Verizon Communications Inc (VZ) — Q4 2018 Earnings Call Transcript

Thanks, Brad. Good morning, and welcome to our fourth quarter earnings conference call. This is Brady Connor, and I am here with our Chief Executive Officer, Hans Vestberg; and our Chief Financial Officer, Matt Ellis. 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 we get started, I'd like to draw your attention to our Safe Harbor statement on slide two. 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 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. In addition to our comments today, on February 21st, Verizon will be hosting an Investor Day event in New York City, and we will be webcasting presentations by Hans and the leadership team. More information about this event will be posted on our IR website. Now, let's take a look at consolidated earnings for the fourth quarter and full-year. In the fourth quarter of 2018, we reported earnings of $0.47 per share and full-year earnings of $3.76 per share on a GAAP basis. These reported results include several special items that I would like to highlight. Our reported earnings for the fourth quarter include a net pre-tax loss from special items of about $4.9 billion. This net loss consists of a previously announced goodwill impairment for Oath of $4.6 billion, acquisition and integration charges of $189 million, and severance and annual mark-to-market for our pension and OPEB liability of $165 million. In addition, we recognized the deferred tax benefit of $2.1 billion related to an internal reorganization of wireless legal entities. Excluding the effect of these items, adjusted earnings per share was $1.12 in the fourth quarter. 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 $0.90 in the fourth quarter, up 4.7%, compared to $0.86 a year ago. On the same basis for the full-year, adjusted earnings per share excluding tax reform and the adoption of the revenue recognition standard was $3.87, up 3.5% compared to $3.74 a year ago. It has now been a full year since the adoption of the new accounting standard for revenue recognition. The effect of this change is illustrated in the table on slide four. As a reminder, it results in a reduction of wireless service revenue offset by an increase in wireless equipment revenue and the deferral of commission expense in both our wireless and wireline segments. The impact from this change was $0.09 per share in the fourth quarter and $0.28 per share for the full-year. The effect has been fairly consistent throughout 2018 with the fourth quarter slightly higher due to seasonality in wireless volumes. In 2019, we expect a smaller benefit from the adoption of the standard due to the deferral of commission costs. The reduction in benefit creates a year-over-year EPS headwind, which is expected to be about half of the 2018 impact in each of 2019 and 2020. For the remainder of this call, unless otherwise noted, financial results will exclude the impact of the revenue recognition accounting change to provide clear comparability with prior periods. With that, I will now turn the call over to Hans to take you through a recap of 2018.

Thank you, Brady, and good morning to everyone. This was truly a great year for Verizon. I’m so proud of our team and what they have accomplished in 2018. As I traveled around and met with our employees and loyal customers, I have seen firsthand the great work that they are doing in pioneering solutions, focusing on creating value and meeting customer needs. We’re on the forefront of technology innovation as to provide our customers with fantastic experiences on our networks. 2018 was a remarkable year. We delivered solid financials, returned value to our shareholders and strengthened our balance sheet as we continue on our trajectory to achieve a pre-Vodafone credit rating profile. Our capital allocation remains disciplined and focused as we invest in our networks and put our Board in a position to maintain our consistent approach to the dividend. Financially, on a like-for-like basis, 2018 was highlighted by strong wireless service revenue and earnings growth. This is a testament to Verizon providing the best wireless experience on the nation's best network. Our bottom-line performance was delivered through a combination of this revenue growth and our business excellence initiatives, which drove cash savings across the Company. We widened our network leadership position in 2018 and continued our momentum in delivering solid financial and operational performance. Our networks remain best-in-class and are performing better than ever, as evidenced by recent wins from J.D. Power and RootMetrics. We extended our leading wireless performance as we enhanced our network and delivered a personalized experience for all our customers. 2018 was a year of 5G firsts. We were the first to complete an overlay of data transmission on the 5G global standards. We were the first to complete the first 5G data session on a smartphone. And in October, we proudly became the first in the world to commercially deploy 5G with our 5G Home product. As seen in the year, our confidence is high as we head into the 5G era and the beginning of what many see as the fourth industrial revolution. Operationally, we’re now transitioning to Verizon 2.0, which is the realignment of our operations to better focus on our customers. This new operating model realigns our customer-facing units into consumer, business, and Verizon Media Group. This will enable us to leverage our scale and infrastructure to create better solutions for our customers. We expect Verizon 2.0 will go live in the second quarter of 2019, and our results for the second quarter will be presented under the new structure. This transformation in how we face our customers is matched with the transformation under our business excellence initiatives, where we recently announced our voluntary separation program and plans for our IT outsourcing. Together, these initiatives, along with our Verizon 2.0 operating model, position us to be even more competitive in a rapidly changing environment. Now, I'll hand over to Matt to talk about the financial and operating results of the businesses, starting with slide six. Matt?

Thanks, Hans. In the fourth quarter, total operating revenue as reported was $34.3 billion, an improvement of 1%; and for the full-year, 2018 revenue was $130.9 billion. Excluding the impact of the new revenue recognition standard, total revenue was $34.1 billion in 4Q, up 0.5%. For 2018, on a comparable basis, excluding impacts from revenue recognition, divestitures, and partial year impacts from acquisitions in the media group, adjusted operating revenues grew approximately 2.2%. The primary driver of the increase was continued wireless service revenue growth driven by step-ups in access and net account growth. In the fourth quarter, consolidated adjusted EBITDA, excluding special items, totaled approximately $11.0 billion, compared to $10.7 billion last year. For the full-year, consolidated adjusted EBITDA, excluding special items, totaled approximately $45.6 billion, an increase of 3.1%; and consolidated adjusted EBITDA margin was 34.9%, slightly lower than last year's margin of 35.0%. Our business excellence initiatives produced cumulative cash savings of $2.3 billion in 2018. For the full-year, the mix of activity skewed more towards capital reductions than OpEx savings. The voluntary separation program gives us a good starting point for further benefits in 2019, and the program remains on track to achieve our goal of $10 billion of cumulative savings for the full-year period. Let's now turn to our cash flow results on slide seven. In 2018, Verizon significantly strengthened the balance sheet with strong cash flow while continuing to efficiently invest for sustained network leadership. Full-year cash flow from operations totaled $34.3 billion, up $10 billion year-over-year. Year-over-year improvements in cash flow from operations were driven by strong operating results, recurring and nonrecurring tax reform benefits, reduced headwinds from the wireless device payment model, as well as lower discretionary pension and benefit contributions. Full-year capital expenditures were $16.7 billion, in line with our revised guided range of $16.6 to $17.0 billion. Free cash flow for the year totaled $17.7 billion, up $10.6 billion year-over-year. We ended the quarter with $113.1 billion of total debt, comprised of $103.0 billion of unsecured debt and $10.1 billion of device payment securitizations. Our near-term unsecured bond maturities are modest at $2.6 billion through year-end 2020. Total net debt was down $4.7 billion in 2018, and unsecured debt is lower by $5.2 billion. The reduction in unsecured debt and higher EBITDA were the primary drivers in improving our net debt-to-adjusted EBITDA ratio from 2.6 times at the end of 2017 to 2.3 times at the end of 2018. In addition, the balance sheet is stronger as a result of about $5.1 billion of discretionary employee benefits funding during the last two years. This was primarily related to our pension plans, raising the funded status from approximately 70% at year-end 2016 to about 91% at year-end 2018 on a GAAP basis. The strength in the balance sheet provides us with the financial flexibility to grow the business. We expect excess cash flow remaining after investing in the business and paying our dividend will be deployed in 2019 towards our balance sheet goals. Now, let's focus on the operating segments, starting with wireless on slide eight. Our customized experiences within our unlimited plans on the best wireless network have created a strong value proposition, and this is resonating with consumers. New customers are coming to Verizon at higher access points, and existing customers are stepping up in their plans. Additionally, we have seen our customers expand their accounts with more lines throughout the year. In the fourth quarter, total postpaid net adds were 1.2 million, up 3.9%, including phone net adds of 653,000, which were up 51.5% over last year’s strong results. In addition, we added 11,000 tablets and 556,000 other connected devices, predominantly wearables. Smartphone net adds were 873,000, up 34.9% compared to 647,000 last year. For the quarter, we increased customer accounts, adding 118,000 to our base. For the full-year, postpaid net additions of 2.5 million included 1.1 million phones, 1.6 million other connected devices, and 181,000 tablet losses. Our competitiveness in 2018 was highlighted by smartphone net adds of 2 million, up 13% versus the prior year. The overall experience of pairing our unlimited plans with the best network continues to resonate with our customer base, resulting in outstanding retail postpaid churn of 1.08% and phone churn of 0.82% in the fourth quarter. In the quarter, postpaid device activations totaled 11.9 million, down from 12.4 million last year. About 81% of these activations were phones, with wearables accounting for the majority of the other device activations. The reduction in activations was the net result of higher gross additions being more than offset by lower upgrades. Our retail postpaid upgrade rate was 6.3%, up sequentially as expected, but was lower compared to 7.2% for the same quarter last year. The elongation of the upgrade cycle continues as more customers hold onto their devices for a longer period. In the quarter, prepaid net losses were 90,000 compared to a net loss of 184,000 in the prior year. Our 4G smartphone prepaid base increased during the quarter and all of the decline in prepaid net additions was due to 3G and basic prepaid phones. We ended 2018 with 118 million total retail connections excluding wholesale and Internet of Things. Our industry-leading postpaid connections space grew 2.3% to $113.4 million, and our prepaid connections totaled 4.6 million at the end of the year.

Let's turn to slide nine and take a closer look at wireless profitability. Our wireless operating results provided the basis for growth and profitability in the fourth quarter. Total wireless operating revenue increased 2.1% to $24.3 billion in the fourth quarter. For the full-year, operating revenue totaled $91.3 billion, an increase of 4.4%. For the quarter, wireless service revenue increased by 1.9%. For the full-year 2018, service revenue grew 1.7%, attributed to ongoing customer growth, step-ups to unlimited, and the benefits of subscribers customizing their experience through mix-and-match plans. On a year-over-year basis, equipment revenue decreased 2.1% in the fourth quarter due to lower upgrade volumes. For the full-year, equipment revenue increased 8.4%, driven by higher-priced handsets and increased sales of wearables. At the end of the quarter, approximately 48% of our postpaid phone customers had an outstanding device payment plan balance. Our postpaid phone base on unsubsidized service pricing increased to about 84% at year-end versus 80% at the end of last year. The fourth quarter trends in service revenue, business efficiencies, and upgrade volumes provided the basis for EBITDA margin to increase year-over-year to 40.5% compared to approximately 39.8% in the same period last year. In the fourth quarter, we generated $9.8 billion of EBITDA, an increase of 3.9%. For the full-year, we generated $40.9 billion of EBITDA, up by approximately $2.3 billion year-over-year. Let's move next to our wireline segment on slide 10. Total operating revenue for the wireline segment decreased 3.5% in the quarter and 3.1% for the full-year. Growth from our high-quality fiber-based products continues to be offset by secular pressures from legacy technologies and competition. For the full-year, consumer revenue decreased by 1.5%. Consumer markets revenue decreased 1.0% in the quarter as Fios Internet growth was overshadowed by declines in video and legacy products. Fios revenue grew by 2.9% in the quarter. This growth was primarily driven by an increase in the total customer base and strong demand for higher internet speeds. In the quarter, we added 54,000 Fios Internet customers. We now have a total of about 6.1 million Fios Internet subscribers. In Fios Video, the business faced ongoing headwinds as observed throughout the linear TV market. The Fios Video business ended with 46,000 subscriber losses in the quarter and 168,000 for the year. For the quarter, enterprise solutions revenue decreased 3.0%, partner solutions revenue decreased 9.2%, and business markets revenue was down 5.6%. Overall, secular and pricing pressures continued to be significant headwinds for these businesses. We expect legacy product revenues to continue to decline in 2019 at rates consistent with last year. In order to counter this decline, we continue to invest in fiber-based products and new applications that will open new opportunities for customers across our business lines. Through our One Fiber initiative, we are building a single, highly resilient and scalable fiber network that will allow us to efficiently provide advanced data services to customers across our consumer, business, and enterprise customer groups. As a result, we remain confident that we can continue to generate growth and momentum in fiber-based products and new applications. Segment EBITDA margin was 16.9% for the quarter and 19.2% for the year, as our focus on operational efficiencies was more than offset by revenue declines and content cost escalations. Let's move on to slide 11 to discuss our media and IoT businesses. For the quarter, Verizon Media Group revenue was $2.1 billion, a decrease of approximately 5.8% year-over-year. As expected, revenue trends were up sequentially from Q3, due to seasonal advertising spending. Year-over-year, we continue to see traction in growth in mobile usage. However, this is overshadowed by the macro pressures from declines in desktop volumes. From a technology standpoint, we have now completed our supply and demand side platform integrations. We are focused on technologies and resources in the business that will yield forward momentum. In our telematics business, total Verizon Connect revenue was $242 million. IoT revenues including Verizon Connect increased approximately 9.5% in the quarter. Our value proposition is evolving as our engagement with municipalities gains more momentum with the upcoming commercial rollout of 5G services. Let's move next to discuss 2019. Our focus on executing on the fundamentals of the business positions us for strong performance in the upcoming year. On a GAAP reported basis, we expect low single-digit percentage growth in full-year 2019 consolidated revenue, compared to the prior year, driven by the continuation of wireless service revenue growth. We expect to see organic earnings growth in 2019. However, our EPS will be impacted by the revenue recognition headwind we discussed earlier, as well as a few non-operational items, primarily a higher effective tax rate and increased interest expense due to placing additional spectrum into service. After the effect of these items, which we expect to be approximately $0.24 to $0.28 of pressure on EPS growth, we expect our adjusted EPS in 2019 to be approximately the same as our adjusted 2018 EPS, excluding the impact of the new lease accounting standard. At this point, we expect the adoption of the new lease accounting standard to have about $0.01 to $0.02 per quarter headwind impact on EPS in 2019. The 2019 effective tax rate is projected to be in the range of 24% to 26%. We expect cash income taxes to be $2 billion to $3 billion higher due to tax benefits that were realized in 2018 that we do not expect to repeat this year. Our internal capital decision process and return objectives have not changed. We are consistent and methodical in our allocation. We expect consolidated capital spending to be between $17 billion and $18 billion, including the expanded commercial launch of 5G. This capital intensity is consistent with historic levels. Let me now turn it back to Hans to walk through our strategic priorities for 2019. Thanks, Matt. Verizon’s strategic priorities for 2019 are clear. I have outlined five priorities with my team that focus on our customers, financial performance, 5G leadership, our valued employees, and Verizon's role in creating benefits for our society. First, we will redouble our long-standing excellence in customer satisfaction. This customer-centric mentality has always been one of our core assets and will become even more essential as innovation continues to accelerate. Second, we'll build on the momentum of our strong 2018 financial and operating results. Today, we're growing the business, strengthening the balance sheet, and improving the cost structure to compete in the environment. In the future, we will enable and monetize new use cases on our advanced networks. Our third priority is to extend our leadership in 5G. The cornerstone of our strategy continues to be our best-in-class network. We have demonstrated our network leadership through every cycle from analog to 4G. We run to and embrace the challenge of deploying the best technology for our customers. Whatever the technology, such as small cells, dense fiber or LTE advanced features, Verizon has a proven track record of setting the gold standard for others to follow. In return, our consistent investment in our networks, particularly 5G, will pay dividends as we advance and lead the industry into the fourth industrial revolution. Not too long ago, the mere thought of having a 5G network before the beginning of the next decade would have seemed implausible, but we pushed the industry to get there faster. As a leader and catalyst of change, we advanced 5G development and delivered to the world the first two 5G deployments in 2018 with our initial four commercial markets, and this is real 5G. This is a completely transformative experience that gives customers speeds measuring hundreds of megabits to gigabits, reduce latency, allows for connections per square kilometer by millions, and energy efficiency at a fraction of today's consumptions. Our 5G network is projected to deliver a game-changing wireless experience. The assets we have compiled and put into place in 2018 have enabled this vision. We have the spectrum to provide rich ultra-wideband 5G services. Our deep fiber backbone connects our assets, enabling a high-capacity and efficient architecture. Our investment in the intelligent edge network creates new capabilities and gives us the flexibility to serve our customers. And it is our engineers and the know-how they've accumulated through this development process that binds our 5G solution together. No other wireless operator has this unique combination of assets. We are the leader in 5G, as we have said before and proven once again. We don't wait for the future; we build it. Our fourth priority is our employees. Our winning team within new Verizon 2.0 will be the key to creating new solutions in today's world. We want to continue fostering an organization environment that embraces change, sparks curiosity, and encourages strategic-risk taking while inspiring all of us. Internally, our shared purpose is to deliver the promise of the digital world by enabling people, businesses, and society to innovate and drive positive change. Our fifth priority is carrying forward Verizon’s commitment to responsible business practices and making the world a better place. At Verizon, we coined the word humanability, which means the power of technology to create new ability for humans to innovate and drive positive change in the world. I'm confident that Verizon’s 5G network will be a universal enabler of advanced use cases and technology that brings humanability forward. I’m super excited to host our upcoming investor day on February 21st. We will bring the Verizon executive team and go deeper into our strategy, our vision of Verizon 2.0, and our enhanced customer focus. With that, I will turn it back to Brady for the Q&A session.

Thanks, Hans. Brad, we are now ready to take questions.

Great. Thank you very much. Good morning. Hans, I wonder if you could give us an update on 5G Home. When do you expect the standards-based gear to be available? And what does the CapEx guidance really imply in terms of homes passed this year and the progress towards the 30 million? And then, any commentary on the handset outlook for mobile 5G and what we should expect on that side this year?

When it comes to the 5G Home, we are thoughtfully deployed in the four cities that we decided for. So, what we’re waiting for right now is the CP equipment for 5G Home. As the industry is evolving, the first focus for the industry is actually to do chipset for smartphones, and then secondarily the next generational chipset comes on the CPE side. We definitely believe that this year, we will get CPEs on the NR standard in the second half of 2019. So, that's where we are. We’re building the network as we speak. And as soon as we see the availability of the CPEs, we will, of course, get that out in the marketplace. And that, of course, subsequently answers the question on handsets as well. We’re going to see handsets coming out in the first half of 2019. As you know, we have announced two phones, one from Motorola and one from Samsung. The one from Samsung has not been seen yet but hopefully will be seen soon. And as soon as those are ready, and we have been together sort of interoperability testing that, we’re going to launch that. Remember now that the network is a multi-use network. So, the home and the mobility are the same network we’re building. So, it’s more about what type of devices you’re connecting to the network. And then, ultimately, on the question on CapEx, I think Matt guided our CapEx, which has been consistent over the years. We are doing everything. Remember, the majority of investments in the 5G network is coming with the fiber networking we’ve been doing, the passive asset we’re doing, the intelligent edge network design that we’ve been working on for years, and then, of course, you have the equipment coming at the end of it. So, we have actually, for several years, been investing to be prepared for 5G, and this includes the CapEx guidance for this year for obvious reasons.

Maybe a couple of quick questions for Matt. On the wireless side, you saw ARPA decline a little bit in the fourth quarter versus the growth in the third quarter, and you saw deceleration in the service revenue growth. What's driving that decline that we saw this quarter? And, are the sort of benefits of moving to the unlimited sort of fully reflected in the decline we're seeing, and how do you expect that to turn going forward? And then, on the free cash flow, thanks for the CapEx and the taxes guidance. Any other sort of things you should be thinking about as we look to free cash flow in ‘19 from a pension contribution or working capital standpoint? Thanks.

Thanks, John. So, on the wireless service revenue, I think, as you look at the fourth quarter number, we continue to have good underlying momentum in the wireless service revenue, whether you're talking about the service revenue line or whether you're looking at the ARPU line. But, there is a little bit of noise in the fourth quarter number that masks that growth. So, let me just give you a little more detail. In 4Q, both in ‘17 and ‘18, we had some nonrecurring items that give us that 1.9% year-over-year increase, which, as you say, slightly lower than the past two quarters but still certainly a good positive number. 4Q in ‘17, we had a positive adjustment related to our wholesale revenues, and that adjustment didn't repeat this year. So, we're lapping that adjustment. Additionally, this year, we had a couple of items go the other direction, including some service credits related to natural disasters impacting customers. So, when you compare those, you remove those, the underlying core retail postpaid service revenue increased sequentially, had good momentum year-over-year, in line with what we saw in Q2 and Q3. Importantly, we start 2019 billing more accounts and at a higher ARPA than we started last year. So, it's a good place to be. I think, we continue to see opportunity to increase service revenue in 2019 by adding accounts as we did last year, but also increasing ARPA. There is still significant headroom for us to move customers to unlimited and step them up when they're in unlimited, adding more devices to accounts. So, I think the momentum we saw in ‘18 will certainly continue into ‘19 in a good way. On the free cash flow, so, we don't actually provide, as you know, a free cash flow guide for the year. We did talk about the fact cash taxes will be higher. As I think about cash flow for 2019, there are five major items I would think about, a couple of them in the positive direction. We certainly expect the core EBITDA of the business to increase year-over-year. Additionally, last year, we had $1.7 billion of pension and benefits contribution, so we would not expect to be at the same level in 2019. And the other direction I mentioned in the prepared comments, the higher cash taxes, will also have the payments related to the voluntary severance program; all of those cash outflows will be in 2019. And we do expect CapEx to be higher part slightly year-over-year too. So, when you net those items together, you can kind of get to a view for 2019 cash flow. But certainly, cash flow in 2018 was very strong, $34 billion, up $10 billion year-over-year. We're proud of the progress we made there and will certainly look to build on that in 2019.

Hey, guys. Thanks. Two if I can. How should we think about wireless EBITDA in 2019, given your continued cost focus, and the comment that 2018 cost savings were more focused on CapEx than OpEx? And second, on the balance sheet, I wouldn't let you get away without talking about leverage, 2.3 times today and headed lower. Can you think a little bit for us about priorities for cash flow from here? Do you see buying assets like spectrum or fiber that could lever your back up or should we start thinking about capital return in the next couple of years? Thank you.

I'll begin with the second point regarding the balance sheet. We've made good progress on the leverage ratio, reducing net debt-to-EBITDA from 2.6 to 2.3 over the year. As we look towards 2019, our priorities for capital allocation remain unchanged. We will maintain a disciplined approach to capital deployment. Our top priority is to invest in the business, whether through capital expenditures or other investment methods. Following that, maintaining the dividend remains very important to our shareholders. Additionally, we're focused on strengthening the balance sheet. Alongside the decrease in the leverage ratio, I want to highlight that we have made contributions of around $5 billion to our pension and benefit plans in recent years, increasing our pension plans' funded status from about 70% to 90%. We've made significant progress there and expect to continue improving the balance sheet while looking for growth opportunities. If there is extra cash available, we will determine the best course of action at that time. Regarding wireless EBITDA in 2019, we anticipate service revenue will continue to grow, providing us with favorable momentum from 2018 to build upon for next year. Additionally, we are addressing the cost side of the business, with 10,000 employees leaving the company in the coming months, which will positively affect EBITDA. We are also seeking more ways to enhance efficiency and competitiveness. Therefore, we expect to see a positive trajectory in EBITDA as we move through 2019, which will support cash flow, as previously discussed.

And I can only add that on the question about CapEx and OpEx and in ‘18, we had more cash savings on the CapEx. We will continue with our disciplined way of the business excellence program, both on CapEx and OpEx. And I think that in ‘18 we showed that we did everything we wanted to do on CapEx. At the same time, we actually became more efficient. And I think the program we have put in place is very rigorous and very good. And that brings us all the benefits that we need to get from the investments at the same time as we’re getting the efficiency. So, that's very much part of it, but we also look very much for the top-line, as Matt talked about. I think it's a combination with the new leadership team coming into the second quarter; I think we want to have a great focus on it.

If you don't mind, I was hoping maybe you clarify some of the comments you made around the EPS guidance and some of the drivers. So, you're basically saying that you expect earnings exclusive of the new lease accounting to be similar or effectively flat this year. And I think you indicated that there's essentially about a $0.14 headwind from the ASC 606, you had $0.28 benefit in ‘18. I think that goes to about $0.14 this year. And I just wanted to clarify. I think you also indicated there's another say $0.10 to $0.14 coming out of the higher tax rate and the increase in interest expense because of putting spectrum into service. So all in, those items are $0.24 to $0.28. Is that the point you made?

Yes, good morning, Brett. Exactly. So, yes, you heard the guide right. On a GAAP basis, prior to the lease accounting, roughly similar. And you're right, within there, and we’ve talked about this I think on the third quarter call, you have these headwinds from 606, and that's $0.28 of the benefit in 2018. We said roughly half going the other way in ‘19. So, you're right. That's around $0.14, and then a couple of other items below the line that we talked about in the prepared comments. So, as we deploy the AWS-3, we’re capitalizing less of our interest expense. So, that creates a year-over-year headwind; that doesn't change the cash flows of the business one bit. And then, on the ETR, we have the same guided range this year as last year, 24% to 26%. Last year, we ended up with 24.2%. We had a number of nonrecurring items that had us at that lower end of the range. Going into the year, we don't necessarily have line of sight to the same amount of nonrecurring items this year. So, at this point, we’re planning on being closer to the midpoint of that range, and we will see how that plays out. But, as you say, when you add those up, you’ve got about $0.24 to $0.28 of headwinds. And so, that means you have operational year-over-year improvement of a similar amount that gets you to that guide. So, I think what you see over the past couple of years here, Brett, is certainly in ‘16 and ‘17, we had a business that was pretty flat to the revenue and earnings line. And then in ‘18, when you adjust that for the impact of tax reform and 606, we had a 3.5% increase in EPS, and that was even with some headwinds in there from the share count dilution from Straight Path and a couple of other items. So, good EPS growth in the core business in ‘18, and then you see us building on that in ‘19. And we tried to provide a little more color commentary in the prepared remarks, so you get the flavor of it and get some of the puts and takes to get us to the overall guide. But certainly, it’s based on the core underlying business continuing to grow year-over-year.

Could you provide a quick follow-up on the wireless components that are driving the core growth? What are your projections for Verizon Media services in 2019? I know it had a negative impact on earnings in 2018; what do you expect that impact to be this year?

Verizon Media Group was a significant topic of discussion in the latter half of last year. We didn’t break down the earnings, and we won’t be doing that now. However, with a revenue decline of 6.9% in Q3 and 5.8% in Q4, it did not contribute to earnings as much as we had hoped last year. As we enter this year, the expectation is for them to improve revenue. As they enhance their revenue growth, it will also positively affect earnings. We believe they have solid plans for the business, and our focus now needs to be on executing those plans to turn around revenue, which will subsequently improve earnings.

I have a couple of questions for Matt. On the wireline side, we're seeing some pros and cons. There was a slight increase in enterprise, but we also experienced a significant decline in wholesale, and margins have decreased in that division. I'm curious if this will be a focus for the voluntary separation program you've initiated, and if so, could you detail the drivers on the wireline side? My second question pertains to the impact of IFRS 16 lease accounting changes in 2019 on the business and the income statement. That insight would be appreciated. Thank you.

Thank you, David. Regarding the wireline sector, I will also ask Hans to share some insights. The ongoing decline in certain legacy technologies is a continuing trend. However, it is encouraging to see that as we expand our fiber assets and explore related opportunities, some new technologies we are implementing, such as SD WAN, are making good headway in counterbalancing these declines. We plan to persist with these efforts. Furthermore, as you mentioned, looking ahead to 2019, the wireline segment will benefit significantly from the voluntary severance program. This, along with other cost-saving measures we are implementing, should support improvements in wireline margins in 2019.

Yes. The wireline team is experiencing a decline in certain areas, but we are optimistic about the potential for new solutions with our intelligent edge network and the fiber we're deploying, as well as offerings like SD WAN. The small and medium business segment remains crucial for the U.S. economy, where we have a strong presence. Although wholesale has declined somewhat, we are deploying more infrastructure than ever before. While it will take time, we expect to see more opportunities arise. Our dedicated team is committed to reversing the trend of slow growth, and they are focused on launching new products. Our solid customer base supports the wireline business, and as we enter the second quarter, our customer-centric organization will play a vital role in collaborating across our entire portfolio, including wireline, wireless, and IoT. Our goal is to return to growth while managing costs effectively, so we maintain a careful focus on revenue while also keeping our expenses under control.

Yes. On the lease accounting, David. So, a couple of different things. On the income statement, as you heard upfront, we expect $0.01 to $0.02 of headwind per quarter. That's going to come mostly above the line. There may be some initial adjustments that will hit below the line, but mostly above the line. If you think about it, there are some upfront costs associated with leases that we historically would've capitalized under the old rules that we won't necessarily be able to capitalize all those upfront costs under the new rules. So, that's where you'll see some of the change come through. From a balance sheet standpoint, we will be grossing up both the asset and liability side of the balance sheet. At this point, we expect in the $21 billion to $23 billion range. So, that's the impact you should see come through in the first quarter of 2019 from adopting that new standard.

I wonder if we could just stay with the discussion of wireline for a second. Matt, when you were talking in your prepared remarks, you talked about pressure from programming costs. I wonder if you could just think about the Fios Video business for a moment. It seems like you've been hitting on some of the same themes for a while now, and that it may be right for sort of reimagining what you do with that business. Can you just talk about your strategic thinking about how long does it make sense to stay committed to a linear video product for Fios versus sort of repositioning it along with your 5G product as really almost a pure connectivity service, focused on broadband?

Several trends in wireline have persisted for years, including rising content costs. We are continually exploring options for customers that align with the price points we can offer. However, we do not anticipate significant changes in the trajectory of content costs in the coming years unless we take specific actions. If we have the opportunity to provide customers with various ways to access the video content they desire, we will be eager to pursue that. Since we launched choice TV about four years ago, we've been searching for ways to give customers more affordable options for their video services, and we’ll keep working on that.

And I agree with Matt here. We will of course over time see that we can create optionality for our customers to choose between different solutions for their TV viewing. So, we will have that definitely in our pocket. Initially, of course 5G Home has been focused on other cities than our footprint for Fios. But ultimately, we need to see that our customers have all the choices when it comes to how they want to consume the video. We see the trends in the market. And as Matt said, we're working hard on our cost in Fios all the way from content to other cost elements, and see that we're managing that well. But ultimately, we need to create optionality for our customers. That's what Verizon has always done, and that we’ll continue to do.

Just a couple if I could. First, going back to the comments for expanded commercial launch of 5G in 2019. Can you frame how much of the country Verizon will cover for mobile 5G by the end of ‘19 and maybe also by the end of 2020? And then, secondly can you quantify the specific potential earnings benefit from the voluntary separation program once it fully rolls through the financials?

If I start with the 5G, we have not disclosed where we are on the deployment. I can say, we’re deploying as fast as we can. And much of the work that we've been doing the last couple of years is of course to prepare everything from the fiber to the agreements with the cities to getting the intelligent management network from the transport network to the core network all the way out to access. As the industry matures, the equipment is maturing for NRs, so we can bring that in. And we actually have quite a lot of deployment already of those types of base stations. So, we will come back to that when we commercially launch that, what we have noted. It’s nothing we want to disclose for competitive reasons. So, I wouldn’t talk about it right now. But, I think what is important to understand is this lead that Verizon has on 5G. We have been on this for several years, including the millimeter wave where we already have commercial service, where we of course not only understand the engineering of 5G technology and spectrum, but also all the way from operations, marketing, installations, all of that. And that is extremely valuable insight when we want to go fast as soon as we see that we have all the pieces that are needed for launching 5G Home or 5G mobility with the ecosystem there and all of that. So, again, we have triggered the industry to be probably one and a half to two years ahead of the schedule of 5G. We think that is enormously important for Verizon to be on the forefront of innovation. And we want to push that and said, we’re not holding back on coming out with 5G; it’s more that we just need to see that the ecosystem is equally ready as Verizon is right now.

Hey, Mike. Regarding the voluntary benefits, we have announced that 10,000 people will be coming off payroll this year, occurring in three main waves. Some left at year-end, and we have a couple more waves coming up, which will affect the overall process. We will have a few backfills, though not for exactly the same positions, as we are reimagining the work. Overall, a significant majority of those 10,000 will not be replaced. The timing of people's exits will be important. Remember, we took a charge of $1.8 billion. While we have not disclosed our expected income statement benefit for 2019, we anticipate a strong payback on the initial severance costs. Therefore, you can expect a considerable benefit in 2019. As we continue to transform the way work is performed, those positions will not return, leading to lasting cost improvements going forward.

I want to provide some context regarding our significant transformation in the network, which has introduced new ways of working. We are also establishing a new approach with our IT, involving a substantial outsourcing effort alongside a voluntary program. Ultimately, this is our strategy to enhance efficiency and agility for the future. Recently, we announced a reduction in the Verizon Media Group as part of this larger transformation, which is happening while we are in a strong position. Given the competitive landscape, we aim to be more agile and responsive with our investments. This transformation also includes the implementation of Verizon 2.0 in the second quarter to deliver more customer-centric solutions, leveraging our network, brand, and distribution assets to excel in the marketplace. It's important to consider all of this context when reflecting on our current initiatives. Having been here for some time, I am seeing positive responses from the organization regarding these changes, which reinforce our leadership in the market.

Thanks, everyone.