Verizon Communications Inc (VZ) — Q1 2020 Earnings Call Transcript

Thanks, Brad. Good morning and welcome to our first quarter 2020 earnings conference call. This is Brady Connor and I'm here with our Chairman and Chief Executive Officer, Hans Vestberg; 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 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 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. Now, let's take a look at consolidated earnings for the first quarter. In the first quarter, we reported earnings of $1 per share on a GAAP basis. Reported first-quarter earnings include a pre-tax loss from special items of approximately $1.4 billion, including a loss on spectrum licenses related to Auction 103 of $1.2 billion, and a net charge of $182 million related to a mark-to-market adjustment for our pension liability. Excluding the effects of these special items, adjusted earnings per share was $1.26 in the first quarter, up 5% compared to $1.20 a year ago. Let's now move to slide four and take a closer look at our first-quarter earnings profile. We expect 2020 to be the final year that the adoption of accounting standard ASC 606 for revenue recognition will have a material year-over-year impact on our income statements. As we illustrated in previous quarters, we realized a lesser benefit from the adoption of ASC 606 during the first quarter compared to the prior year, primarily due to the deferral of commission expense. The reduction of the benefit realized creates a year-over-year headwind to both reported and adjusted earnings per share, which will continue throughout 2020. The impact was $0.03 for the quarter. For full-year 2020 we expect headwinds from the deferral of commission expense to be approximately $0.09. We estimate there was a negative $0.04 net impact included in the reported and adjusted EPS from COVID during the quarter. Adjusted EPS growth of 5% over the prior year illustrated on the earnings waterfall slide reflects the strong underlying performance of the business, partially offset by the impacts of the deferral of commission expense. With that, I'll now turn the call over to Hans to walk you through a recap of the actions we have taken during this unprecedented time.

Thank you, Brady, and most welcome to this earnings call. This is an earnings call that is very different from all previous ones that I have done. I've been in crises like the telecom crisis in 2000 and the bank crisis in 2008 and 2009. This is something totally different. It's a health crisis with a pandemic that impacts each and every one of us wherever you are in this world. I'm proud of the team at Verizon, how we have stepped up in this crisis and how we work together. We decided very early on to split our team into our crisis management team, and the leadership team continued to drive our business forward. In the middle of February, we made that split in order to ensure that we're actually attending to all the things that are happening in a company the size of Verizon. Our COVID-19 response has been based on how we manage our four stakeholders. We have taken decisive action, but they are all balanced and thinking about the long-term and the positive impact for all our stakeholders. Let me quickly go over what we have done in different areas. On the employee side, the majority of our employees are working from home. We moved quickly to a work-from-home environment. Today, we have high productivity in that setup. We have also retrained some 20,000 of our own employees to work with new tasks from home, and some additional 1,000 of third parties that are part of our delivery. But we also need to acknowledge we have a lot of our employees on the front lines, serving customers and maintaining the networks while keeping some of our stores open. We have roughly 30% of our stores open, of course, with limited opening times and only by appointment. But they play a vital role in keeping up the most important infrastructure in this country right now besides hospitals and first responders, and I'm happy to report the team is doing a great job. And talking about our customers, we have been addressing all our customers' new demands during this crisis. At the same time, we are part of the pledge to Keep Americans Connected, which means that we are waiving late fees or overages for small and medium businesses and the residential customers who have been impacted by the coronavirus. Our network has performed well. I will come back to that a little bit later. When it comes to our work in society, helping communities is also extremely important right now. Large corporations need to take responsibility. We have done initiatives like the PayItForward concert series, which gathers concerts or celebrities, bringing in people actually adding to and helping small and medium businesses. We call it PayItForwardLIVE. We have also been working with the WHO and other organizations that need help and ultimately supporting the most vulnerable in our society. Finally, on the education side, we have always focused on supporting schools that we already had partnerships with, but we are also adding initiatives like providing New York Times content to high school students across the country. So, we're proud of what we're doing in that area. Financially, we have also worked quite a lot on managing costs. We took cost measurements in the first quarter, everything from third-party spending to reducing travel, but we are doing this prudently as usual. On top of that, we increased the CapEx guidance in the quarter because we felt it was a good time for us to continue to reinforce our robust networks as we entered an uncertain period in our industry. At the same time, of course, we are signaling that we believe there is a good return on investment on that incremental CapEx. Additionally, I think Matt and his team have done a great job ensuring our balance sheet is strong and added liquidity in the middle of the quarter through very cost-effective bond issues. We are also working with various scenarios for the future. Nobody really knows how this will end, but we have several scenarios and actions that we're working with as a leadership team. Now, let’s discuss the network a little. We have been reporting every week on the development of our network since the outbreak of the pandemic. You are seeing some staggering numbers like over 200% increase in gaming, 10 times increase in collaboration tools, 40% increase in video usage, and 800 million calls a day, which is twice the normal traffic we see on Mother's Day, the busiest day of the year. All that we have been managing very well with the network. We have built a robust network and we can deliver high quality. If we then look now week-to-week, you can see on the slide that we have much less variance in usage patterns. We feel that we have settled into a type of network usage. I want to point out the mobile handoffs, which is how our customers are moving between different cells, which is down 35% since the outbreak of COVID-19. In certain places like New York City, we observed over 50% reductions in mobile handoffs. So how does our network hold up when it comes to all the changes? This is how we reported during Investor Day the capacity relative to peak usage on the wireless network. As you can see, we continue to maintain a healthy capacity even with the increase in demand caused by COVID-19. The main reason is that we were prepared and had added capacity ahead of this crisis. The network usage has diversified across different times and applications. We are also taking advantage of the temporary AWS-3 spectrum that the FCC enabled us to use as insurance if there was any unexpected surge in demand. I'm happy to report that our technicians and operations team have done a fantastic job and the network is maintaining its performance amid the significant increases in usage. Let me finish my remarks by discussing our 2020 commitments. They remain intact. We are managing this unprecedented crisis while continuing to execute our strategy. Regarding strengthening our core business, we currently have more digital sales than we had before, which is encouraging. We also strengthened our core business by acquiring quality millimeter wave spectrum that enhances our 5G strategy. In growing our 5G and fiber, we are currently ahead of our plans and remain on track as we progress with the deployments. Of course, challenges exist with COVID-19, but our teams are innovating new methods to facilitate deployments. Despite potential challenges going forward, I am confident that our team is resourceful and continues to drive progress. Recently, we also added the BlueJeans acquisition, which aligns with our investment strategy in the Verizon Business Group where we see great opportunity, particularly underlined by the changes necessitated by COVID-19. Integrating BlueJeans capabilities to our existing distribution channels and for the future of 5G will offer vital video capabilities. We are committed to maintaining financial discipline, led by Matt and the team. Lastly, it is vital that as a purpose-driven company, we continue to engage with our employees. We have virtual volunteering programs where employees can contribute to society. We also communicate with our employees daily via live webcasts to ensure everyone is informed about our initiatives during these uncertain times. Quickly reflecting on the first quarter, Matt will provide more detail, but I am proud of our team for delivering strong growth in wireless service revenue, a 5% increase in adjusted earnings, including the impacts of COVID-19, and strong cash flow up 26% year-over-year. While segments face challenges, they also show strengths during this quarter. Ultimately, our guidance implies ongoing uncertainties in the market. We will not provide guidance on revenue due to the unpredictability of hardware sales, but we are maintaining our EPS guidance and will discuss it in more detail.

Thank you, Hans, and good morning, everyone. As Hans discussed, we are in an unprecedented time. As a result of the impact of the COVID-19 crisis and the various measures taken to address the emergency, we experienced starkly different trends during the first two and a half months of the first quarter than we did during the last few weeks. We understand that most of you are more interested in what we currently see in the business, so I'll provide a high-level overview of our quarterly results and spend more time addressing the most recent trends and how they impact our expectations for the second quarter and the full year. We'll begin with a review of our consolidated operating and financial results. In the first quarter, consolidated operating revenue was $31.6 billion, down 1.6%. Growth in wireless service revenue in both the Consumer and Business segments was offset by sharp reductions in equipment revenue. Consolidated wireless equipment revenue was down over 16% in the first quarter driven by the Consumer segment, primarily as a result of limited in-store customer engagement in March due to COVID. Adjusted EBITDA was $11.9 billion, down slightly from last year, including the impact from COVID. Lower wireless volumes in the Consumer Group drove benefits to margins through decreased promotional spending, lower equipment revenue, and improved churn. These benefits were more than offset by higher bad debt expense, lower advertising revenues from Verizon Media Group in March, and customer actions that resulted in decreased wireless fees and non-recurring usage charges. Our incremental bad debt reserve of $228 million was the largest component of these items. The headwinds from the deferral of commission expense that Brady highlighted earlier reduced EBITDA by $172 million, contributing approximately 55 basis points to the EBITDA margin in the quarter. We continue to focus on our Business Excellence program with the goal of realizing $10 billion in cumulative cash savings by the end of 2021, and we've saved $6.3 billion through the end of the first quarter. The activities of this program over the past two years have positioned us to be more agile and adaptive in uncertain times like these. Adjusted EPS for the first quarter was $1.26, up 5.0% from $1.20 a year ago. This included an estimated net impact of approximately $0.04 from COVID, primarily driven by an increase in our bad debt reserve. Let’s now turn to our segment results starting with the Consumer Group on slide 10. Our Consumer team continues to deliver best-in-class services to our customers while ensuring they stay connected to their personal and work communities. We are extremely proud of the team's efforts especially our frontline workers' endeavors to meet our customers' needs during this very challenging period. Our Consumer segment started the year with typical low seasonal volumes during the first quarter. In March, customer transaction activity slowed significantly due to shelter-in-place policies, travel restrictions, and other measures aimed at promoting social distancing. Later in the call, I will provide deeper insights into the exit rate trends as we serve our customers in this new environment. First-quarter phone gross adds were down nearly 13% year-over-year and postpaid phone net losses were just over 300,000 for the quarter. Phone churn performance remained solid throughout the quarter at 0.77%, which was a decrease of four basis points from a year ago. In line with first-quarter seasonal activity and the impact of COVID, our retail postpaid upgrade rate remained low throughout the quarter and has been a key contributor to the decline in wireless equipment revenue. We expect this trend to persist as long as social distancing policies and other safety measures remain in place to protect our employees and customers. Fios Internet net additions of 59,000 were up sequentially and year-over-year, as work-from-home and in-home schooling and other related measures increased the utility and demand for our high-quality broadband offerings. However, Fios video net losses accelerated for the quarter, and we expect cord-cutting trends to continue. In order to ensure the safety of our customers and employees while providing critical network services, we have modified our approach over the past few weeks and are not currently entering customer locations except for critical functions. Now, let's move to slide 11 to discuss Consumer financial performance. Our Consumer segment entered 2020 with strong momentum as we added a significant number of wireless connections towards the end of 2019, favorably impacting the first quarter. For our Fios consumer products, we launched new Mix & Match pricing early in the quarter, providing price transparency and choice in our broadband and video offerings. We also introduced Yahoo Mobile to expand our wireless offerings across our digital media customer base. We continue to generate strong service revenue and other revenue growth, but this was more than offset by a significant decrease in wireless equipment revenue due to low volume activity. Consumer segment total revenue was down 1.7% year-over-year. Growth in unlimited plans, connections per account, and high demand for our broadband services in the quarter drove strong profitability for the segment, offset by an increase in bad debt expense attributed to COVID impacts. Consumer EBITDA margin of 46.4% was up 60 basis points over the prior year and included approximately 80 basis points of headwind from deferral of commission expenses. Lower equipment revenue had a limited impact on our overall EBITDA performance. Now let’s move to slide 12 to review Business Group results. During a time when connectivity is providing critical support to those impacted by this crisis, our Business team is at the forefront to serve our enterprise, small and medium business, public sector, and wholesale customers. We remain an outstanding partner for first responders, healthcare providers, and other frontline workers. As Hans mentioned, we are extremely proud of our team's work to deliver essential services to our customers so they can assist others. Business trends were strong throughout the quarter, and we saw a heightened demand for our products and services in March. Businesses need our services now more than ever as we experienced strong demand for mobility, Jetpacks, VPN services, and high-speed circuit capacity in the first quarter. Looking at the details on the slide for wireless products, phone gross adds were up 25% year-over-year, driven by strength in global enterprise and public sector, with offsetting pressure in small and medium business. This contributed to postpaid phone net adds of 239,000 and total postpaid net adds of 475,000. Business segment phone churn of 1.02% in the quarter was flat year-over-year, driven by strength in the public sector while facing pressure in small and medium business. Now let's move to slide 13 to review business financial performance. Operating revenues for the Business segment in the first quarter were down approximately 0.5% from the prior year. Wireless revenues within enterprise, SMB, and public sector were up year-over-year, driven by strong wireless service revenue growth of 6.9%. This increase was offset by legacy wireline and wholesale revenue declines. We are encouraged by the business EBITDA performance in the first quarter, which was driven by tight spending controls and solid wireless performance as we captured profitability even amid higher-than-usual volumes and ongoing transformation investments in the segment for future growth. Let’s move on to slide 14 to discuss Verizon Media Group. During the first quarter, Verizon Media Group's performance was impacted by COVID, similar to other players in the digital advertising and search business. Total revenue is $1.7 billion, down 4% compared to last year, primarily driven by COVID impacts. Prior to COVID, our year-over-year revenue trends were continuing the steady improvement seen in 2019. We are observing increased levels of customer engagement across our platforms. However, advertising rates and search revenue have declined in the current environment. Verizon Media launched a coronavirus hub on Yahoo! News and Yahoo! Finance and a COVID-19 newsletter through Yahoo Mail, both of which are driving significant customer engagement as we aim to keep users informed about developments in their area and around the globe with trusted content. Now let’s move to slide 15 for a quick overview of overall wireless performance. Slide 15 shows the key metrics and financial data for combined wireless products and services from the Consumer and Business segments for the first quarter. Total wireless service revenue grew 1.9% year-over-year. Additional details are provided in the financial and operating information along with supplemental earnings release schedules on our website. Now let’s review our cash flow and balance sheet for the quarter on slide 16. Cash flow from operating activities was $8.8 billion, an increase of $1.7 billion from the prior year. This year-over-year growth was partially driven by Voluntary Separation Program payments and voluntary pension contributions in the first quarter of 2019 that did not repeat this year, as well as working capital improvements from our operations this quarter. Capital spending for the first quarter totaled $5.3 billion, which is up approximately $1 billion year-over-year. We expect the timing of capital spending to be more front-end loaded than it was last year. Our capital expenditures support capacity for unprecedented traffic growth across our networks while we continue to deploy more fiber and add additional cell sites to support our 5G rollout. As mentioned earlier in March, we increased our full-year 2020 CapEx guidance to $17.5 billion to $18.5 billion to facilitate Verizon's network activity and help support the economy during this disruption. Free cash flow for the quarter was $3.6 billion, which was up 26.2% year-over-year and continues to fund our dividend. Our balance sheet remains strong with very low unsecured bond maturities through the end of 2021. Our net unsecured debt to adjusted EBITDA ratio was 2.1 times, up slightly from year-end. Let us move on to slide 17 to evaluate trends seen in the last half of March and early April. During March, as COVID safety measures were implemented with new federal and state recommendations for social distancing, our retail consumer and small business activity diminished significantly. By mid-March, we experienced a dramatic shift in customer behavior as stores closed and business activity halted across the country. Concurrently, we noted increased demand from our public sector and some large enterprise customers to support frontline crisis responders, new work-from-home arrangements, and other demands for critical connectivity services. This slide provides selected metrics from March 15 through April 15, offering a detailed view of the early impacts of the current COVID environment. It is difficult to predict how long these trends will continue. In the Consumer Group, we closed nearly 70% of our company-operated retail stores and reduced in-store services throughout the day as a safety measure. As illustrated in this slide, we witnessed a considerable drop in customer engagement and device volumes during this timeframe. Consumer wireless gross adds declined nearly 50% from the similar period in the previous year and upgrades declined over 40%. Expected lower customer switching across the entire industry has resulted in significant improvement in phone churn. As part of the industry's effort to support customers, we signed the FCC's Keep Americans Connected Pledge in March, agreeing to waive late fees and keep customers connected in the event of nonpayment due to the pandemic for the pledge period. We have added 15 gigabytes of data to metered consumers and small business plans as well as to hotspot usage for unlimited plans. This additional data combined with increased in-home WiFi usage has resulted in decreased data overage revenue for the quarter. In addition to these customer-focused actions and impacts, consumer behavior has shifted dramatically during this brief period, including reduced international roaming revenue. To keep our employees and customers safe through social distancing, we are generally not performing installations for consumer Fios when work inside the home is required. Gross adds are currently limited to those that can be performed directly by the customer or with the technician working outside the home. In our Business group, we have broken out trends for our small and medium business customer group, showing the drop-off we've seen in gross adds and upgrades as a major portion of small businesses have significantly reduced activity or faced a complete shutdown. In contrast to Consumer, we are not seeing the same improvement in churn at this time. For public sector and some global enterprise customers, an increased demand for remote connectivity solutions has arisen as more individuals are working and schooling from home. Wireless gross adds for these customers were up 163% over the analogous period in the prior year, driven mainly by demand for phones, Jetpacks, and other connected devices. Our network superiority and long-standing relationships with enterprises, first responders, and combination with other frontline workers allowed us to meet their connectivity needs across the country when they require Verizon the most. In addition to the surge in gross adds, we've noted improved retention for our enterprise and public sector customers, with phone churn improving by 35 basis points during this period. We are working with all our customers to ensure they stay connected, even if they are facing financial hardships as a result of COVID-19. Consequently, we believe our enterprise, public sector, and wholesale customers will be relatively less impacted than our SMB customers initially, but we may see greater long-term risks from the crisis. Wireless service revenues in our Business Group are being influenced by reductions in overage fees, diminished international roaming, and an uptick in suspensions of lines. Across Consumer and Business, we expect total wireless service revenue growth to be 3 to 5 percentage points lower than anticipated in the second quarter due to the reduction in fees and usage-based revenues. Additionally, bad debt expenses increased due to our changing expectations surrounding customer payments during this period. In the first quarter, we raised our bad debt reserve by $228 million based on the anticipated number of customers who would utilize relief measures under the Keep Americans Connected Pledge. We will continue to oversee Consumer and Business payment behavior and collaborate with our customers to help them stay connected despite challenging circumstances. As a result, it is plausible that additional bad debt reserves may be necessary in the second quarter. In Verizon Media, we face a decline in advertising and search revenue as advertisers pause or cancel campaigns during this time, coupled with users searching for fewer commercial terms leading to fewer monetization opportunities. Consequently, advertising revenues declined by nearly 10% in March, with COVID predominantly impacting the second half of the month, while that decline rate has persisted into April. Several industry forecasts expect a 20% to 30% decline in digital media revenues in Q2, with Verizon Media's results likely aligning with those experienced in the wider industry. Now let's go to Slide 18 to discuss our guidance and outlook for 2020. Obviously, the environment we find ourselves in today is vastly different than when we provided guidance just a few months ago. Given the unprecedented magnitude of recent conditions, we've revised our financial guidance for the full year. Nevertheless, we remain confident in our strategy, business model, and ability to generate sustainable long-term earnings growth. Our consolidated revenue guidance of low to mid-single-digit percent growth that we announced in January included the expectation that 2020 equipment revenues would not create similar year-over-year headwinds as it has in past years. However, device activations have been low since mid-March, and we expect this trend to continue throughout the second quarter with uncertainty surrounding customer behavior for the remainder of the year. The broad range of potential outcomes around equipment revenue led us to conclude that it is prudent to withdraw our consolidated revenue guidance at this time. For adjusted EPS, we are revising our original guidance from 2% to 4% growth and are now guiding to a range of negative 2% to positive 2% change from the prior year. Our new estimated range is based on a scenario that assumes significant headwinds will persist throughout the second quarter. We have limited visibility into the second half of the year, which depends on various potential operating environments. We will continue to assess the impact of COVID on our business, including our bad debt reserve, and expect to provide updates in our next earnings call according to how developments transpire. Other income statement items for which we provided guidance, including depreciation and amortization, interest expenses, and the adjusted effective tax rate remain unchanged as originally guided. Moreover, we have upheld our CapEx guidance for the full year that we announced in March. Our supply chain remains strong, and we have not encountered a material slowdown in sourcing necessary equipment from our network and device partners. We are optimistic that government agency measures will offer support to citizens, businesses, and frontline responders impacted by this crisis. We remain keenly focused on providing best-in-class network performance and customer experience to all our customers, which will continue to facilitate long-term operational and financial success, while weathering short-term disruptions. Despite the extreme nature of the world's current experiences, we believe that Verizon is well-positioned to remain resilient through this situation. Let's take a look at slide 19 to discuss our strong balance sheet and liquidity position. Over the past few years, we have fortified our balance sheet, and the results of those actions have positioned us well to manage through the COVID pandemic's impacts. We ended the first quarter with $7 billion of cash on hand. Maintaining a higher cash balance during a market crisis is part of our liquidity planning strategy and we executed that strategy with a $3.5 billion bond offering completed in March. Additionally, we started and ended the first quarter with no commercial paper outstanding but have accessed this market in the second quarter to further bolster our liquidity. During the first quarter, before the market disruption, we completed one of our largest device payment securitizations amounting to $1.6 billion. Having a cash cushion is prudent for many reasons, given our anticipation that some customers may face challenges in making timely payments due to the crisis. We are closely monitoring these trends concerning our ABS programs. In the second quarter, we had nonrecurring cash outflows including $2.7 billion of maturities and $1.3 billion of spectrum licenses from Auction 103. Scheduled unsecured bond maturities for the rest of 2020 stand at zero due to our continued liability management strategy that maintains low near-term maturities. Additionally, at the end of 2019, owing to our funded status and previous discretionary contributions, we anticipate no mandatory contributions to our pension plan until 2026, subject to market conditions. Our pension funded status has been better protected in recent years as we have increased the hedge ratio of our liability to about 50%. This resulted in the end-of-first-quarter funded status of our pension plan declining only from 92% at year-end to 87%. Our standby credit facility with our banking group of $9.5 billion provides additional assurance regarding our liquidity. Our balance sheet is robust, and our liquidity position has been further reinforced as we navigate this difficult period for our customers and markets. We have shown a capacity to access both the bond and commercial paper markets in recent weeks. Our strong financial position enables us to continue investing while supporting all of our stakeholders. I'll now turn it back over to Hans to outline our 2020 priorities, after which we will address your questions.

Thank you, Matt. Let me wrap things up by discussing our priorities heading into the year and beyond. I feel that we are very well-positioned to execute both in the short and long-term to create more value for all our stakeholders. We have embraced the Verizon 2.0 transformation, which encompasses a new leadership team, new network technology, and a new go-to-market approach, and we are delivering on that. I believe we already have good results, with more to come. Additionally, we have a solid strategy for our COVID-19 response, ensuring a balanced approach that creates long-term value for all stakeholders. The 5G strategy continues to be at the forefront of our efforts. As I’ve indicated before, we are in the midst of execution, maintaining our focus on it. We see opportunities with 5G going forward, including in building out cities, 5G mobile edge computing, and achieving nationwide 5G this year. Matt mentioned our financial discipline and capital allocation, which make me confident in our strategy. We’ve done exceptional work not only in the last 12 months but also over the last three months to strengthen our position in meeting all capital allocation demands—from our business to our shareholders and debt holders. Ultimately, I believe that our brand has been strengthened during this time, enhanced by our talented workforce and our response to business practices that show our commitment to society. Overall, I feel confident about our strategy and the progress we are making. We need to adopt a multipronged approach, balancing crisis management with continued execution of our strategy. With that, I hand it back to you, Brady.

Thanks, Hans. Brad, we're ready to take questions.

Thanks. Thanks for taking the question. A question about your updated EPS guidance. As you noted during your presentation, certain activity in the business has declined significantly. I would assume that there's a degree of cost savings associated with that. You also highlighted some areas where you're seeing some pressures. You highlighted roaming revenues as an example. So, I was hoping you could provide a little more insight into the puts and takes that caused you to see a slightly lower outlook for earnings over the course of the year. And then just to clarify, you said that this revised outlook reflects headwinds you expect to see in the second quarter. I'm curious whether you're saying that the variance in earnings that you expect to report this year will primarily be contained to the second quarter, or if you're saying that those headwinds for the remainder of the year collectively resulted in a change? Thank you.

Hey Brett, thanks for the question, and good morning everyone. So, as you look at the guidance, we went through some of it in the prepared remarks. As you think about the revenue side for the second quarter, really break it up into two major buckets. The actions we've taken and the impacts from changes in customer behavior. So, as I start off and think about the actions we've taken, it starts with the Keep Americans Connected Pledge for that 60-day period. The majority of that will occur in the second quarter, so we'll see more impact in Q2 than we did in Q1. Additionally, as we mentioned, we've given customers an extra 15 gigabytes of data on metered plans or on hotspots for those customers who are on unlimited plans. So, that will have a significant impact on the overage fees that we would typically collect. Earlier this week, we announced that we would extend the 15 gigabyte offering from the end of April through the end of May. On the customer behavior side, one obvious factor is international roaming. I think it's fair to say you can put a pretty low number in your model for international roaming revenue for the second quarter. We also expect to see those customers in the SMB side suspending some of the lines on their accounts over this time period, which will impact revenue too. So when we add all those things up, we see that these factors will impact year-over-year service revenue growth by roughly 3% to 5% in Q2. Some of those impacts will of course extend beyond Q2, while others may not. We'll control how much we extend those actions, but customer behavior will obviously be influenced by broader macro conditions, so we'll see how that plays out through the second half of the year. So, that encompasses the service revenue side. Regarding other revenue components, we anticipate equipment revenue will be down. We've also seen a significant reduction in media revenues. We were down 4% for the first quarter but saw a decline of 10% in March. Most of the quarter-over-quarter revenue reduction occurred in the COVID period. Moving into the second quarter, we expect those reductions to increase further. A number of industry forecasts predict a 20% to 30% decline in digital media revenues in Q2, and Verizon Media's results should reflect those industry trends. While some cost savings will materialize, the revenue impacts will affect our overall profitability during the quarter, and you see those reflected in our guidance. Regarding the second half of the year, it’s too early to tell. There is a lot that can unfold in the next 90 days. We'll have a clearer picture of the second half at our next earnings call. But what we do know is that we came into this situation in a position of strength, with solid performance over the last few quarters. Due to our important products and services, and our strong balance sheet, we have a cushion to navigate and weather this unprecedented period effectively. That's how we see the second quarter and how things may evolve as we look at the rest of the year, Brett.

Thank you.

Thanks, Brett. Hey Brad, we're ready for the next question.

Great. As a follow-up to Brett's question about the 300 to 500 basis points, can you provide more details regarding the sub-impact and ARPU impact that you anticipate from all these different elements? You offered some excellent insights on what's happening in April, but could you give a sense of the overall gross add impact you expect? Additionally, on the ARPU side, how significant are the components being affected, and how might that influence the 1% to 3% service revenue decline you’re projecting? Shifting to a new topic about Fios, when did you implement the new policy of not entering consumers' homes? It appears that Internet net adds are definitely slowing; do you foresee them going negative? Lastly, what are your expectations for video trends as we progress into the second quarter? Thank you.

Yes. Thanks, John. Following up on the service revenue. When you think about ARPU, you've got the base billings, and then you've got the additional elements coming in like international roaming, overages, and late fees. We feel really good about the core billings within the business. We’re seeing customers utilize our products and services on stronger levels than before, and I expect that to continue. However, we will see pressure around the edges with those additional items that can contribute to service revenues. Most of the 3% to 5% impact comes from those variables we factor into the service revenue line. The business side might experience suspensions as well, but we’ll see how it plays out in total. Overall, the core ARPU will show some pressure from these elements as we navigate through the quarter. The subscriber numbers are promising; reflecting low churn in the consumer segment. You're seeing a churn rate of around 0.5, which is quite low historically. It demonstrates the value customers place on our network quality, especially as we go through these uncertain times. I’ll turn it over to Hans for further insights on Fios and our engineers' roles in consumers' homes and how we're adapting to the current situation.

Thank you, Matt. John, ensuring the safety and health of our employees has always been our priority. This led us to close approximately 70% of our stores and adjust visiting hours. We have similarly restricted our engineers' participation in home visits. Initially, we limited visits into homes, focusing on critical functions. However, we have recently innovated to enable Fios installations without entering homes. We introduced processes enabling customers to install Fios without our technicians being inside the home, including self-installation kits and virtual guidance. We've ramped up these initiatives over the last couple of weeks and I am confident that, with time, we can return to a normal level of installations while ensuring the safety and health of our employees and customers remains our top priority. As we know, balancing interests is critical during a crisis, and our top priority remains the safety of our employees, in addition to ensuring our infrastructure remains operational. As you noted, the adaptations we've made have opened new possibilities for us and I’m grateful for the team's resilience.

Great. Thanks, guys.

Yeah. Thanks, John. Hey, Brad, we're ready for the next question.

Hey, guys. Thanks. To clarify one more time on this 3% to 5% in 2Q, can you please confirm that versus your prior expectation for year-over-year growth rather than just year-over-year? Also, can you quantify what the service revenue headwind was in the first quarter versus the regular business growth rate? And then second, Verizon Media revenue sounds like it's down 20% to 30% in the second quarter. What do the margins look like in this business? We don't really know much about the sort of cost flexibility there and whether margins can stay positive or flip to negative when revenue comes down quickly. Thank you.

Yes, thanks Phil. As you examine the service revenue, the 3% to 5% decline represents a reduction in growth rates on a year-over-year basis. For the first quarter, we experienced a modest impact of around 30 to 40 basis points on service revenue growth. Thus, the 1.9% increase would have seen further upside without the March effects. We are satisfied with where our service revenue trajectory is positioned going forward. In Q2, we expect continued strong underlying performance in the wireless business, enhancing service revenue throughout the year. Regarding the Verizon Media Group, as I reported, advertising has seen an impact lately. However, the increased activity and engagement provide encouragement. The Media team has shown significant creativity in developing new products and services during this pandemic period. I maintain confidence in the Media Group’s capacity to navigate various scenarios contingent on the pandemic ramifications. We've seen consistent efforts to minimize direct costs and drive innovation. However, please remember that advertising can be volatile during this time, requiring cautious management.

If I can just clarify as well on Brett's question, you said that a lot of the impact I think for the EPS cuts is in the second quarter. But I think it would make sense that you're guiding for probably weaker earnings throughout the year. Is that fair?

Most of the impact in the guide is related to the second quarter. We will see some of the revenue effects like international roaming continue beyond Q2. We'll provide further insights during our next earnings call when we have improved visibility into what the remainder of the year looks like.

Thanks guys.

Yeah. Thanks, Phil. Hey, Brad, we're ready for the next question.

Hey, guys, thanks for taking the questions. I guess two if I could. First, looking at slide 17 where you present COVID environment effects on the mobile business, could you extend this discussion regarding consumer SMB and enterprise on the wireline side? Then secondly, in the last quarter there was a substantial investment in the business services group aimed at modernizing the technology and the go-to-market capabilities. Could you elaborate on the achievements made thus far in that exercise? Moreover, what are your expectations for the return on that investment given the current environment? Thanks.

Yes. Thanks, Dave. Let’s break that down. Starting with the wireline impact, Fios performed well in the first quarter, but we expect some gross add challenges stemming from modified policies preventing our entry into customers' homes. We will continue to provide strong service with low churn, benefiting from customers' appreciation of our products. While we anticipate some impacts on gross additions for Fios, we’re innovating new methods to facilitate installations. We have prominent plans to install Fios via devices that customers can connect independently. Moving into SMB, we’re adapting quickly to assist larger enterprises with their growing communication needs amid rapid changes in network traffic given the current circumstances. Lastly, the investment in VBG has been significant. I wish to reiterate that it’s vital for us to modernize while maintaining a clear long-term focus. The immediate returns may not be immediately evident, but we anticipate increasingly positive outcomes as we advance with our Business Group strategy into 2021 and 2022. Additionally, we recently acquired BlueJeans, enhancing our service offerings in the Verizon Business Group alongside broader synergies that will serve well in the 5G landscape. Rapid digital acceleration is a key theme for Verizon moving forward.

Yes, exactly, Matt. Verizon Business Group's strategy remains intact, unifying various wireline and wireless operations for interconnected solutions. Tami and her team are focused on completing the transformation, which will provide Verizon with increased capabilities during this period. The investment continues to generate growth opportunities across our service lines, particularly as businesses modernize and digital solutions become paramount in the industry.

Thanks, guys.

Yes, thanks, David. Hey Brad, we’re ready for the next question.

Good morning. Thanks for all the COVID-19 details; they are very helpful. I wonder if you could elaborate further Matt on the bad debt, helping us understand its distribution across Consumer versus Business segments. I'm assuming a significant proportion is in SMB. How does that break down between wireless and wireline? Secondly, Hans, could you address digital channels? You've spoken at length about Fios in a box. How do you plan to push more phone and wireless sales through the online channel? Where do you stand today, and what can you do to boost that percentage?

Sure, Simon. As we review bad debt metrics, most of our impacts originate from the Consumer side due to the relative size of that customer base compared to SMB. In terms of the bad debt reserve we established, we’re now operating under the new CECL accounting standard. This requires us to take a more forward-looking stance on anticipated losses. We estimate that approximately 800,000 customers reported difficulties in making payments due to COVID conditions, and that forms the basis of our bad debt reserve. While this presents challenges, we are encouraged by the relatively strong payment behavior we've experienced early in this current period. Consumers prioritize essential services like their mobile connection, which is paramount during times like these. We are closely monitoring our SMB accounts and their payment trends as well. I'll turn the digital engagement question over now to Hans.

Thanks, Matt. Regarding digital channels, our approach is running parallel to various strategic initiatives amid our ongoing crisis management efforts. Firstly, enhancing our digital ordering channels provides an avenue for customers to procure products seamlessly. We acknowledge that post-pandemic, customers may migrate toward a more digital-centric purchasing process. Insights gained from remote operations will inform our team’s preparations for the future, harnessing the momentum towards digital commerce. We're not only innovating installation methods through Fios in a box, but we’re also ensuring a comprehensive omnichannel experience is in place to meet customers' evolving expectations. This is a balanced strategy that adapts to current demands while preparing for the future of consumer engagement. Efforts are focused, and I am confident that we can amplify our digital sales as we proceed.

Great. Thank you.

Thank you, Simon. Brad, we are ready for the next question.

Yes, hi. I wonder if I could ask a longer-term question in the context of the COVID crisis. Your investments in wireless, which have largely focused on 5G, particularly around millimeter wave, have necessarily concentrated on dense urban gathering places—stadiums, and arenas, and airports—which obviously aren't seeing significant traffic today. Should we re-evaluate that strategy and shift investment priorities more toward coverage instead of dense urban usage? Alternatively, could this be a pleasant short-term aberration, given the longer planning horizons on network densification? I ask in the context of a spectrum strategy, as it could warrant further emphasis on mid-band spectrum that potentially afford greater coverage.

Thank you, Craig. I maintain a firm belief that dense urban areas will sustain their population density, despite the current crisis temporarily limiting movement. People will remain where they reside, and it's crucial to remember that this persistence supports our focus on retaining a robust wireless network in urban environments alongside expansions into suburban and rural areas. We will not shift our strategy for expanding our presence in densely concentrated urban markets; we still see substantial usage, although fluctuations in movement levels have occurred due to the pandemic. Mid-band spectrum remains a key focus for Verizon, particularly C-band, which we perceive as advantageous given its capacity and compatibility with global 5G roaming standards. We’re encouraged by the FCC's plan for a C-band auction in December and will maintain our historical rigor in measuring return on investment across our spectrum acquisition, network densification, and software enhancements. We aim to sustain healthy network capacity and superior quality service across the board, which differentiates us as a carrier while adhering to evolving market demands.

And can you comment specifically about the L-band uplink concept and the availability now of Ligado spectrum?

Yes, I can provide context on this topic. I would like to express our appreciation to the FCC for its swift response in allowing the use of additional spectrum. As it pertains to L-band, we still face notable challenges. The frequency in question lacks a market ecosystem, as it is not utilized globally, which raises concerns as there are no compatible equipment or handsets available. Our engineering teams are investigating the developments surrounding Ligado, but given how long this matter has been underway, our teams continue assessing the overall risk profile of this spectrum acquisition possibility.

Thank you.

Thanks, Craig. Hey Brad, we're ready for the next question.

Great, two if I may. First, I was wondering if you can provide the number of customers that have stopped paying their bills, specifically wireless bills, due to COVID-19? I assume that number has influenced your disconnect count, and you mentioned 800,000 in response to Simon's question. I want to understand how that plays into these figures comprehensively. Secondly, regarding free cash flow and dividend outlook, I'd like to get a more comprehensive framework on potential dividend payouts expected in 2020. Thank you.

Colby, in responding to your first question, our registration reflects customers who have indicated that their ability to pay their bills has been affected by COVID-19. That information is not representative of permanent disconnections. Instead, it reflects a situation where customers have alerted us to difficulties due to the pandemic. We proactively work with most of those customers, ensuring they maintain their service. As of mid-April, we observed about 800,000 customers who cited such impacts and have actively participated in the pledge. However, we have not noted widespread disconnections. Historically, we have experienced customers reliably prioritizing their wireless bills, and our current data generally aligns with that pattern, offering us confidence. On the free cash flow and dividend front, we’re maintaining the view that our balance sheet is strong and offers us flexibility. We previously shared our capital allocation priorities clearly; these include business investments, shareholder dividends, debt reduction, and potential share buybacks. Overall, our current financial standing leaves us well-positioned to meet our shareholder commitments, though we recognize that buybacks may not be feasible this year.

Okay, thank you.

Thanks, Colby. Hey Brad, we're ready for the next question.

Thanks and good morning. Just a couple of follow-ups. First, you provided abundant detail on the potential revenue impacts. Can you quantify or approximate the variability of wireless expenses in relation to gross adds or overall device sales? Secondly, does the temporary use of other license holders' spectrum increase Verizon's interest in leasing or renting spectrum commercially in the future? Thank you.

Thanks, Mike. I will address the expense variability question first. As wireless volumes decrease, we clearly see reductions in handset costs, which are absorbed quickly into our financial statements. Still, other expenses don't share the same level of variability. For example, promotional costs are amortized over the expected life of contracts, leading to delay in securing benefits from these expenditures despite reduced volumes. Overall, while we do see reductions in some operational costs, there are other considerations which impact our revenues. You’re correct that the slowdown in device sales also hinders revenue-making opportunities. On the conversation about spectrum, I can confirm that our engineering team remains engaged, while our current focus is on maximizing our existing assets. Although we believe leveraging temporary spectrum presents operational learning opportunities, our long-term spectrum strategy remains rooted in solid business justifications.

Thank you.

Thanks, Mike. Hey, Brad, we have time for one last question, please.

Great. Thank you for taking the question. Hans, I wanted to follow-up on your DSS comments. If I refer back to my notes from mid-February following the Analyst Day, you seemed to be fairly firm in stating that DSS would be implemented by year-end, coinciding with 5G advancements. Is there any change to that timeline? Additionally, regarding related infrastructure, Kyle also mentioned five-fold increases in small cells to enable 5G this year. Have any of the shifts in social patterns influenced the macro roll-out timelines? Thank you.

Thank you, Jennifer. We feel encouraged about dynamic spectrum sharing, we are continuously testing and deploying the necessary equipment for enabling that. I'm confident that Kyle and his team will provide Ronan and Tami the opportunity to decide on launch timing for DSS in the second half of the year. We have not encountered supply chain issues regarding this initiative or small cells. As noted, we've actually outpaced our earlier plans as of March. I can say without reservation that we remain on track with respect to our five-fold increase in small cells for this year, even amid the challenges we are facing in municipalities. We’re proactively working with these municipalities and adapting timely digital approvals, which has proven achievable. All in all, we are not backing away from these targets, and it currently appears to be heading in a positive direction. Given the circumstances, I'm confident in how we are executing across our three-pronged approach: managing immediate crises, maintaining daily operations, and planning for the future.

Thank you.

Yes. And thanks, Jennifer and Hans, and team. Everybody, make sure you stay safe and be well. With that, we'll conclude the call.