Verizon Communications Inc (VZ) — Q2 2021 Earnings Call Transcript

Thanks, Brad. Good morning, and welcome to our second quarter earnings conference call. This is Brady Connor, and I am 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 2. Information in this presentation contains statements about expected future events and financial results that are forward-looking and subject to risks and uncertainties. Discussions 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. Now let's take a look at consolidated earnings for the second quarter. In the second quarter, we reported earnings of $1.40 per share on a GAAP basis. Reported second quarter earnings include a net pre-tax gain from special items of approximately $182 million, consisting of a pre-tax gain of approximately $1.3 billion related to a pension remeasurement credit, as well as a pre-tax loss of $1.1 billion from early debt redemption costs. Excluding the effects of these special items, adjusted earnings per share was $1.37 in the second quarter. In May, we announced an agreement to sell Verizon Media to Apollo Funds with an expected close date in the second half of 2021. Upon the announcement, certain assets of the Verizon Media business were classified as an asset held for sale. As a result, we no longer depreciate or amortize these assets, which resulted in a partial quarter benefit of $0.03 per share in the second quarter, and this benefit will continue until the deal closes. With that, I'll now turn the call over to Hans to take us through a recap of the second quarter.

Thank you, Brady, and thank you for joining our second quarter earnings call. It is remarkable the difference a year can make. We're quickly resuming pre-pandemic norms and at Verizon our network and in-store traffic is almost back to pre-pandemic volumes, and our office employees are gradually going back to the office. Of course, some behaviors have changed permanently. The mass shift toward online activity has sped up the timeline for work from home, distant learning, banking, entertainment, telemedicine, etc. All of these societal and behavioral shifts have had an impact on the business. And they reaffirm our network as a service strategy and our focus on delivering on our five vectors of growth. Finally, after a year of virtual meetings, I've been spending time in the field with customers and partners, and importantly, with our frontline workers, who have done such heroic work throughout the past year serving our customers. All-in-all, we have a very enthusiastic and cautiously optimistic stakeholder base. As we conclude the first half of 2021, I have to say, I'm extremely proud of the achievements we have made to strengthen Verizon in all aspects. Let me mention a couple of the milestones. We strengthened our strategic focus with our divestment of Verizon Media Group, which we believe will close around the end of the quarter. We invested in the best portion of the C-Band in order to accelerate and amplify our multipurpose network as a service model. We have also improved our 2.0 organizational structure, and we brought in a diverse slate of top leaders. Our finance and treasury team did an outstanding job of strengthening our balance sheet, with low cost of borrowing and maturity for our debt. We also laid out a long-term financial goal focused on growth. All this focus on strategy execution and delivering profitable growth by our teams have paved the way for continued great financial performance. In the second quarter, we not only generated our strongest earnings on record, we also produced good growth and profitability in all our units and segments. We demonstrated continued strength in wireless service revenue growth. Combined with our scale and operational efficiency, we produced 5.6% adjusted EBITDA growth. Given the strength in our first half results, we're raising our full year guide, and Matt will provide details later in the call. When it comes to our operations, our recent investments in our customers through the biggest 5G upgrade promotion and innovative trading, coupled with a mix and match for both wireless and Fios customers have led to strong performance across both our offerings. On the network side, we continue to offer our customers the industry's best network experience. For the 16th consecutive time, RootMetrics awarded Verizon the best overall network performance. For the 27th consecutive time, JD Power named us the number one network quality. For our C-Band build, we're on track to build 7,000 to 8,000 sites by year-end, and we're on plan to launch in the first 46 markets. We're also strengthening our network by expanding our fixed wireless access reach. If we look at the traffic in the network, customer activity is near pre-COVID levels. As mobility traffic comes back, we've seen mmWave usage increase by 290% year-to-date. As we continue to deploy mmWave sites, and we add more device penetration, we expect these numbers to continue to increase rapidly, tracking towards 5% to 10% of traffic in most dense urban areas by year-end. We're making progress in executing across all five of our vectors of growth. In 5G adoption, approximately 20% of our wireless phone base are now on 5G devices, with a majority of them being C-Band capable. In the second quarter, the step-up rates were very, very healthy, and this reflects the value and differentiated experience for our customers. We also had a record high new accounts that opted for a premium unlimited plan. Regarding our next-generation business application, we launched the first commercially available private 5G network solution in the U.S. It's an on-site, private 5G that brings on-premise 5G capabilities to large enterprises and public sector customers. The team in our Verizon business group continued to forge very important partnerships, with one of them in the quarter being with Mastercard, where we will work together with Mastercard on 5G Mobile Edge Compute, transforming contactless payments for consumers as well as small and medium-sized businesses. The customer differentiation that we continue to develop further strengthened in the quarter, with new content and experiences added to our mix and match platform with a broken device trading and the biggest upgrade ever promotion. We'll also add through partnership content with Apple Arcade and Google Play Pass. We've been focusing on expanding our broadband nationally, and we expanded our 5G Home Services, which is now available across 47 markets. On the 4G home front, we expanded to more suburban and urban areas, and it is now available in parts of all 50 states. At the same time, we launched a new home router that is compatible with the C-Band. Finally, we have recently expanded our 5G business internet to parts of 42 cities. In summary, our strategy is working, and it's more relevant than ever, driving value for our investors and customers and society, as they embrace new ways of living and working. We have great momentum on all five vectors of growth, delivering on profit growth with alignment for long-term growth targets. With that, I’ll now turn it over to Matt to discuss the financial results.

Thank you, Hans, and good morning, everyone. Second quarter results were exceptional, both financially and operationally. We continue to execute on our strategy, driving contributions from all five growth vectors. We attracted new customers and accounts and delivered low churn amid strong upgrade activity, all of which serves to accelerate 5G adoption in advance of our C-Band deployment later this year. Accelerating volumes contributed to another quarter of strong sequential wireless service revenue growth, building off our industry-leading performance in recent quarters. At the same time, our disciplined approach is driving profitability and strong earnings results. Let's go through the details beginning on Slide 6. In the second quarter, consolidated operating revenue was $33.8 billion, up 10.9% year-over-year. Service and other revenue rose 5.7%, driven by strength in wireless, Fios, and media. Equipment revenue rose 47.6% year-over-year, given COVID-impacted sales a year ago, and was up more than 17% from the second quarter 2019 levels, driven by healthy upgrade activity. Total wireless service revenues were up 5.9% year-over-year, and 4.0% compared to the second quarter 2019. The results represent sequential growth of $139 million, nearly double our industry-leading sequential growth reported in the first quarter. Total Fios revenues were up 5.4% year-over-year, driven by continued broadband subscriber growth. Adjusted EBITDA of $12.2 billion grew 5.6% over the prior year, in line with our service and other revenue growth, despite absorbing approximately $60 million of incremental tower lease costs related to the updated agreements to accelerate the deployment of our C-Band spectrum. As Brady and Hans highlighted, adjusted EPS for the second quarter was $1.37, the best on record. The execution of our strategy has translated into record earnings results, and we are well-positioned to continue the momentum into the second half of the year. Now, let's review our operating segment results, starting with Consumer on Slide 7. Momentum built throughout the quarter, and we timed our promotions to take full advantage of the economic recovery and increased customer activity. The result was one of our strongest net new wireless account quarters. With stores fully opened and consumer behavior closer to pre-pandemic levels, we delivered 1.7 million of postpaid phone gross ads in the quarter, up from 1.2 million in the second quarter 2020, and almost identical to 2019 levels. Phone churn of 0.65% remained favorable throughout the quarter and benefited from new offers in the marketplace. This result was a record low for a non-COVID impacted quarter. As a result, phone net ads of 197,000 were our best second quarter for consumer. The response to our differentiated customer proposition, including the broken device trading and the biggest upgrade ever promotion was terrific. Device upgrades, which were significantly higher compared to both the second quarter 2020 and 2019, drove 5G adoption and step-ups to premium unlimited plans, a strong indicator that our strategy is working. We exited the second quarter with approximately 20% of our phone base using 5G capable devices, with the vast majority supporting C-Band. In addition, step-up rates were historically high, with nearly 60% of new accounts opting for a premium unlimited plan, a record high. At quarter-end, approximately 69% of our account base was on unlimited plans, with nearly 27% of our account base on premium unlimited plans. The quality and reliability of our Fios service, combined with the simplicity of our mix and match offerings continue to drive strong demand for broadband. Fios internet net ads totaled 92,000 in the quarter, supported by strong customer retention, and our Fios internet customer base is more than 7% higher than a year ago. Our trailing 12-month total Fios internet net ad performance is the highest since 2015. Now, let's move to Slide 8 to discuss the consumer financial performance. The improved customer activity translated to impressive top-line trends. Total revenue for the quarter grew 11.2% year-over-year, and was also 6.7% higher versus the second quarter 2019. Equipment revenue was the biggest driver, rebounding above pre-COVID levels from higher activations, aided by our customer value proposition. Wireless service revenue momentum translated to 5.4% year-over-year growth, and 2.5% growth compared to the second quarter 2019. Service revenue is driven by customer growth, step-ups, products such as content, as well as reseller and prepaid. This growth comes despite minimal contributions from international roaming, which we expect should provide a further uptick to growth in future quarters. Momentum in Fios continues with revenues of $2.9 billion, surpassing pre-COVID levels, driven by the continued uptake of gigabit speeds. The results represent our highest revenue results ever. We remain encouraged by the continued margin improvement within Fios, driven by the adoption of mix and match plans and a greater contribution from broadband. Consumer segment EBITDA for the quarter grew 4.9% over 2020, representing an EBITDA margin of 44.3%, down from the prior year, primarily resulting from higher activations. Now, let's move to our business segment on Slide 9. Business wireless activity was highlighted by postpaid gross ads of 1.2 million, up 6.3% over the second quarter 2020, and up 2.1% over the second quarter 2019. Segment postpaid phone churn was 1.07%, up 17 basis points year-over-year, reflecting elevated disconnects from COVID-related purchases in 2020, particularly within the education vertical of the public sector. As schools plan for more in-person learning this fall, we expect disconnects to remain elevated in the public sector in the third quarter. Despite the disconnect pressures, phone net adds were strong at 78,000, with improving trends in both SMB and enterprise. Both of these posted their strongest phone net ads in over a year, offsetting the disconnects in the public sector. Let's now move to Slide 10 to review the business financial performance. The business segment delivered strong top-line growth with total revenue up 3.7% year-over-year. Equipment revenue, which is up approximately 47% was the primary driver of the increase. Wireless service revenue growth of 8.0% was driven by strong momentum in small and medium businesses, and the first quarter of enterprise growth since the onset of the pandemic. The public sector continues to show strong growth over 2020, though it is pressured by COVID-related churn in education. The wireless strength was partially offset by declines in business wireline, which returned to a more normal trajectory after elevated COVID-related demand. The business segment EBITDA margin was 24.1% in the quarter, down approximately 210 basis points year-over-year, mostly driven by higher equipment volumes and wireline pressure. While pressures likely persist in the near-term, the economic reopening, business transformation initiatives, and 5G for enterprise provide opportunities to drive margin. Now, let's move on to Slide 11 to discuss Verizon Media Group. Verizon Media Group continued its recent trends and delivered strong performance, driven by high customer engagement with our brands and demand for our advertising platforms. Total revenue for the quarter was $2.1 billion, up approximately 50% from a year ago, and up 13% from the second quarter 2019. Let's now move to our cash flow results on Slide 12. Cash flow from operating activities for the first half of 2021 totaled $20.4 billion, compared with $23.6 billion from the prior year. The change was primarily driven by higher cash taxes and higher working capital requirements due to greater volumes. The cash tax impact was a result of a one-time benefit received in the second quarter of 2020, as well as COVID-related postponements of payments in the year-ago period. These expected headwinds were offset by our strong operational results. Capital spending for the first half of 2021 totaled $8.7 billion, as we continue to support traffic growth on our 4G LTE network while expanding the reach and capacity of our 5G ultra-wideband network. C-Band CapEx was more than $160 million in the first half, and we have placed orders for approximately $1.4 billion of related equipment year-to-date, giving us confidence that we will be within the previously provided $2 billion to $3 billion range for the year. The net result of cash flow from operations and capital spending is free cash flow for the first half of the year of $11.7 billion. During the quarter, we began to normalize our cash balance closer to the pre-pandemic levels given the macro environment, and we ended the period with $4.8 billion of cash on the balance sheet, a sequential change of $5.4 billion. We exited the quarter with unsecured debt of $141.6 billion, a sequential improvement of $6 billion, as we continue to focus on optimizing our debt footprint. Our total borrowing costs in the second quarter were $1.4 billion, which was relatively flat to second quarter 2019 levels, despite having approximately $40 billion in additional debt this year. Net unsecured debt at the end of the first half was $136.8 billion, and our net unsecured debt to adjusted EBITDA ratio was approximately 2.9 times. Now, let's review our annual guidance targets on Slide 13. Our strong first-half performance and the momentum in our business gives us the confidence to raise our guidance. Please note that the updated guidance reflects the planning assumption that the Verizon Media sale closes at the end of the third quarter. Starting with revenue, we are raising our wireless service revenue growth outlook to 3.5% to 4%, up from the prior 3% plus. The drivers of the revised outlook are broad-based and include positive trends we are seeing for customer acquisition, premium plan adoption, and products and services such as cloud and content, as well as prepaid and reseller growth. The anticipated timing of the Verizon Media sale means we would not recognize any revenue from that business in the fourth quarter. As a result, service and other revenue is no longer an apples-to-apples comparison with 2020, and we are withdrawing that growth guidance at this time. Turning to earnings, we now expect an adjusted EPS range of $5.25 to $5.35, up from the prior range of $5 to $5.15. The increase is driven by the improved wireless service revenue outlook, the aforementioned media DNA benefit, and a reduction in the expected interest expense related to the C-Band investment. Our guidance for the effective tax rate and CapEx were unchanged. In summary, we're competing effectively and delivering strong volumes, growing accounts, driving healthy step-ups, and positioning our base to capitalize long-term as we grow 5G adoption. Our customer performance has led to quality financial results, as demonstrated by the sequential wireless service revenue growth while also flowing into the bottom line with best on record adjusted EPS. We entered the second half with a lot of momentum, and I am confident we will continue to execute our strategy and deliver strong operational and financial results throughout the remainder of the year. With that, I will now turn the call back over to Hans to discuss our priorities for the remainder of 2021.

Thank you, Matt. At our Investor Day, we laid out commitments for 2021 and beyond to scale our network as a service strategy and generate GDP plus growth. We made transformative investments over the last 12 months through acquisitions, divestitures, and customer innovation, creating a strong platform for growth in the second half of 2021 and beyond. Our priorities for the second half continue to build on our current network and customer initiatives to further amplify and accelerate 5G adoption, further cement our network leadership through our industry-leading mmWave and C-Band assets. We expect to close our TracFone and VMG transaction later this year, increasing our focus on what we do best, while bringing innovation and best-in-class customer experience to the value segment. Overall, we aim to drive growth across all five vectors with disciplined and customer-focused execution. At the end of the great transformation in the first half, we competed very well in the marketplace, and we're confident and excited about our opportunities ahead. With that, I’ll turn it over to Brady for the Q&A.

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

Yeah, thanks for taking the question, and two if you don't mind. First, I just want to go back to some of the color Matt was giving on the improved outlook for wireless service revenue growth this year. At the high-end, that's actually a pretty significant improvement. I know you outlined a number of things that were behind it, but I was hoping you can maybe just dig into that a bit more. I'm particularly interested in what you're doing to outperform as it relates to plan mix? And then are you seeing a return of any of the fees that had come out of the run rate last year? Is that something you've seen already? Or, is that embedded in the outlook? And then, just on the improved EPS guidance, if we just sort of look at the $0.03 benefit you got from moving away from the DNA media in the recent quarter, that would imply that the improvements to your outlook this year maybe captures $0.07, $0.08 just from that accounting shift with the rest of it being operational. But if it's more nuanced than that, I think we all appreciate that insight. Thank you.

I can start, and Matt will add to this. Regarding service revenue, I believe you have observed how well the team has performed over the last four quarters in distinguishing our offerings. Our customers are upgrading, with 60% of new accounts this quarter opting for a limited premium. 5G adoption is progressing, and the team continues to grow on the consumer side. We have added more options than in several years, allowing for mix and match, and this differentiation is clearly appealing in the market. Additionally, store visits are nearly back to pre-pandemic levels. Overall, this is a favorable time for us, which is why we are confident in our guidance and the growth of service revenue. Our focus remains on profitable growth. The team is capitalizing on market momentum, which reflects in our guidance. This strategy has been effective for us over the past couple of years. Matt?

Yeah. Thanks, Hans, and thanks for the question, Brett. So, starting with the question about wireless service revenue growth, and as Hans mentioned, it's really building on the momentum that we've seen in the first half of the year. The continuation of the sequential service revenue growth, we saw that the prior couple of quarters, we saw that increase even further in the second quarter. We expect that trend to continue as we get into the second half of the year, because of the operational momentum that Hans mentioned, more step-ups to higher price plans, etc., etc. In terms of the fees, obviously, the year-over-year component is rather unique this time, as the second quarter last year was the most heavily impacted by COVID. More specifically, for us, we had to keep Americans connected pledge that was in place for all of the second quarter, that as you said, impacted some of the fees. As you think about the numbers this year, a good chunk of those are back in. We're more at a BAU level. A couple of items, though that aren't in the numbers yet, obviously, international travel is not back to anywhere close to pre-pandemic levels. I don't expect that to be there, for the balance of this year. Hope there'll be a tailwind as we get into next year, but the guide doesn't make any assumption about an acceleration or return of those fees in the second half of ‘21. One other thing I’d draw attention to as well, when you look at our numbers, and you think about the return of fees, one of the things that has been very strong in the first half of the year is customer payment patterns, which is a great thing to see. And certainly, with all the stimulus payments out there, there's a lot of money in the system, and customers are actually paying more frequently. So, even though we’re back to normal in terms of things like late fees, we're actually charging significantly less than we were in the second quarter of ’19, because more of our customers are paying on time at this point, which is certainly a trend that we're very happy to see. So, some of the fees are back, but not all of them are back when you think about it. And we're not assuming they will be back for the balance of the year. The guide is based off of the strong operational momentum in the business, customers stepping up to those higher price plans, and we see that momentum continuing. Your second question about the EPS guidance, and obviously glad to be able to raise the guidance based off having a very healthy business that is performing exceptionally well. As you mentioned, some of the upside to the guidance comes from the media depreciation, amortization, probably about $0.06 to $0.08, depending on the timing of the close. But the majority of it's coming from cash items, whether that be the wireless service revenue guide, we were just discussing, but also related to improved expectation around cash interest expense, lower than anticipated at the start of the year. So, most of the guide is driven by cash-related items, and that's of course, based off the strong momentum you see in the business, both operationally and financially.

Thanks for that color.

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

Great. Thanks. Good morning, guys. Just a question on the upgrade rate, obviously, it's up not just year-over-year, but even over the ‘19 levels. Do you expect that trend to continue and maybe even accelerate as we move into the second half of the year? And then, if you could comment on the impact on margins? I would imagine that it helps incentivize people to move into those higher price premium plans. But the higher mix of equipment revenues may put pressure on margins. So, just how you foresee the sort of margin trends in the second half as these volumes build would be great? Thanks.

Yeah. As I said before, we have this formula right now that we've had since we launched unlimited, with both mix and match and our value proposition that we have done. You saw in the second quarter, that now we added also gaming with good traction with both Google and Apple gaming. This is a unique model for us. At the same time, of course, we have excitement around 5G, and what we have in our network is performing extremely well. I think that our team has a very, very good model for continuing this. I think I said it in the first quarter, it will become more of this value proposition and differentiation. And yes, it came, we went into gaming. So, I say it again, I have a lot of confidence in the team in Ronan's team to continue to come up with things that our customers love, using our distribution, our network and our brand to continue to grow this. That is the whole strategy. Remember, the five vectors of growth, we’re playing in all five of them, and that's why we are also confident about all of our long-term guidance without a doubt. You see part of that in this quarter, that we are already executing on all of these vectors.

Hey, John. As you pointed out, the increase in equipment revenues is reflected in the margin percentage. However, it's important to also consider the margin dollars, which have increased both sequentially and significantly year-over-year. I'm pleased with our performance in this area. As you mentioned, higher equipment revenue does affect the margin, but I appreciate the combination of volume and margin we achieved in the second quarter. Looking ahead to the second half of the year, with our outlined strategies and the office that Hans referred to, along with new devices entering the market and the anticipated 5G launch, I expect to see strong equipment volumes. Additionally, I anticipate good EBITDA dollars in the second half of the year as well.

Okay. Thanks, guys.

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

Hey, guys, thanks. Two if I can, consumer wireless broadband were strong. Did home broadband drive that? And how many home 4G, 5G customers do you have now? And second, a lot happening in NBN online these days with Boost going after AT&T, after they couldn't cable away last year. Did you look at that deal? How do you think about the potential for new competition from all these channels? Thanks.

Thanks. When it comes to broadband in general, that was brought up on our vision as we have outlined, we want to be a nationwide broadband provider, and we're going to use to access technology that is best suited for our customers in a mix of everything from fiber to 4G to 5G mmWave, C-Band, and all of that. And this quarter, we'll open up even more opportunities for that. We will open more 5G home markets, we will open more 4G home markets. And then of course, as Matt outlined as well, we took more Fios subscribers than ever in the last three, four quarters. So this is playing out well for us. We're opening up all of that. We are very excited about what's going to happen in the second half with a new CP that has C-Band as well. So, we executed everything we said we should do in the Investor Day in the second quarter. And we look forward to the second half of this year, and we will continue to report out what we're doing. The second question, I think that we're open for business, but we don't comment on any particular deals in a market or something like that. But we are happy with the customers we have on our MNO.

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

Thanks so much. Just a quick one on TracFone, you said closing in the second half of the year. Any more color on the process, or more timing expectations would be great. And then, on the C-Band, I think you said previously you wanted to deploy about 7,000 to 8,000 towers later this year. I see you reiterated the CapEx guide, but any color on getting the equipment supply chain and the ability to hit those targets in terms of rolling out? And any updates to your longer-term targets of 175 million on C-Band, how are you thinking beyond that? Thank you.

So, on the TracFone, I think nothing has changed since we outlined or we proposed the acquisition. It’s tracking according to plan with a process that we need to go through. The team is responding to all the questions we have. So it's going to be in the latter part of the second half of 2021, as we thought all the time. So, nothing strange, it's actually on track. But that's where we are. Second question was…

C-Band.

C-Band, yeah. The 7,000 to 8,000 sites, yeah, we can definitely say we're on track. When we reported the first quarter, we had just started everything. Now we feel we have a full funnel in the supply chain. The guys in our supply chain have done a great job with our partners. We have all the gear we need to deploy the 7,000 to 8,000, and our team executing very well. So, we feel very good about being able to have 7,000 to 8,000 sites up by year-end. When it comes to the long-term, we have the same ambitions as before, we haven't changed those, and we continue to execute. So, we will do it as fast as we can, given the different types of milestones that are involved in the spectrum. But, so far, we are executing on that plan, and we're on or ahead of our plan of executing right now for the end of the year.

Simon, one other data point for you, the vast majority of the radios that we need to turn on those 7,000 to 8,000 sites are already seen in our warehouses. So, the supply chain is robust, working very well with our partners. Obviously, a lot of work still to do, but the network teams from where we were in March, after we came out of the auction to where we are today. Their detailed plans in place and they are executing strongly against it.

And the spectrum clearing is working okay?

Spectrum clearing is also on track. We stay close to the folks doing everything. We hear from them is that's completely on track as well.

Sounds good. Thanks a lot.

Yeah, thanks, Simon. Brad, we're ready for the next question.

Hey, guys, thanks so much. In the first quarter, you guys talked about how the second half of the year would be an improvement for Verizon in the consumer business. We've seen obviously some of the new promotions come out. Margins have drifted down to the 44% range. Does Ronan have permission from you, Hans, to take that down further, if you see some more gains opportunistically in the second half with either the current kind of 5G handset upgrade promotions or new stuff coming down the pipe? And then the second question is consumer cost of service has been up pretty significantly for the last couple of quarters relative to the past year. Is that related to C-Band prepositioning? Or, is there something else going on? And what's the outlook for that? Thank you.

Regarding the consumer group, Matt provided some insights about the lower margin, which is influenced by the hardware component. We view this as a positive indicator of market trends. David, our focus remains on achieving profitable growth, which has been our long-standing strategy. Ronan and his team share this focus, but they are also quick to seize opportunities, especially with the recent increase in store traffic. This quarter, we launched some timely offerings. We will continue to back Ronan as he develops effective solutions for both the market and our customers, who will appreciate them. Our unique positioning is clearly making an impact, as reflected in the second quarter results. We will reassess in the second half to see if Ronan has further plans. However, our commitment to profitable growth is unwavering, and we aim to conduct high-quality business. This is evident in our results.

Yeah, so just adding to Hans, obviously, the margin percentage will be impacted by the volumes. We saw good volumes in the second quarter. But as Han said, what we're focused on is if you also look at their sequential service revenue growth, continue to lead the industry in that, because not all net ads are created equal. That also comes in with EBITDA dollars increasing. The margin percentage will play out where it does based off the volumes. But we're focused on you have seen that sequential revenue increase, and also the EBITDA dollars flowing in the right direction. In terms of your question around the cost of service, predominantly in consumer, one of the items that we had in the second quarter was a step-up in the network rents and lease of about $60 million a quarter, as a result of the new lease payments we put in place. As you know, under the accounting, you look at the total payments over the life of the lease and kind of flatline irrespective of how the actual cash flow payments flows. There was obviously a significant upgrade to our lease agreements, and that was a one-time step-up in the quarterly rate there that flowed through the books, that's let’s say about $60 million, close to a penny a share impact from that, that should be the same going forward now. So, that's the biggest driver you're seeing on the cost of service.

So, Matt, just maybe follow-up on that.

Thanks, Dave. Okay. Go ahead, Dave.

Thanks. So just, that's all in consumer?

The vast majority of the wireless network costs are allocated to consumers, some of that is in business, but the majority is in consumer. Obviously, the majority of the customers, the majority of the wireless service revenue is in consumer. And so the costs are going to be allocated largely in line on a similar basis to that. So yes, most of it is in consumer.

And then probably worth noting that then your EPS guidance includes negative $0.03 for the two, three, four Q impact of that increased tower expense.

Absolutely, that's fully baked into the guidance and step-up in that cost. That comes back to the underlying strength of the business that we have even with that, that baked in as well.

Great. Thanks, Dave. Brad, we’re ready for the next question.

Thanks, and good morning. Curious what you learned during the pandemic and now the reopening, about where customers want to transact for wireless, whether it's upgrading phones or changing service providers? And, are a large portion of wireless transactions simply destined to remain in physical locations, versus a virtual or online channel? And then just to follow-up, you mentioned a number of markets that you've been focused on for ultra-wideband and 5G home. Just curious if you could share some population and household coverage numbers for ultra-wideband and home for the end of ’21, and targets for the end of ’22. Thanks.

Thank you. No, of course, we see some changes in behavior when it comes to our customers. But, we had already started building our omni-channel that our customer can start on the web, and they can end in the store, or they can start in the store and on the phone, and all of that in order to see that they will do these as seamlessly as possible. But clearly, we see much more digital than before. But also, when the economy came back and the vaccinations in the United States were coming up on high levels, we also saw the traffic coming back into stores. So we’ve had, I would say all our stores opened in the second quarter, and we see much more foot traffic than we have seen in the previous quarters. Not really back to pre-pandemic days, but clearly, fairly close. So, we think our customers still want to come into a store and see our technology and our products, but they might be wanting to finish the delivery and the purchase in a digital format. That’s how we build our store. So we're working very closely to see that the new behaviors that we can meet that’s where our customers really feel good about dealing with us, and I think our team is doing a great job in that area.

Mike, in terms of your question around the mmWave coverage, we don't really talk about the mmWave coverage. In terms of pops, you heard Hans mention that we're on track to seeing 5% to 10% of dense urban usage on our mmWave by the end of the year. That's a combination of more customers having 5G devices in their hands, customer activity moving back to more pre-pandemic levels, and then obviously building out more mmWave sites. We said we would do 14,000 sites this year, over 30,000 by the end of the year. I can tell you, we are running well ahead of schedule for the 14,000 sites through the first half of the year. As we do that, we continue to add coverage. Then we said we'd expect to cover 1 million to 2 million homes with mmWave open for sale by the end of the year. We are on track with all of those items.

Thanks. Any early look to 2022?

The build continues – obviously, we're not going to give guidance for 2022, but everything the network team is doing whether on mmWave, whether on C-Band. Remember, we said we'd be at around 100 million pops during the first quarter next year. We expect still on track to be at that level. At this point in time, I can't speak more highly about the work the network team is doing as they build, whether it's the fiber that's obviously important to the network, the mmWave expansion, the C-Band expansion and continuing to have the best 4G network out there as well. So, they're doing a tremendous job, and they continue to be on both our 2021 plans and our longer-term plans, too.

Thanks.

Great. Thanks, Mike. Brad, we're ready for the next question.

Yes. Hi, thank you. Two quick questions. First of all, I am going to return to a question that Phil asked, I didn't hear the discussion. Can you talk about the Dish wholesale deal with AT&T? What your observations are? And, whether you were part of that negotiation? And then separately, if you could just comment on whether you saw any significant impacts from the EBBP program during the quarter, either in your wireline business with Fios or your wireless business?

Hey, when it comes to specific deals in the market, we don't comment on that. Apparently, this is something that AT&T won from T-Mobile, so I cannot comment on our involvement in itself or not. But as I said, we're open for business. We have a natural strategy model, which is paying off well for us with the five vectors of growth, and we're very happy with what we have.

Craig, to your second question, we saw some of our customer base certainly participate in that during the course of the second quarter. I wouldn't say it was a significant impact in our numbers, but we did certainly see our customers participating.

Great. Thanks, Greg. Brad, we're ready for the next question.

Oh, great. Thank you. Two questions for me as well. I mean, first, AT&T moved to 30 and 36-month handset, EIPs periods this quarter, and your churn is even lower than theirs. Your customers stick around even longer on average. Have you thought about going longer than 24-months? And if not, why is 24-months sort of the right period? I'm just really curious on C-Band, as we try to figure out how to model 2022 and you get the licenses cleared, and you put the switch and light that up for customers. As you go into 2022, how's your go-to-market strategy change, if at all? And what do consumers sort of see in terms of their experience that's going to be materially different? Obviously, it was a big investment, and I'm just sort of thinking through on a practical basis, what happens if that starts to kick in?

Yeah, I can start with the C-Band. For obvious reasons, we think it's an important moment. We are both amplifying and accelerating our 5G in the network, amplifying the opportunity. However, given away our commercial ideas when we're going to launch this right now, we wouldn't do that. But, of course, we are excited over it. We think it's going to be great for our customers, it’s going to be fantastic performance, and it expands our 5G mobility options, our 5G fixed wireless access options, and it also extends our 5G Mobile Edge Compute options. It just plays straight into our strategy. So we are excited over it. We will come back with how we will bring that to our customers, so they are equally delighted as they are with our network today, but it’s getting something that is so much superior to anybody else.

Yeah. Hey, Doug, on your first question about the handsets device payment period, we're very comfortable with the offers we have in the marketplace. It's 24-months for a lot of items. Some of the higher priced items, it's a little bit longer just to manage that. But, as you mentioned, the churn is very, very strong. Dot six, five, and consumer for phone shows what we're doing with customers is working very, very effectively. If we feel the need to adjust it, we will do so, but it will be based off of what we see customers need and not be focused on any impact on the accounting treatment associated with it. We will continue to be focused on finding the right offers for our customers. I think you see from the results in the second quarter, what we're doing is resonating with customers, both from an ad standpoint and also a churn standpoint too.

Great. Thank you.

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

Hi, thank you. A couple of related questions. The first is one of your competitors has talked repeatedly about the network capacity improvements that come from 5G. If you adjust that company's target for M&A, you could infer that their capacity is up about seven times for their 5G expansion. I'm wondering if you could suggest a similar number for Verizon’s capacity and growth potential, considering the wonderful investment in the C-Band? On a related note, as it relates to the home business, I'm curious if you could describe how you think about allocating the cost of spectrum?

On the first point, if you've been following my previous comments about 5G, it's clear that 5G technology is significantly better at handling data than 4G. This improvement is noticeable. You have to consider not just the spectrum, but also how we engineer and construct the network. We are seeing great potential in our ability to manage much more data. Right now, on the mmWave, we are using between 400 and 800 megahertz, but we have access to 1600 megahertz nationwide, so there's a lot more we can achieve. As demonstrated during Investor Day, our network has more capacity than before, even before we implement our current projects. We are very optimistic about our progress. Keep in mind, our 4G network is already the best in the country, and we are currently enhancing our 5G, which is also performing exceptionally well. While others may make claims, we focus on execution, and we will maintain that focus.

So, Peter, on the second part of your question about allocating costs of the spectrum. I've reframed that and actually view it from the standpoint of this is the first time that we've had wireless technology, where we can drive multiple revenue streams off of the same network build, whether that be the mobility, which has obviously been the foundation of 4G, 3G, and everything since the start of wireless. Then the ability to also have fixed wireless access, to also have the public mobile edge compute, all coming off that same network build, that same network investment, we think gives us the opportunity to provide a very good return on the investment that we've made in both C-Band and mmWave.

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

Thank you. A couple if I could. Firstly, on the non-paid churn front, obviously that I think you guys noted the benefit because of some of the subsidy programs. But, at some point that will probably reverse for the industry as a whole. So could you help us understand how big of an impact that typically is in a normalized year, non-paid churn? And how much of a tailwind that is right now to get a sense for what that might do when things normalize? Secondly, I mean, you have a lot of content bundles now, you also have the new deal with Apple Arcade. Could you give us some sense for how this impacts your cost of service? How much of the increase in cost of service is accounted? You did quantify the lease number, but it would be good to get some sense for what this is doing overall to cost versus kind of trends? Thanks.

I can, and Matt will talk about no-paid churn. When it comes to the content deal, I think I've said it a couple of times now. Our whole idea is to offer exclusive offers for our wireless customers. We also want to offer that partnership to brands that we think resonate with us. The model, as we’ve spoken about before is that this is incremental revenue for us. It's not only loyalty; it's actually incremental profit for us. So it's a totally different model that might sometimes not have been in the market before, because suddenly we use the best network, the best distribution, and the best brand to work with companies like Disney Plus, etc., to give our customers a premium experience, on top of the differentiation we already have with a mix and match. In the end, when we make these customers paying customers, we get our fair share of that because we, with our assets, have created it together with the asset for Disney Plus, Discovery, or gaming etc. That's how the model is working. I have to say I'm very pleased with it. I think we've six or seven of these offerings in the market right now, and all of them are very positive to us and to our customers. We will continue to see if we can find more. I think it’s a unique model that we have created that nobody else has in the market. As I said, we've more in the funnel.

Kannan, on your other question around the churn, I would say it's a very small number of basis points of benefit coming from the reduction in what we call involuntary churn. What you're also seeing in the total churn number is actually the benefits of the engagement with the customer, the experience the customer has on the network, and the other experiences we bring to that relationship that Hans just touched on, being a bigger piece of the strength in the overall phone churn number that we reported, especially on the consumer side. In terms of the impact of cost of sales, obviously the content cost associated with the items that Hans mentioned do flow through there. You should expect to see that number continue to be a contributor of that line. When we look at the overall profitability of bringing that together, the overall customer proposition, it's EBITDA additive to the business and also brings a better experience to the customers. We see that as a win-win.

Thank you, both.

Great. Thanks, Kannan. Brad, we've got time for one more question. Let's go to one last question, please.

Great. Thank you. Two if I may. First off on business EBITDA margins, at your Analyst Day back in March, you'd guided to sustaining north of 25%. We saw that below that in the second quarter, also in the first quarter, although there's that one-time impact. It sounds like you're guiding for that to continue to be below 25%. I'm just curious what's changed so quickly, that you're targeting below that target, at least it looks like for 2021? And then also, as it relates to the biggest upgrade ever promotion, when we look across the space competitively, obviously AT&T has been doing something similar since the fourth quarter, even T-Mobile did something just yesterday. Do you really look at this as a promotion implying at some point there is an expiration and you pull back from the market? Or, is this really just the new way of competing in today's competitive market and really something that investors should assume in some form or other is going to be with us for a long period, if not permanently? Thank you.

I can make a quick answer on the promotion, and Matt will come back. We have already pulled the biggest 5G upgrades on the market. That we did today.

Today. Today is the wireless day.

Great. Thank you.

Yeah. Thanks, Colby. That's all the time we have today for questions. Thanks, everybody, and be safe.