Verizon Communications Inc (VZ) — Q3 2019 Earnings Call Transcript

Good morning, and welcome to our third 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 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. The presentation contains certain non-GAAP financial measures. Reconciliation 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. As a reminder, we are in the middle of a millimeter wave spectrum auction, so we will not be able to comment on our current millimeter wave spectrum holdings or spectrum strategy. Now let's take a look at consolidated earnings for the period. For the third quarter, we reported earnings of $1.25 per share on a GAAP basis. These reported results contain two special items: a net pretax gain from dispositions of assets and businesses of $261 million, and a $291 million pretax pension remeasurement charge. The gain from dispositions includes several transactions during the quarter, primarily the sale of our Sunnyvale Yahoo! campus as we look forward to moving to our new Verizon Media Group facility in San Jose. The mark-to-market pension charge was related to our management pension plan, which triggered remeasurement earlier in the year as a result of the Voluntary Separation Program. The charge is primarily due to a reduction in the discount rate assumption during the quarter. The net impact of these special items was minimal to net income, resulting in adjusted earnings per share of $1.25, which is up 2.5% compared to $1.22 a year ago. Let's now move to Slide 4 and take a closer look at our earnings profile for the second quarter. Consistent with previous quarters, we have illustrated the ongoing impacts to earnings from the adoption of accounting standard ASC 606 for revenue recognition and ASC 842 for leases. As we pointed out in the past 2 quarters, we have realized a lesser benefit in 2019 than we realized last year from the adoption of ASC 606, primarily due to the deferral of commission expense. This reduction in benefit creates a year-over-year headwind to both reported earnings per share and adjusted earnings per share, which will continue until the end of 2020. The impact was $0.03 for the third quarter and $0.09 on a year-to-date basis. Accounting standard ASC 842 for leases resulted in a gross-up on the balance sheet for all operating leases at the beginning of the year. In addition, the lease standard affects our earnings per share primarily due to the expensing of certain lease costs, which results in a headwind of $0.01 in the third quarter and $0.04 year-to-date. We expect the fourth quarter impact to be within the previously provided range of $0.01 to $0.02 per share. As you can see on the earnings waterfall slide, adjusted EPS growth of 2.5% reflects the strong underlying performance of the business, partially offset by the impacts of the deferral of commission expense and the adoption of the leasing standard. Matt will take you through the details of the quarterly performance later in the call. With that, I'll now turn the call over to Hans.

Thanks, Brady, and thanks, everyone, for joining the third quarter earnings call. I want to start by saying that I'm very pleased with how well the team executed our strategy and operations this quarter. We made a lot of progress on our overall strategy, so I'm very happy with it. Let's start with the network. I think the network team has continued to execute extremely well. I'm confident in our ability to keep winning the third-party awards on the 4G network. We are just continuing to do a really good job there. At the same time, our team is executing on our 5G strategy, and we're now up to 15 markets where we have deployed our 5G Ultra Wideband. Our commitment to 30 markets by year-end is still strong, and we will continue to do so the rest of this year. At the same time, we also launched the 5G Home city based on the NR standard. That proves the model is now moving into the standard 5G to really see that we get the full benefit of the deployment and the development on the 5G standard when it comes to 5G Home. We're also doing a lot of things in One Fiber, continuing to have a very high pace in that. And that One Fiber is so important for our overall Intelligent Edge Network that we are deploying in the company to realize the market-purpose network to gain efficiencies and serve our customers even better over time. So in short, a lot of progress in the network. At the same time, our strategy execution in the quarter showed a lot around our business model and the flexibility we have. Just recently, we made an announcement with Disney regarding our agreement concerning Disney+. I think this proves the model that we have decided to have, with a very strong network distribution and a brand that attracts the best brands on the planet to work with us, and we're extremely excited over that. At the same time, we continue to deploy 5G Ultra Wideband in stadiums, especially now with the NFL, 13 stadiums when the season kicks off having 5G coverage. This is important for us because it's part of the dense urban areas where you have a lot of viewers at the same time when really our 5G is coming to excel. The 5G build that we're doing with our assets is making a real big difference here. At the same time, we're also working with our 5G mobile edge compute. As we stated already in the beginning of the year, we're going to launch the first 5G mobile edge compute center in the fourth quarter. That is in progress, and we're going to announce that later this quarter. So we're excited about that. At the same time, you see us engaging much more with large enterprises because with the 5G platform and 8 currencies, we are now having a lot of interactions. We announced this quarter, for example, a collaboration with SAP and Corning. All of these are use cases for the 5G mobile edge compute. So we're excited about all that opportunity we're creating with the 5G mobile edge compute with the largest companies in the market. When it comes to Verizon Media Group, they also had a quarter of strategy execution and came out with new products in the portfolio: a new mail service. They also had enhancements on Yahoo! Sports and Finance, and we saw a lot of traction on it. We saw a great uptake on our NFL segment that we have now with Yahoo! Sports. So all in all, our Verizon Media Group is executing the strategy we laid out one year ago in a really good way. And finally, earlier in the quarter, I think we continued to lead the wireless and Consumer market with our new mix and match offerings, which is just a continuation of how we want to bring our customers to understand how they can move up in the value chain to unlimited. I must say, Ronan Dunne and his team are doing an excellent job in moving this market forward. As you can see in our operational performance, we had a really good quarter regarding wireless additions here; one of the best third quarters we have had in several years. So really, this is paying off what we are doing in the model and actually moving this forward. So all in all, a lot of progress on our strategy. Of course, there is a lot more to be done, but it is now positioning us where we want to be as a company with our customers and our shareholders. Finally, this all comes down to our financing. We had a revenue growth of almost 1% in the quarter. More importantly, we continue to have wireless service growth in the quarter. We continue at nearly the same level we had in the previous quarters. Overall, that converted into continued EPS growth that we had in this quarter as well. This is, of course, coming with a very strong underlying operational performance with some headwinds coming from accounting. But great work from the team, based on our commitment to cost efficiencies or voluntary separations done and all of the things we're doing simultaneously. That also results in very strong free cash flow, allowing us to continue to take control of our balance sheet and ensure that we are putting ourselves and our Board in a good position going forward. All in all, the finance performance resonates well with the strategic execution we did in the quarter. We also saw a lot of execution when it comes to responsible business, which is important to us because it is part of our strategy. We made commitments around our education initiatives or 5G to schools. We made commitments regarding our CO2 emissions. In summary, this is all part of our strategy; it's part of our responsible business. Ultimately, it should be good business for all of us: our customers, our shareholders, and our employees, who should all be part of that journey. So we are continuing on that path, and we think it's very important for all our stakeholders. Overall, this was a very good quarter. The team executed well on all metrics. There are areas we need to improve and areas we are still working on, but in general, I would say that I am happy and satisfied with how the Verizon team has shown up this quarter. By that, I hand it over to Matt.

Thanks, Hans, and good morning, everyone. Let's start with a review of our consolidated operating results. On a reported basis, third quarter consolidated revenue was $32.9 billion, up 0.9%. This growth was primarily driven by higher wireless service revenue, partially offset by lower wireless equipment revenue and ongoing declines in legacy wireline revenue, predominantly in our Business segment. Year-to-date consolidated revenue is up 0.5%, in line with our full year GAAP consolidated revenue guidance of low single-digit percentage growth for 2019. In the third quarter, we delivered strong adjusted EBITDA margin while positioning for future wireless revenue growth by updating our unlimited offer and executing effective promotions to drive strong wireless volumes. The headwinds that Brady mentioned earlier from the deferral of commission expense and the lease accounting standard lowered EBITDA by $240 million, which is approximately a 70 basis point impact on EBITDA margin in the quarter. As reported, third quarter consolidated adjusted EBITDA margin was 36.6%, down from 37.4% in the prior year. Since we initiated our business excellence program in 2018, we have realized cumulative cash savings of $4.6 billion and remain on track to achieve our goal of $10 billion of cumulative cash savings by 2021. Our Voluntary Separation Program has produced approximately $900 million of expense savings year-to-date, including over $400 million of savings in the third quarter. The last tranche of employees exited the business in late June, so we have now reached our full run rate of expense savings from the VSP. As Brady mentioned, adjusted earnings per share for the quarter was $1.25, up from $1.22 a year ago. This is the third quarter this year with adjusted EPS growth of 2.5% or higher, highlighting the strength and momentum in the business. The combination of wireless service revenue momentum, solid margin performance, and strong customer volumes keeps us on track to achieve our adjusted EPS guidance of low single-digit percentage growth for 2019, excluding the impact of the lease accounting standard. Additionally, we still expect our full year 2019 adjusted effective tax rate to come in at the lower end of the 24% to 26% range. Now let's review our operating segment results, starting with Consumer. As a reminder, our Consumer segment includes both wireless and wireline products and services, targeting retail customers as well as our wireless wholesale operations. In August, we launched new unlimited price plans, which provide more choice to customers and an easier entry point into unlimited on the nation's best network. As a result, phone gross additions were up 10% over the prior year. The popularity of the new mix and match plans and overall value proposition drove postpaid phone net additions of 239,000 for the quarter, more than double the 112,000 last year. Postpaid smartphone net additions were 372,000, up from 285,000 in the prior year. Total postpaid net additions were 193,000, including other connected devices of 130,000, primarily wearables, offset by tablet losses of 176,000. Our network leadership, coupled with the personalization of our customer value proposition, led to a postpaid phone churn of 0.79%, which was similar to last year even with additional market participants. Total postpaid device activations were flat from the prior year at 7.4 million, including 6.2 million phones. Our retail postpaid upgrade rate was 4.9%, down from 5.1% a year ago, reflecting the continued elongation of the handset upgrade cycle. In the third quarter, prepaid net losses were 81,000 compared to a loss of 96,000 last year. Our focus on the high-value prepaid market has resulted in stable prepaid revenue despite declining volumes. Fios Internet net additions of 30,000 were relatively flat sequentially and down year-over-year. Fios Video results continued to be impacted by the ongoing shift away from linear video offerings, resulting in losses of 67,000. Our customers see value in our high-quality broadband offering paired with multiple choices for video through linear TV bundles or over-the-top options, such as YouTube TV and the recently announced Disney+. Now let's move to Slide 8 to discuss Consumer financial performance. In the third quarter, total Consumer operating revenues were $22.7 billion, which is up 1.4%. This was primarily driven by continued strong growth in wireless service revenue and Fios service offerings, offset by declines in wireless equipment and legacy wireline services. As we look to add value beyond connectivity, other revenue grew 18.7%, driven primarily by recurring services, such as Total Mobile Protection. Consumer wireless service revenue increased by 2.1% over the prior year even as we introduced new unlimited pricing. We increased wireless service revenue and offering by driving customer step-ups to unlimited plans from metered plans and increasing connections per account. We have continued room for further growth as around 50% of our customer account base is currently on unlimited plans. In the third quarter, Consumer wireless equipment revenue decreased 5.6% as lower upgrade rates more than offset an increase in phone gross adds. Consumer Fios revenue increased by 1.7% due primarily to the demand for our broadband offerings. Consumer EBITDA margin as a percentage of total revenue in the quarter was 45.3%, which was down 30 basis points from the prior year. This includes headwinds of approximately 80 basis points from the deferral of commission expense and the new lease accounting standard. We are extremely proud of the team's ability to drive significant volume in the quarter while maintaining strong EBITDA margins. Now let's move to our Business segment. Our Business segment includes wireless and wireline products and services provided across four customer groups: global enterprise, small and medium business, wholesale, public sector, and other. Business wireless volumes remain strong with a 12% increase in gross adds for the quarter, primarily within small and medium business and public sector. Postpaid net adds were 408,000 compared to 364,000 in the prior year. This includes 205,000 phones, 112,000 tablets, and 91,000 other connected devices. Our continued strong customer loyalty across the Business segment led to phone churn of 0.98%, which was relatively flat sequentially and up slightly over the prior year. Total postpaid churn of 1.22% was up 5 basis points compared to the prior year. Total postpaid device activations were up 5.7%, while our retail postpaid upgrade rate was 4.5% versus 4.8% in the prior year. Let's now move to review the Business financial performance. Strong wireless service revenue growth and high-quality fiber products were offset by softness in legacy wireline technologies, causing total operating revenues for the Business segment to be approximately flat for the quarter. Revenue from our Business wireless products grew 6.9%, including 6.1% wireless service revenue growth. This performance reflects Verizon's best-in-class network quality, reliability, and solutions-based approach with our Business customers. Revenue from our wireline products declined 6.7% in the quarter. From a customer group perspective, global enterprise revenues declined 2.4%, driven by legacy pricing pressure and technology shifts. Wholesale revenues declined by 13.7%, driven by price compression and volume declines, which we expect to continue in a highly competitive marketplace. Small and medium business revenue increased 6.2%, driven by wireless service and Fios growth, partially offset by ongoing declines in traditional data and voice services. Public sector and other revenue increased 1.2% as a result of growth in wireless and wireline products and services. Business segment EBITDA margin was 25.2%, which was down 300 basis points primarily driven by the decline in high-margin wholesale revenue. This also includes headwinds of approximately 50 basis points from the deferral of commission expense and the new lease accounting standard. Now let's move on to discuss Verizon Media Group. For the third quarter, Verizon Media Group revenue was $1.8 billion, which was down 2.0% versus the prior year, continuing the improvement in revenue trends. Gains in native and mobile advertising continue to be offset by declines in desktop advertising, though the business is building momentum in key areas. We are migrating customers to our recently integrated native and demand-side advertising platforms with double-digit growth year-over-year. For the first time, we are seeing mobile traffic increases outpace desktop traffic declines in our core owned and operated products, including sports, finance, news, entertainment, home, and mail. Although it's early in the NFL season, customer engagement has doubled over a year ago in terms of minutes watched, as more and more fans are using their mobile devices to watch games on Yahoo! Sports. We are diversifying our monetization streams in Media Group, including additional customer engagement opportunities on Yahoo! Sports and fantasy platforms and the launch of new integrated content-to-commerce capabilities. Let's now move to the reconciliation of Verizon 2.0 results to our legacy Verizon 1.0 results. As we have previously committed to providing transparency through our transition to the new Verizon 2.0 segmentation, this includes a reconciliation similar to the one we provided in the second quarter. These waterfall charts reconcile revenue and EBITDA from our Consumer and Business segments back to wireless and wireline. The top chart shows Consumer revenue of $22.7 billion in the quarter. After removing Consumer wireline and adding back Business wireless, we report total wireless revenues of $23.6 billion, with an EBITDA margin of 46.8%. The bottom chart shows a similar reconciliation from Business to wireline results. Starting with Business revenue of $7.9 billion and ultimately arriving at total wireline revenue of $7.1 billion in the quarter, with EBITDA margin of 17.4%. Wireline revenues were down 3.8% from the prior year, with margins down from the prior period due to the ongoing pressures in legacy product volumes and price compression. You can find additional detail in our supplemental information included on our website. Let's now move to discuss the wireless results. Looking at overall wireless, which includes both Consumer and Business, total operating revenues increased 2.6% to $23.6 billion in the third quarter, primarily driven by a 2.7% increase in service revenue. Based on the momentum in the business, which is carried over into October, we expect total wireless service revenue growth for the fourth quarter to be between 3% and 3.5%. Total wireless EBITDA margin as a percentage of total revenue in the quarter was 46.8%. This includes headwinds of approximately 90 basis points primarily from the deferral of commission expense and the new lease accounting standard. Excluding this impact, EBITDA margin was 47.7%, similar to the prior year despite the significant increase in volumes. The success of our new mix and match unlimited plans translated into impressive volumes, driven by phone gross adds up 10% to 2.7 million, which marks our highest third quarter phone gross add performance in the last 5 years. Postpaid phone net adds for the quarter were 444,000, which were up from 295,000 a year ago. Postpaid smartphone net additions in the quarter were 615,000, up 21% from 510,000 in the prior year. Total postpaid net adds were 601,000, consisting of tablet losses of 64,000 and connected device gains of 221,000, mostly driven by wearables. Postpaid phone churn of 0.82% was up slightly from 0.80% last year while total retail postpaid churn of 1.09% was up 5 basis points year-over-year. For the quarter, we increased customer net accounts by 25,000 as compared to zero in the third quarter last year. Total postpaid device activations were up 1.1%. This was driven by an increase in postpaid gross additions of 4.3 million, up 7.7% from the prior year, offset by a decrease in our retail postpaid upgrade rate to 4.8% from 5.0% a year ago. To recap the wireless quarter across Consumer and Business, we reset unlimited pricing and absorbed the initial impact from optimizations. We were competitive on the promotional front and we drove strong wireless volumes that set us up for future growth. All of this was accomplished while growing EBITDA on a like-for-like basis and generating one of our strongest free cash flow quarters in several years. We are excited about the trends in our wireless products while pushing forward to extend our 5G leadership. Let's now focus on our consolidated cash flow results and the balance sheet. Year-to-date, cash flow from operating activities totaled $26.7 billion, up from $26.2 billion during the prior year. Benefits from year-over-year operational improvements and lower discretionary employee benefit contributions were partially offset by higher cash tax payments and payments related to the Voluntary Separation Program. Year-to-date, capital spending was $12.3 billion, which was 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 60-plus markets outside our ILEC footprint. We maintain our full year 2019 CapEx guidance range of $17.0 billion to $18.0 billion. The net result of cash flow from operations and capital spending is free cash flow for the first 3 quarters of the year of $14.4 billion. We ended the quarter with $109.6 billion of total gross debt, which is $3.3 billion lower than the prior year. The unsecured debt balance was $100.8 billion, which is lower year-over-year by $2.9 billion and lower sequentially by $1.3 billion. Our net unsecured debt to adjusted EBITDA ratio at the end of the quarter was 2.1x versus our targeted range of 1.75 to 2.0x, reflecting the continued strength of our balance sheet. We remain focused on reducing our unsecured debt portfolio while continuing to actively manage our near-term maturities, optimize our overall funding footprint, and lower our cost of capital. Our capital allocation priorities continue to be in order: investing in the business, continuing our commitment to the dividend, and managing our balance sheet to achieve our targeted leverage range. In the third quarter, we demonstrated yet another period of focused execution. We were able to maintain strong EBITDA performance and generate solid cash flow while driving significant volumes to set ourselves up for future revenue growth in the fourth quarter and beyond. We continue to be disciplined in our approach to capital allocation, and we remain committed to strengthening our balance sheet, all while leading the industry in 5G development. With that, I'll turn the call over to Brady so we can get to your questions.

If we look at some of your most recent moves with the unlimited price adjustment and now the partnership with Disney to give away Disney+ for free for a year, it certainly seems like you're assuming a bit more of a growth posture than we've seen from the company recently. I was hoping you could maybe just sort of frame to us why you see this opportunity as we're sort of late in the 4G cycle, not quite in the 5G cycle yet. How are you hoping this is going to position you as you do get ready to ramp more aggressively in 5G? And then, of course, anytime we see an operator become a little more growth-centric, there's always some degree of investment to create that growth. How do we think about the level of spending you're going to have to incur to make sure you can keep this momentum going?

Thank you very much. I think that when we -- this is part of the overall strategy that we outlined in the beginning of the year. We have a great network. We have the distribution and, of course, the brand. When it comes to Disney+, we can partner with the best partners, and it's actually a win-win. They are gaining a lot by partnering with us, and we are gaining a lot as well. I think this is a differentiation we can provide our customers, giving them flexibility and so on. So I think that, first of all, it's not assumed that this is a heavy investment; it's actually a win-win in all respects. I think that's very important. Then when it comes to our move on mix and match early in the quarter, that has been part of very rigid planning, a disciplined way of viewing things where we are actually ramping and doing a pathway for our customers to come into unlimited, moving up in unlimited. Ultimately, when 5G comes, we're going to have ubiquitous 5G coverage, and they can move up to that higher level. So it's all a plan, but we also said all the time, we see opportunities on 4G as well. We know that we outlined a great opportunity on 5G with 4 different business cases. But hey, we can execute on our assets today, and we are very pleased with that, using our strengths right now to capitalize on market opportunities that we see. I think that the team has been executing very well this quarter, and that's what you see.

Yes. And Brett, if I would just add on a couple of points. You mentioned us having a growth posture. We've really been leaning forward for over a couple of years now. From when we launched unlimited, we've been continuing to update our Consumer offerings, our customer offerings. You see those resonate. It's built on the backbone of having the best network experience. So this is an ongoing process that you've seen from us over the past couple of years. And you should expect us to stay on the front foot going forward. In terms of -- you mentioned investment in growth. If you look at the wireless numbers as a whole, as you say, very strong growth. But when you adjust out for the accounting, our EBITDA margin was in line with last year. So it's a great performance from the team that we can focus on growth and continue to report strong margins. So it's well-balanced there as well.

How effective were the new plans in driving more subscribers to unlimited? I heard you mention you still have about 50%. I appreciate the commentary on service revenue for the fourth quarter. What does that tell us about unlimited take rates and moving up or down tiers?

In general, as I said, for us, it's a way to see that our customers get the best value. They can mix and match. I think that resonates well with the marketplace. As Matt said, we have been at the forefront since unlimited came out, offering a wide range of opportunities for our wireless customers. That's what we're seeing. As you heard from Matt, that means we come in with good momentum in the fourth quarter, and our wireless service revenue is now increasing our guidance for the fourth quarter. It's worth noting that it's both Consumer and Business, and we're doing very well on the Business side as well. I think that Tami and the team are doing great work on wireless. If you see the numbers, we continue to do really solid work across the board.

Yes. Yes. To follow on from that point, if you think about the 444,000 phone net adds we had in the quarter, we had more than 200,000 in each of the Consumer and Business segments. So that wireless growth is very well balanced across the totality of our customer portfolio, which is very good to see. You mentioned the unlimited percentage. In prior quarters, we were saying we're still less than 50%. This quarter, we had approximately 50%. The new plans give people a great opportunity to move up to unlimited, and we are seeing them doing just that. There's still plenty of space and more customers to come there, Phil, and as you see the service revenue guide for the quarter. When we have an increase in net adds, that gives us greater confidence around service revenues as we look into the future.

I guess a couple for Matt on the financials. I think, Matt, we saw a kind of spike in wireless cost of service in the quarter, which I think could have led to wireless margins being a lot better. If you could kind of address that spike, it would be helpful. Similarly, on the flip side on wireline, there was almost a 2 percentage point sequential step down in wireline margins. I know you mentioned that we've hit the full run rate from the voluntary departure plan, which I thought would have propped that up. Could you kind of walk us through what happened in the wireline margin side, too?

Yes. Thanks, David, for the question. So on the wireless cost of service side, I mentioned that the phone net adds split was fairly even between Consumer and Business. Business had a more than 10% increase in phone gross adds. As you are aware, many of our Business customers are still on a subsidy model rather than a device payment model, so I think you see the impact of that. But as I said earlier, we had great growth in the quarter in wireless, and overall margins were in line with last year. On the wireline side, we still have work to do as you look at wireline. Certainly, we see the continued effect of the revenue declines in legacy products. That's not new; we've seen that for many quarters now, and we expect that to continue. The key for us in wireline is to develop products and services that will offset those declines. By bringing the Business segment together, we now offer both wireless and wireline products to our Business customers, putting us in a better position to be that partner of choice for our Business customers moving into a 5G world. As we develop those products and services, we look forward to seeing what comes from those segments as we go forward.

I can only add on the wireline side there, the transformation we're doing with the new segments is, of course, paving the way for actually thinking about the customer. This customer is extremely important for the digital transformation when it comes to private 5G networks and mobile edge compute in the future. So the customer relationship is very important. Secondly, as Matt said, the investment we're making in the network right now with mobile edge compute and fiber is, of course, something that will offset that over time. It's not immediate because we are facing a secular decline in the product portfolio. But we constantly work with the front end of it, and I think that what we have done is very good. I have, together with Tami and the team, visited the majority of all the large Fortune 50 companies in this country right now, talking about our offerings and what we can do for them in the future. I believe we have made a really good start, but it will take some time.

Two questions. First, anything you can tell us about the financial impact of the Disney partnership? More specifically, what kind of lift are you guys seeing from an ARPU standpoint as you have non-unlimited customers moving up to unlimited? And then, could we talk about the use of cash as you guys get to your leverage targets? It looks like you are going to get below or at 2x sometime early next year. How do you prioritize your returns of cash to shareholders versus other needs, like spectrum for instance? Is there a chance that we could see buybacks come back into the cards next year?

Thank you. If we start with the Disney+ agreement, first of all, we learned to look from our exclusive agreement without the music. Both how we do these deals is a win-win for the partner and us. Remember, we are fairly picky about who we do this type of partnership with. We work with the best brands, with great products. The same goes for Disney+. Remember, we offer a substantial base, solid distribution that no one else has in this country, with the best customer base and the best network. This is a differentiator for us and for our customers, especially as we move to other phases of content distribution. At the same time, we also have the ability to move our customers up in our value chain toward unlimited, as we have been adding these types of content offerings. As for capital allocation, as Matt said, our first priority continues to be investing in our business. Our CapEx, together with any tuck-ins we need, remains our #1 priority right now. Secondly, we are committed to being in a good position to continue to increase the dividend; this is the 13th consecutive year of dividend increases, and we want to maintain that trend. Then, of course, we will continue doing what we committed to: getting back to pre-Vodafone ratings and related measures. That is what we are executing daily. Yes, we're getting very close, which will give the Board a lot of opportunities to think about what they want to do. That's what Matt and I, along with the entire treasury team, aim to achieve.

Yes. To add, while we're not going to provide any more details about where we'll be next year, you should not expect us to aim outside the bottom end of our debt ratio range, below the 1.75. Also, do not expect us to build a significant cash balance on the balance sheet.

Hans, I wanted to talk about 5G a little bit. You rolled out the new standards-based 5G Home in Chicago. Can you just give us a little bit of color about what difference that makes and how aggressively you're going to lean into this in terms of new markets and households until you get the next generation with the new chipsets? Regarding that, you've got a number of 5G Ultra Wideband devices in your handset mix. Obviously, you're waiting for the iPhone. But how do you see that penetration in your subscriber base over the last few months? What does the pipeline look like for new devices with that capability over the next few months?

Thank you very much. When it comes to the 5G Home that we launched now with the NR standard, that was an important step for us because, as you remember, we launched in 4 cities with our proprietary software. Now we have it on the global standard software, which is a significant advancement for us. The second important event of these launches is that we are now having the cell set-up. We have been working to deliver a new experience for our consumers, which began with our first four cities. As you rightly pointed out, I have said multiple times that the next-generation chipset will come in the second half of 2020, and that's when we believe we will have a more massive deployment. Until then, we are deploying in the millimeter wave with the Ultra Wideband in many cities. When we get that more advanced next-generation CPE, we will be in a strong position in the second half to actually make great strides. So this is just the next step for us to get all the insights, billing, and experience for our consumers to enhance our following steps when the next-generation chipset arrives. Regarding smartphones, as you pointed out, we have launched all the iconic 5G phones so far this year, and we see exciting adoption levels. Many customers are taking the phones, and although we have not launched in all cities, they are getting ready. This is paving the way for our customers because many of these phones are also exceptional 4G devices, and as soon as 5G launches in their city, they will also have access to that. We anticipate that all phones being launched next year will be 5G capable. We expect a range of phones to come out; there's one brand we're not aware of, and we are waiting for them to talk about when they will have a 5G phone. Overall, I feel good about the software tuning between the network and the handsets, and as we deploy more, we are improving overall customer experience significantly.

How do you see the pricing model evolving with 5G in terms of the opportunity to charge by rate of speed instead of the current model of unlimited per gigabytes or a certain quantum of gigabytes?

Thank you. Of course, as we enter 5G, we gain numerous new pricing models. I still believe that our model for unlimited is truly beneficial for us and our consumers, allowing them to move up in value from lower tier access to higher tier unlimited plans. This offers a wide range of options and, of course, the highest plan includes 5G. At the same time, we have begun adding flexibility to our business model, such as incorporating Apple Music, Disney+, and other offerings. Overall, we have many tools in our portfolio to continue driving growth. I have full confidence in the Consumer team to execute effectively. As we have merged our offerings, you can now observe the new potentials we have unlocked. The 5G Home, 5G Mobility, and other innovations present countless opportunities for us as we continue along this journey.

Hans, can you give us more thoughts on what you think people will do with gigabit speeds instead of megabits? When we rolled out 4G, we saw a lot of innovative applications. Any thoughts on that as you're talking to the Fortune 500 companies? Are there ways for you to participate in some of the revenue from some of these new applications, given the lower latency?

Yes, that's an excellent question. First off, 5G Home represents a completely new business model. This new technology allows us to operate a stand-alone fixed wireless service, which has never been financially feasible before. The addition of 5G brings about 8 currencies and new opportunities stemming from low latency, enhancing our digital factory capabilities with robotics. We see an increasing number of businesses moving to private 5G networks that provide heightened security because they can define their own networks alongside compute and storage capabilities. This introduces new charging and engagement opportunities with our customers. As previously mentioned, we are set to launch our first 5G mobile edge compute center this quarter, paving the way for additional opportunities. Moreover, on the Consumer side, exciting developments in AR/VR are emerging with potential investment from venture funds. I believe we are at an important juncture akin to the initial rollout of 4G, but with even greater possibilities. We have more insights now than we did then, and we anticipate groundbreaking applications to arise.

Two questions, if I may. Number one, can you talk about the revenue impact of the step-up in the insurance fee on a full-year basis and the amount you expect to reinvest in things like promos and marketing and Disney+? This would provide us with a better sense of the net benefit to the company. Secondly, given the slower deployment for small cells, not fiber, but small cells across the industry, are you considering shifting more of your investment dollars back to the macro network as we shift into 2020?

I can start with the second question. I'm not sure where you say there is slowness. The definition of what is a small cell is, number one, I mean I'm not sure if there's a clear definition. Of course, we are deploying a lot of urban cells right now. In my view, that's small cell deployment. So I don't believe you're referring to us when you talk about slow deployment because we are currently in the midst of our 5G deployment focused on dense urban places where macros are not as viable. It depends on what you define as a small cell. They're everything from micro to medium-sized hybrids to macros. However, in our case, we are not slowing down anything at all.

So Colby, on the question of the revenue impact from the step-up in our insurance products, Total Mobile Protection, from a geographic standpoint, that's in the other revenue line, so the contribution from that step-up is not in the service revenue line. But as you said, you saw a good increase in that line in the quarter. We continue to add value to our customers. It's an example of how we think about the Consumer offering holistically, whether that be in core services on the best network; whether it be bringing value like we've introduced this year with Apple Music and now with Disney+; and how we bring other services, such as Total Mobile Protection, cloud storage, and the like into our portfolio. As we do this, you see the revenue impact, in addition to the increase in volume. Coming out of the third quarter, we have seen significant momentum and strong volumes propelling us into the fourth quarter.

For Disney+, you're the national partner for Disney, and the impact for both of you is highly dependent upon getting Verizon customers to sign up and use Disney+. What would you consider a good conversion rate for unlimited customers to Disney+ customers? Should we benchmark it to Apple Music usage? Any go-to-market strategy commentary around that would be interesting. But also, you're proving that you can partner with great content. I'd be interested in your comments on the benefit of owning media and particularly Verizon Media Group.

Thank you. I think that it's a bit different to compare Apple Music to Disney+, given that streaming content is a heavier engagement than audio streaming. Regarding the conversion rate, while we would prefer not to provide specific metrics right now for competitive reasons, we are confident that our team knows well how to message the offering. We are focusing on co-marketing, and we find this beneficial for customer loyalty while also adding value for our customers. The conversion rates will be a point of interest for Disney, more so than us, and I believe we have a good handle on that. As for media content, our model allows for flexibility. We continue to partner with top brands and develop much engagement over time. The Verizon Media Group plays a critical role in this strategy as we leverage over-the-top services like Yahoo! Finance and Yahoo! Sports. We focus on customer engagement as we learn more about how content works and how to monetize it through our advertising platform. The synergy between Verizon Media Group and our network business is crucial for our success moving forward.

Hans, may I ask for a quick comment on the wireless side? Obviously, there were strong phone adds in the quarter. Are you seeing any share-taking opportunities here with Sprint and T-Mobile? I don't want to call it distracted, but they are obviously preoccupied. How might that situation change as we go into 2020? Secondly, any opportunities to carve out some of the wireline assets? I know this has been discussed for years, but can you see anything that might make sense? Lastly, Matt, could you elaborate on legacy pricing pressure within wireline? What exactly are we seeing as far as pricing pressures go?

When it comes to wireless and the competitive landscape in the third quarter, it was very similar to the second quarter. There were some iconic launches, but it remains competitive. We are currently on the forefront as Matt mentioned, providing compelling network and customer offerings. Overall, we presume the landscape will change moving forward, but our strategy will remain unchanged. We will continue to focus on the network and provide the best customer-centric organization, ensuring we make the right decisions to help our customers create the products they desire. Our structure, products, and organization are prepared to seize any market opportunities that arose in the third quarter.

On the wireline side, the legacy pricing pressures have been consistent with previous quarters. We have seen both volume and pricing pressures as customers continue to shift towards fiber-based services. This transition underscores the significance of our One Fiber initiative, which is aimed at capturing new growth opportunities as traditional services decline. We are actively enhancing our fiber deployment; in the third quarter, we increased deployment to over 1,500 route miles a month on average. This momentum will enable us to increase opportunities as we move ahead to counter those legacy impacts.

Hey, look, that's all the time we have for questions today. Before we end the call, I want to hand it back over to Hans for a few closing comments.

So a quick summary. As I said in the beginning, I am satisfied with how the team has executed our strategy this quarter. We continue to execute well on our network, both 4G and 5G, as well as One Fiber, as Matt described. Our customer-centric model is starting to pay off significantly with our coordinated offerings across Verizon Business Group, Verizon Media Group, and Verizon Consumer Group. You will continue to see us leading the charge in 5G, which is important for us. We have seen significant progress this quarter, especially with 50 markets live, 13 NFL stadiums, and various arenas hosting both hockey and basketball as well. We also have 5G Home coming out. There is continued progress here, with much more to do in the fourth quarter, which is exciting. Overall, we continue to maintain discipline in the financial environment we're all in, executing carefully while seizing opportunities as they arise in the marketplace. So all in all, I am pleased with the quarter, and we are happy with the momentum we are creating heading into the fourth quarter. Thank you very much for being on the call today.

Thank you, everyone.

Thank you.