industry volumes, we anticipate ongoing growth in postpaid phone net additions. Additionally, as we implement our broadband strategy, the services we offer on top of that connectivity will be crucial moving forward, and we are well-positioned to deliver on that front. I hope this addresses your questions, Mike.

I think just one other point to bring up; it's funny when you're at this point in your career you get to look back and you see an awful lot of similar questions but just asked in a different way; I remember when we brought Verizon together back in '99 and we had about 20% market penetration on postpaid and there was no smartphone and people were saying, where is the industry going, you can't possibly get anymore penetration than you've gotten. And at that point I pointed to areas like Sweden, Hans's home country that was at 50% penetration, and now we're over 100% penetration and you see wearables, and with 5G, and Hans mentioned this, you're going to see so much more penetration on all of the different business applications that are going to change people's lives. I really don't think much about postpaid or smartphones or any category you want to look at as an opportunity for future growth; there are so many things that we have literally 0% penetration on today that are going to be big businesses five years from now; that's why I'm so excited to see the way we're positioned and the leadership team's philosophy around dealing with customer pain points and providing on the products that they're going to need that will be indispensable five years from now.

Good morning, and I want to extend my congratulations to Lowell; it has truly been a pleasure, and congratulations to you as well, Hans; I am looking forward to your success. I have a strategic question regarding video. You have discontinued go90 this quarter, and there have been press reports discussing how to move forward with Oath, particularly regarding whether Oath's addressable advertising might be more successful outside the company rather than within it. Could you please elaborate on the role you see video playing, considering you've had some time to explore various strategies around video and addressable advertising? Additionally, if you could comment on the situation regarding Oath mentioned in the press reports, that would be helpful.

Let me address those questions in reverse order. Regarding Oath, I’m unsure about the source of those concerns. We have no plans to spin off Oath in any form. We are realizing the synergies we anticipated and the future we envisioned. Matt mentioned in his remarks the integration efforts underway; they are on track, and I see no reason to pursue any changes, and no credible reports suggest otherwise in my opinion. So I want to be clear on that. As for video, it is currently the main driver of traffic on our network, and we expect that trend to continue. While we aren't advocates of linear strategies, I don't intend to criticize others’ approaches; it's just that given our assets and future investments, we believe a digital focus is preferable. We are, as we've always said, directing our efforts toward future opportunities. I was encouraged by our recent meetings in Sun Valley where we engaged with major content providers, including sports leagues, healthcare, education, and gaming. Each time they learn about the advantages of 5G, particularly regarding latency along with capacity, they become excited about the potential. My perspective, which Hans shares, is that we have developed these strategies collaboratively; he has been one of my trusted advisors over the past five years in understanding industry trends. We believe we are well-positioned for the partnerships we need to succeed. We won't be owning content or competing with other content providers; instead, we aim to be the best partner for them in terms of distribution, which we see as a smart strategy for the company moving forward.

And I can only echo that; I've been around now for quite a while, both as leading this but I've been seating together with Lowell, the management team, and the board on the strategic decisions we've done. I'm fully onboard on all of them. And when I look at the assets we have, I'm really happy with them and I'm encouraged to see what we can do with them both, leveraging them. And we also are going to get more of the synergies that Lowell talked about. Just talking about the Oath, for example; I mean today with the massive confidence we have in Oath when it comes to AIML, and we are in the transformation of our network to virtualization that's a great synergy and creating a lot of newer possibilities for us on the front, and we're constantly working on how we can leverage our assets on our sort of the Verizon side and Oath side, and we will continue to find those ways forward. So I feel good about the assets we have and I agree with Lowell that we can partner with anyone and again, we are betting on that; we're going to have the best network, Intelligent Edge Network; we want to have a great 5G, the best; and of course, we can attract partners that we can work with, and I think that is the model that we have and that we can continue to develop. I see only opportunities when we go to 5G when we can build to connectivity platforms and applications, and sort of define where you're going to play in that or where you're going to have partners. So I'm feeling encouraged about the assets we have and what we can do with them.

Can I ask about the wireline CapEx component, which is down approximately $500 million from the first quarter? I’m hearing that you’re operating in 50 fiber cities. Matt, can you discuss whether we should expect that wireline portion of CapEx to increase as the fiber build progresses? Additionally, what implications does that have for traditional wireless spending? On a separate note, regarding millimeter wave spectrum, we have an auction approaching in November. Given the considerable spectrum you hold, could you share your thoughts on whether that will be an area of focus for you this fall?

On the capital expenditures side, there are timing factors to consider between the first and second quarter. As we expand our fiber network—particularly in the 50 cities outside of the ILEC footprint where we are currently deploying fiber—you'll notice an overlap in capital expenditures across different segments. While the fiber build is primarily reflected in our wireline segment, the biggest customer for this expansion is actually the wireless division. This investment is part of our strategy to densify the network and position it not only for enhanced 4G performance but also for readiness for 5G, especially with the utilization of millimeter wave spectrum. I anticipate a continuation of this spending, and while the total capital expenditure figure should remain consistent, the ongoing developments signify an evolution from one technology generation to the next. The fiber rollout is a crucial part of this transition, so expect to see these trends persist.

When we think about data usage of our network, we usually talk in a couple of different ways in order to define what we need, and first of all we have the choice between densifying and deploying on more spectrum. I think with the last round of Oath spectrum we decided to densify, and I think that is now paying out very well for us. Secondly, looking at all new types of technology and features coming out in a network that can optimize everything from carrier engagement, etc. And lastly, we of course look into what spectrum we need to have; that is putting us in a very disciplined way how we use these three types of assets when we decide what to do in order to have the best return-on-investment. Of course, we are looking into any auction that's coming up and see how that fits in this pattern of decision-making with these different types of options; however, we're also feeling pretty good about the position we have on millimeter wave right now; but again, we will look into if there are any holes we need to fill in this process, but again, it will be in that discussion all the way from densification, looking into new features on the technology, and then looking into what spectrum is needed, and we have the disciplined approach to our return-on-investment.

On 5G, what insights are you gathering from your larger commercial enterprise customers regarding demand for specific use cases? Do you think this could lead to a faster pace of builds as we move into next year? Additionally, Matt, concerning tax reform, you mentioned leveraging the benefits this year to bolster the balance sheet; how should we view the optimal leverage for the business today? How do the applications of available cash and tax reform benefits potentially evolve into 2019?

Let's start with 5G and enterprise. You're correct that there are several areas 5G will tackle, and I believe enterprise is key when it comes to latency, security, and throughput. We maintain ongoing conversations with our enterprise customers to explore new service offerings. We are also developing the Intelligent Edge Network, which includes defining Edge solutions tailored for enterprises, including private 5G networks with low latency. This presents a significant opportunity. There are features expected in the upcoming sixth revision of the 5G technology that will be crucial for our enterprise customers. We are actively working on these innovations and collaborating with our enterprise clients to create real-time wireless services that haven't been offered before. I believe we are making substantial progress in our innovation and exploration in this domain, and I see great potential ahead.

On your question around tax reform and certainly flowing through the cash flow and the capital allocation; look, the capital allocation we've talked about this numerous times, and we are focused on being able to invest in the networks, providing a return to our shareholders, we know the dividend is important and we've increased the dividend for 11 years in a row now, and we've also said we want to strengthen the balance sheet and get back to those pre-Vodafone credit rating profile, and certainly tax reform helps accelerate our ability to do that, that's our focus for 2018. You saw good progress in the first half of the year, not just on the debt paydown but also when we say we strengthen the balance sheet, we include what we did with the pension contribution as well; so we're making good progress there, too early to give specific views on 2019 but certainly as you know, tax reform will help us get to those leverage profile's quicker than we would have done otherwise and look forward to updating you on 2019 when we get closer to it.

Thanks, Matt. Brad, we have time for one more question, let's go and take one more please.

Do you still believe you will be able to utilize wireless customer data for location and usage to implement more targeted advertising, and if so, what is the expected timeline for that? Additionally, it appears that wireless and wireline networks are merging; how do the unions view this situation? Do you have the ability to effectively merge these networks in a timely manner?

Thank you for the question, Tim, and I'd like to express my gratitude to everyone who asked questions today for your well wishes. Regarding customer data, our focus is on transparency; we want customers to be aware of how we use their data. So far, we've been conducting broad data analyses and targeting our advertising based on aggregate data rather than individual customer information. We clearly communicate to customers about the use of anonymous data, which holds significant value. On the convergence aspect, we are adhering to the contract within our operational footprint and are maintaining open communication with the union about our efforts. We are also committed to ensuring that areas we manage outside of the union contract remain unaffected as we progress. Transparency is crucial for us, and we believe we can achieve our objectives without any complications, and we are upfront about it; therefore, we do not see this as an obstacle to our future strategy.

That's all the time we have for questions today. Before we end the call, I'd like to turn it back over to Hans for some closing comments.

Thank you, Brady. I want to conclude this call by highlighting a few important points as I begin my role as CEO of Verizon. First, I need to express my gratitude to Lowell for his incredible leadership and the journey we have shared. I'm thankful that he will be with us during this transition. Yesterday in Houston, we engaged with employees, investors, and partners, which demonstrates the strong relationships he has fostered over the years, and I appreciate him passing that on to me and the team. Lowell, your journey has been remarkable. Looking back at the first half of 2018, we have achieved solid financial and operational performance in a competitive landscape, and we are satisfied with our business's position as we enter the second half of the year. We remain dedicated to enhancing customer relationships and constructing the next-generation network for long-term success. I have discussed the significance of the Intelligent Edge Network for our business, and I'm pleased with our progress in that area. We are committed to our strategy of investing in our network, utilizing resources across Verizon, leveraging platforms like Oath to monetize data and video consumption, maintaining disciplined capital allocation, and creating value for our customers and shareholders. We are confident in our capacity to implement our strategy and are well-positioned to seize the numerous opportunities that will arise as we advance toward 5G. At Verizon, we don't wait for the future; we create it. Thank you for your time today.