Verizon Communications Inc (VZ) — Q2 2019 Earnings Call Transcript

Thanks, Brett. Good morning and welcome to our second quarter earnings conference call. This is Brady Connor and I'm here with Hans Vestberg, our Chairman and 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 transcript of this call will also be made available on our website. Before I 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 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. Now let's take a look at consolidated earnings for the period. For the second quarter of 2019, we reported earnings of $0.95 per share on a GAAP basis. These reported results include a pretax charge of approximately $1.5 billion related to early debt redemption costs. The impact after tax was approximately $1.1 billion or $0.28 per share, resulting in adjusted earnings per share of $1.23. This represents growth of 2.5% on an adjusted basis compared to $1.20 a year ago. Let's now move to slide four and take a closer look at our earnings profile for the second quarter. Consistent with the approach we discussed last quarter, we have illustrated the ongoing impacts to earnings from the adoption of accounting standard ASC 606 for revenue recognition as well as the adoption of ASC 842 for leases. As we pointed out last quarter, we expect a smaller benefit in 2019 than we realized last year from the adoption of ASC 606 primarily due to the deferral of commission expense. The reduction and benefit creates a year-over-year headwind to both reported earnings per share and adjusted earnings per share. The impact was a $0.03 headwind in the quarter and $0.06 year-to-date. As a reminder, this headwind is expected to continue until the end of 2020. At the beginning of this year, we adopted accounting standard ASC 842 for leases, which resulted in the gross-up on the balance sheet for all operating leases. In addition, the lease standard affects our earnings per share, primarily due to the expensing of certain lease costs. As highlighted previously, we expect this to result in a $0.01 to $0.02 per quarter headwind on earnings per share throughout 2019. For the second quarter, this headwind was $0.01 on the earnings per share. As you can see on the slide, the 2.5% growth in adjusted EPS includes both the impacts from the deferral of commission expense related to the revenue recognition standard and the adoption of the leasing standard. This highlights the strong underlying performance of the business. Matt will take you through the details and key drivers later in the call. With that I'll now turn the call over to Hans.

Thanks, Brady, and thanks, everybody, for joining this second quarter earnings call. We had a strong second quarter. It was fueled by very good wireless service revenue growth as well as strong adjusted EPS growth as well. So I think the team had a good quarter with a lot of focus on execution. At the same time, our operational metrics were good with net additions on the wireless side, as well as very low churn. That in combination with solid capital allocation efficiency all resulted in very good cash flow. So if I sum it up quickly, a very good quarter for us financially. Together with our work in the network, which is so important when building our network as a service, we also won all the top third-party measurements. We won from J.D. Power for the 23rd consecutive time and from RootMetrics for the 12th straight win as well. We are really getting positive feedback from the market and the measurements that are very valuable in this market. At the same time, we won additional spectrum in the millimeter-wave auction, which adds to our portfolio, enabling us to build capacity and coverage for the 5G era. We have launched many CTLs recently, and we are on track for the 30 markets we said we would achieve this year. We continue to add new devices to the portfolio, with the latest being the Inseego MiFi and 5G device that we launched recently, giving us four different devices on 5G. We're also very focused on fiber because, ultimately, to go to 5G, you need fiber. Our fiber deployment is now in over 60 cities, and we averaged 1,400 route miles a month in this quarter, continuing our important build for the overall Intelligent Edge Network and the 5G deployment. Regarding Verizon 2.0 transformation, one of the proofs is that we are reporting Verizon Consumer Group and Verizon Business Group as segments in today's earnings release. We have also gained a lot of traction with our customers, especially enterprise customers, with the new support and go-to-market strategy, where we show the full portfolio of Verizon and provide the right support to our customer-facing teams. Additionally, we continue the Network as a Service concept and have announced our collaboration with YouTube TV, where we will offer services to both our Fios and wireless customers. We are working on a partnership with content providers instead of investing ourselves, which provides seamless service for our customers and efficiency for the business. We also finalized the Voluntary Separation Program in the quarter and have made significant progress, achieving a competitive cost base while implementing changes recently. I would say that we are transforming from a position of strength, and I'm proud of the team's accomplishments over the last 12 months, delivering strong results while executing these changes. This sets us up to remain competitive in this market and continue our leadership position. I'm very proud of the team and what we achieved this quarter. By that, I hand it over to Matt to review the financials in more detail.

Thanks, Hans, and good morning, everyone. Let's start with a recap of our consolidated operating and financial results. On a reported basis, second quarter consolidated revenue was $32.1 billion, which was down slightly compared to the prior year. Wireless service revenue growth was offset by lower wireless equipment revenue and wireline service revenue. On a year-to-date basis, consolidated revenue is up slightly at 0.4%. We are maintaining our full-year GAAP consolidated revenue guidance of low single-digit percentage growth for 2019. On a consolidated basis, second quarter adjusted EBITDA margin was 37.7%, which was up from 36.8% in the prior year and includes headwinds of approximately 80 basis points from the deferral of commission expense and the impact of the lease accounting standard. Adjusted EBITDA increased more than $200 million or 1.8% over the prior year due to wireless service revenue performance and continued operational efficiencies across the business. Our business excellence initiatives have realized cumulative cash savings of $4.1 billion since the program started in 2018. We have now completed all three phases of our Voluntary Separation Program and have realized approximately $480 million of expense savings year-to-date. With the last tranche of employees exiting in late June, we expect additional incremental savings in the third quarter. We remain on track to achieve our goal of $10 billion of cumulative cash savings by 2021. As Brady mentioned, adjusted earnings per share for the quarter were $1.23, up from $1.20 a year ago. The increase in our earnings per share was driven by more than $200 million growth in adjusted EBITDA, slightly offset by a higher tax rate. The higher tax rate resulted in an approximately $0.01 headwind to adjusted earnings per share. As a reminder, last year's tax rate included certain one-time benefits related to the Tax Cuts and Jobs Act, which do not repeat this year. For 2019, our adjusted effective tax rate is now expected to come in at the lower end of the 24% to 26% range. Continued wireless service revenue momentum and solid margin performance keep us on track to achieve our guidance of low single-digit percentage growth in adjusted EPS, excluding the impact of the new lease accounting standard. Our expectation of the lease accounting headwind remains unchanged at approximately $0.04 to $0.08 for the full year 2019. Now, let's review the new operating segments under Verizon 2.0 starting with consumer on slide 7. As a reminder, our new consumer segment encompasses both wireless and wireline products and services targeting retail customers, as well as our wireless wholesale operations. In the second quarter, total consumer operating revenue was $22.0 billion, which is flat compared to the prior year. These results were primarily driven by continued strong growth in wireless service revenue and Fios service offerings, offset by declines in wireless equipment and legacy wireline services. Consumer wireless service revenue increased by 2.5%, driven by customer upgrades to unlimited plans and migration within Unlimited to higher tier plans, as well as an increase in connections per account. Less than 50% of our customer account base are on unlimited plans. In the second quarter, consumer wireless equipment revenue decreased 8.2%, as lower upgrade rates more than offset an increase in phone gross adds. Consumer Fios revenue increased by 1.2%, primarily due to the demand for our broadband offerings. Consumer EBITDA margin as a percentage of total revenue in the quarter was 46.5%, which was up 80 basis points from the prior year. This includes headwinds of approximately 100 basis points from the deferral of commission expense and a new lease accounting standard as previously mentioned. Let's now turn to slide 8 and take a closer look at consumer operating metrics. Within consumer, wireless performance is very strong while operating in a highly competitive environment. Phone net additions were 73,000 for the quarter compared to 17,000 last year, including postpaid smartphone net additions of 209,000, up 17% from the prior year. This was driven by phone gross additions, which are up more than 5% year-over-year. Postpaid net additions totaled 126,000, including other connected device net additions of 187,000, primarily wearables, offset by tablet net losses of 134,000. Postpaid phone churn of 0.72% improved sequentially due to focused retention efforts around our high-value customer base as well as normal seasonal patterns. This performance was in line with last year's strong results. Our superior network quality and personalized offerings continue to resonate with our customers. Total retail postpaid churn of 0.97% was up compared to 0.93% last year. Total postpaid device activations, of which 81% were phones, were down 7.6%. Our retail postpaid upgrade rate was 4.3%, down from 5.1% a year ago, reflecting the continued elongation of the handset upgrade cycle. In the second quarter, prepaid net losses were 213,000 compared to a loss of 236,000 last year. We continue to focus on high-value accounts and profitability in our retail prepaid wireless offerings. Fios Internet net additions of 28,000 were driven by continued demand for our high-quality fiber broadband products. Fios Video losses totaled 52,000 as consumers continue to adopt over-the-top video services to replace traditional linear video offerings. Now let's move to our business segment on slide 9. Our business segment includes wireless and wireline products and services provided across four customer groups: Global Enterprise, Small and Medium Business, Wholesale, and Public Sector and Other, which includes Verizon Connect. Total operating revenues for the business segment decreased 1.1% in the quarter as growth in wireless services and our high-quality fiber products were offset by ongoing secular pressure from legacy technologies. In the quarter, revenue from our business wireless products grew 5.6%, including 6.1% wireless service revenue growth. This strong performance reflects Verizon's best-in-class network quality, reliability, and solutions-based approach with our business customers. Revenue from our wireline products declined 7.6% in the quarter. From a customer group perspective, Global Enterprise and Wholesale declined 4.8% and 15.1% respectively, driven primarily by legacy pricing pressure and technology shifts. Small and Medium Business revenue increased 5.4%, driven by wireless service and Fios growth, partially offset by ongoing declines in traditional data and voice services. Public sector and other revenue increased 3.8% due to growth in wireless and wireline products and services. Business segment EBITDA margin for the quarter was 27.3%, which was down 20 basis points compared to the prior year, driven by declines in legacy wireline product revenues. This includes headwinds of approximately 10 basis points from the deferral of commission expense and the new lease accounting standard as previously mentioned. Now let's move on to slide 10 to discuss business operating metrics. Business wireless is transforming consistently and strongly. Postpaid net adds were 325,000, which includes 172,000 phones, 90,000 tablets, and 63,000 other connected devices. Phone churn of 0.97% improved sequentially, while total postpaid churn of 1.21% increased 5 basis points compared to the prior year. Total postpaid device activations were up slightly at 0.6%, while our retail postpaid upgrade rate was 4.2%, down from 4.6% in the prior year. Let's now move on to slide 11 to discuss Verizon Media Group. For the second quarter, Verizon Media Group revenue was $1.8 billion, which was down 2.9% versus the prior year, a significant improvement from the 7.2% year-over-year decline reported in the first quarter. Gains in native and mobile advertising continue to be offset by declines in desktop advertising, though the business continues to build on positive momentum in key areas. We are continuing to migrate customers to our recently integrated advertising platforms, simplifying interactions with partners and driving synergies within the business. We remain focused on growing our audience, engagement, and monetization across our super channels, which include sports, finance, news, entertainment, home, and mail. During the quarter, we launched Yahoo! Finance Premium and HuffPost Plus, which are subscription services that enhance the experience of two of our most popular media assets. Let's now move to slide 12, which reconciles Verizon 2.0 results to our legacy Verizon 1.0 results. As we mentioned during our Verizon 2.0 segment reporting webcast in mid-June, we will be providing overall wireless and wireline results through the remainder of this year. You can find these results in our supplemental information included on our website. Slide 12 shows a reconciliation from Verizon 2.0 to Verizon 1.0 for both consumer and business revenue. The voice full chart shows the bridge from consumer revenue to wireless and from business revenue to wireline. The top chart shows consumer which had $22.0 billion of revenue in the quarter. The subtraction of consumer wireline removes $3.1 billion and the addition of business wireless brings in $3.8 billion, resulting in total wireless revenues of $22.7 billion. The bottom chart shows a similar reconciliation from business to wireline revenue. We start with business revenue of $7.8 billion, subtract $3.8 billion of business wireless and $0.2 billion of Verizon Connect, and then add $3.1 billion of consumer wireline to ultimately arrive at total wireline revenue of $7.1 billion in the quarter. Total wireline operating revenues in the quarter declined 4.5%, while wireline margins were 19.3%. Let's move to slide 13, which highlights our overall legacy wireless results. Looking at overall wireless results, which includes both consumer and business wireless, total wireless operating revenue increased 1.0% to $22.7 billion in the second quarter, primarily driven by a 3.1% increase in service revenue. For the remainder of the year, we continue to expect overall wireless service revenue growth to be within the mid 2% to 3% range. Total wireless EBITDA margin as a percentage of total revenue in the quarter was 48.2%. This includes headwinds of approximately 100 basis points, primarily from the deferral of commission expense and the new lease accounting standards as mentioned. Excluding the accounting standard impacts, second quarter EBITDA margin was 49.2%, up 140 basis points year-over-year. Total postpaid net adds were 451,000 in the quarter. This includes phone net adds of 245,000, which were up from 199,000 a year ago. Postpaid smartphone net additions in the quarter were 420,000. Postpaid phone churn of 0.76% was similar to last year, while total retail postpaid churn of 1.02% was up five basis points year-over-year. For the quarter, we increased customer accounts by 8,000 as compared to a loss of 24,000 in the second quarter of last year. Total postpaid device activations were down 5.7%. This was driven by an increase in postpaid phone gross additions of 3.9 million from 3.8 million in the prior year, offset by a decrease in our retail postpaid upgrade rate to 4.3% from 5.0% a year ago. Let's now focus on our consolidated cash flow results and the balance sheet on slide 14. Year-to-date cash flow from operating activities totaled $15.8 billion, down from $16.4 billion during the prior year. Benefits from operational improvements were offset by higher cash tax payments and payments related to the Voluntary Separation Program. The one-time benefits realized last year related to tax reform were primarily recognized in the first half of 2018. Capital spending for the first half of the year was $8.0 billion, which is up slightly from the prior year. Our capital expenditures continue to support the growth in data and video traffic on our industry leading 4G LTE network, the launch and continued build-out of our 5G Ultra Wideband network, the upgrade to our Intelligent Edge Network architecture, and significant fiber deployment in over 60 markets outside our ILEC footprint. We maintain our full-year 2019 CapEx guidance range of $17.0 billion to $18.0 billion. The net results of cash flow from operations and capital spending is free cash flow for the first half of the year of $7.9 billion. We ended the quarter with $113.4 billion of total gross debt, which is $1.3 billion lower than the prior year. The unsecured debt balance was $102.1 billion, which is lower year-over-year by $3.9 billion and lower sequentially by $1.2 billion. Our net unsecured debt to adjusted EBITDA ratio at the end of the quarter was 2.1 times versus our targeted range of 1.75 to 2.0 times and is down from 2.3 times last year, reflecting the continued strength of our balance sheet. We continue to actively manage our debt portfolio to minimize near-term maturities, optimize our overall funding footprint, and lower our cost of capital. During the quarter, we tendered $4.5 billion of notes that resulted in the pretax charge of $1.5 billion that Brady mentioned earlier. The charge is predominantly non-cash. Our balance sheet strength provides us with the financial flexibility to execute on our strategy. We continue to maintain near-term maturities at low levels, giving us confidence to operate and invest throughout the business cycle. So in summary, the second quarter saw a continuation of our strong performance while we made the transition to Verizon 2.0. We grew customer relationships and increased service revenues. The growth in our earnings was driven by operational performance from the business, which also led to strong cash flow results for the quarter. We continue to be disciplined in our approach to capital allocation and remain committed to strengthening our balance sheet. With that, I'll turn the call over to Brady, so we can get to your questions.

Thanks, Matt. Brad, we're now ready to take questions.

Thanks guys. One short term and one long-term, if I may. First, your 2.5% to 3% service revenue growth guide seems very conservative at this point versus 2.7% on the first half. Are there headwinds in the back half that we should think will get the average down below 3%? And second, Hans, can you dig more into the 60 market fiber build? And help us understand any early progress on in-sourcing backhaul, as well as when you will start marketing that to consumer or business out of region? Thank you.

Thank you. Let me start with the wireless service growth and then Matt will come back on that. But I think that the team has really shown strong performance in recent quarters since we implemented this new structure. I'm confident we have good momentum in our business. I believe our team has more quarters ahead to continue competing effectively in the market. Regarding the fiber build, yes that's a very important initiative for us, and we've been focused on that for quite a while. In this quarter, we improved our pace to an average of 1,400 route miles per month, up from 1,000 in the first quarter. Currently, most of the fiber is being directed towards our own sites, but over time, as we progress further into this year and next, we will also offer it to our enterprise customers and wholesale partners. This is crucial for the overall Intelligent Edge Network, especially for our 5G initiatives.

Yeah, so good morning, Phil. On the service revenue, we are certainly pleased with the results we've seen in the first half of the year, and the momentum remains strong as we head into the second half. We see a path to continue our service revenue growth. We'll see how the back half of the year plays out.

And Hans, if I can follow up, has the in-sourcing of your backhaul as you deploy fiber to your sites begun to lower costs, or are you not seeing those benefits just yet?

We have begun to see benefits, but currently, the impact on total costs is not significant yet. However, this is all part of the Intelligent Edge Network, the multipurpose network we are building. This reflects our capital expenditures over the past two years, focused on efficiencies. We're building towards true optimization, and I see the fiber projects as long-term growth opportunities for us.

Thank you.

Thanks, Phil. Hey, Brett, we’re ready for the next question.

Thanks for taking the questions. This one's for Matt. As you show on slide 14, you're getting very close to achieving the net unsecured leverage target you outlined at your analyst meeting a couple of months ago. As you approach the lower end of the leverage range, how should we think about prioritizing the incremental capital you'll be generating? Should we consider that dry powder for spectrum, or are we closer to a point where share repurchases become a higher priority?

Let me start here. This is, of course, something that Matt and I are working with confidence. Remember, we are very clear and disciplined regarding our capital allocation. First, we invest in the business, as evidenced by our recent capital expenditures. Secondly, we want to provide our Board the opportunity to issue dividends. Lastly, we focus on managing our debt. We will commit to achieving our targeted leverage range, and we will have the flexibility needed for discussions around growth opportunities.

Yes, Hans. As you noted, we are nearing that leverage target we set, and this progress is driven by strong cash flow from our business. We will remain disciplined, ensuring we don’t exceed our targeted leverage range. As we approach that range, we will prioritize investments in the business and determine the best use of any additional cash to enhance shareholder value.

Thank you.

All right. Thanks, Brett. Hey, Brad, we are ready for the next question.

Thanks. Good morning. Hans, I wonder if you could update us a little bit on your 5G initiatives. You talked about opening up the new mobile broadband market. Can you discuss your learnings so far and where we stand on expanding 5G Home? I think you've talked about new markets later this year and dynamic spectrum sharing. How is that progressing, and when are we likely to see that on the Verizon network?

Thanks for the great questions. We've made significant progress in the quarter. We have launched nine markets, on our way to reaching 30 for the full year. The performance improvements for 5G Mobility have been remarkably fast; in some cities, we've doubled our footprint since launch, achieving speeds of 600 to 2,000 megabits per second. The technology's development is progressing really well, and we are collaborating with infrastructure vendors to ensure scalability. We are also seeing a positive response to the Inseego MiFi device, which is great for our 5G business proposition. As for 5G Home, we will launch the standards-based equipment later this year, ensuring we have the right market size to support it. Regarding the dynamic spectrum sharing, it remains on track for the first half of next year. Our engineering team is doing an outstanding job to maximize our customers' experiences.

Great. Thanks a lot.

Thanks, Simon. Hey, Brad, we’re ready for the next question.

Hey guys, thanks for taking the questions. I guess two if I could. One for Matt. If we're guiding for the low end of the tax rate for 2019, should we then think that we're steering our earnings per share growth upward, or are there other factors in play affecting that bottom line? And the second question would be regarding the legacy 1.0 reporting for the business segment. I think one of the surprises from AT&T's results was the strength they exhibited in the enterprise business. They talked about price stability, and I wonder if you think that performance for Verizon reflects similar strength or if the reorganization played a part in that.

I can start with the last question about the business. The enterprise side was a bit mixed this quarter. While there were some challenges, particularly in enterprise, we saw strong growth in the governmental and small/medium business sectors. Our funnel for enterprise remains strong, and I believe our recent changes have set us up for better growth opportunities going forward. So while there may be some legacy declines we face, we are working to accelerate improvements. The reorganization should benefit us as our teams engage more effectively with customers.

Yes, David. As I look at the effective tax rate, it is indeed higher compared to the prior year due to the impacts of tax reform we noted last year. Despite that, our EPS performance was strong, illustrating the positive momentum continuing into the second half of the year. We'll see how the back end of the year unfolds, but I'm confident in our trajectory.

Thanks, guys.

Thanks, David. Hey, Brett, we are ready for the next question.

Great. Thanks. Two questions, first on the 5G Home. Hans, how should we think about the expansion of the 5G Home footprint once you have standards-based equipment? Any insights into growth in the target market or expected subscriber base?

On the 5G Home initiative, we currently have limited deployment in four markets and are monitoring our performance. Our initial reception is encouraging. We plan on launching the NR-based 5G Home CP equipment by the end of this year, ensuring we target markets with sufficient size for growth. We anticipate that 2021 will be significant for our revenue.

And on spectrum, there's speculation that you control less spectrum compared to competitors, particularly following the T-Mobile Sprint deal, which could be a disadvantage. How do you perceive this situation, and how do you plan to address any potential challenges?

We always face questions about our spectrum holdings, but I believe our engineering team has done an excellent job optimizing it. We're in a strong position with millimeter wave spectrum for our Ultra Wideband deployments, but we also have numerous other bands for 5G deployment. The focus is on efficient network construction and optimization. We have the ability to maintain network performance without being impacted by competitors' spectrum holdings.

Great. Thanks.

Thanks, John. Hey, Brett, we’re ready for the next question.

Great. Thank you for taking the question. I'd like to revisit the fiber activity. You're now adding 1,400 route miles of fiber every month versus 1,000 earlier. Some tower companies have cited issues with municipalities and power companies. Are you finding that process smoother or more challenging? It seems like a large jump.

I appreciate the question. It’s not easy work, but Verizon is well-equipped for it. We have strong collaboration with municipalities, engineering, and planning teams. The advancements we've seen since committing to our fiber factory are significant, and achieving that pace is commendable. However, it still requires addressing numerous challenges in the execution phase.

And should we expect that fiber activity to continue to increase throughout the year based on this progress?

We're reaching optimal levels, so while there might be slight increases, we expect our deployment to stabilize around these figures. The focus will transition to delivering services in the markets where we've established fiber.

Thanks, Jennifer. Hey, Brett, we’re ready for the next question.

Hi, thanks. A couple of questions. First, have there been any recent changes to the cable MVNO deal? How do you see your role evolving as a wholesaler in the industry? And secondly, an update on potential strategic moves on the wireline side, whether it's asset optimization or how to proceed in the video business given your current footprint?

On the MVNO side, there are no major changes, but we believe it's a solid model that maximizes our asset usage. We see great potential in our partnerships, particularly with cable MVNOs. As for wireline optimization, we continuously assess our infrastructure and customer relationships, identifying areas for growth and where we may need to reduce our focus. Our goal is to optimize our strategy.

Thank you.

Thanks, Mike. Hey, Brett, we are ready for the next question.

Yes, hi. Hans, I wonder if we could revisit the spectrum issue. I understand you have long-term spectrum positions for 5G across various bands. However, there is ongoing concern that your coverage may be limited compared to competitors. Can you discuss this issue, particularly as you transition to 5G?

That's a critical point. Dynamic Spectrum Sharing (DSS) will level the playing field for everyone, so there shouldn't be disadvantages for utilizing coverage. What matters is building the best experience for customers. We're in dense areas with the 5G Ultra Wideband services and ensuring we remain competitive with our technology and network performance. We will continue to focus on optimizing our spectrum allocation.

Is there a concern from a marketing perspective that your competitors will show broader coverage maps early on?

We have a track record of delivering genuine performance before marketing hype. We prioritize giving customers real experiences over just marketing messages. We'll ensure we execute successfully in delivering high-quality network performance for both our business and consumer customers.

Thanks, Hans.

Yeah, thanks, Craig. Hey, Brett, we’re ready for the next question.

Great. Two questions, if I may. First for Matt, could you quantify the cost of the Voluntary Separation Program (VSP) implemented in the second quarter? It doesn’t seem to have significantly impacted free cash flow. Also, can you provide an estimate of anticipated savings in the third quarter? Secondly, regarding the fiber route miles, while you're adding 1,400 a month, how much momentum are you seeing in terms of getting the associated small cells up as well? It's important for those processes to move hand in hand. Thanks.

I can start with the fiber. The fiber serves multiple use cases, with many deployment paths including for small cells. Starting with deployment and permitting, we’re gaining traction and seeing progress, which reflects positively on our plans for efficient network build-out. It’s critical as we roll out services in all proposed markets.

Regarding the VSP, we anticipate cost savings from this initiative exceeding $1 billion this year. We expect continued strong savings moving into the back half of the year as the final tranche of employees leave payroll at the end of June. Overall, the effects will be positive for expense management as we further optimize the business.

Thanks, Colby. Hey, Brett, we are ready for the next question.

Hey, thanks, guys. Hans, can you comment on what you're observing in the wireless B2B space? Given the competitive landscape, what do you observe about the pricing dynamics, and how do you project ARPA changes for the back half of the year? Any additional insights on customer trends?

In the wireless B2B segment, we are gaining market share. I believe our network performance, reliability, and execution stand out. We're focused deeply on retaining our high-value customers, reflected in our low churn rates and successful initiatives. We see continuous improvements and opportunities in the market, which makes us confident.

Indeed, and as we enter the second half, we expect trends to be conducive to maintaining the positive momentum we've seen. We're trackable with previous expectations, which will support ARPA growth. It's essential to remain vigilant in this favorable operational environment.

Great. Thanks, Mike. Brett, we have time for one last question.

Thanks so much. Just a couple on wireless competition. So, Hans, obviously, a strong wireless quarter. I'm curious if you're seeing any competitive impact from the first set initiative at AT&T. I know, I think you recently signed a deal with the Massachusetts first responder. I'm not sure if that’s sign of competition going back and forth. And then I was just hoping to revisit bundling and the importance of video to wireless, with AT&T planning to bundle HBO Max when they launch it next spring with wireless services. Is bundling video how you perceive it affecting churn, or is that a necessary strategy for competition?

I observed a slight increase in competition in this quarter compared to previous. However, Verizon's ability to gain net additions despite this is a testament to our performance and low churn rates. Our team's ongoing efforts and new, innovative offerings contribute strongly to our competitive position. While competition for large contracts exists, we remain focused on maintaining strong service quality. As for video bundling, while it can help reduce churn, our primary strength is the reliability and performance of our wireless network.

It's crucial that customers value the quality of our network above all. Our consistent leading performance in both phone gross adds and the resulting low churn support this outlook. Hence, our strategy encapsulates both video offerings and, primarily, the commitment to maintaining high network performance.

Great. Thank you.

Thanks, Doug. Hey, Brett, that's all the time for questions we have today. Before we conclude, I would like to hand it over to Hans for closing remarks.

Thank you, Brady. We've covered a lot of ground in this call, and I want to express my pride in the team's achievements. We've made significant changes to our structure, network build-out, and undergone a large voluntary separation program, all while delivering strong financial results. Our commitment to our strategies laid out earlier in the year has been reflected in our execution. In summary, I'm proud of the quarter and our continued progress in transforming Verizon while delivering results. Thank you for your participation, and I look forward to seeing you soon.