Verizon Communications Inc (VZ) — Q1 2023 Earnings Call Transcript

Thanks, Brad. Good morning, everyone, and welcome to our first quarter earnings conference call. I'm Brady Connor, and I'm joined by our Chairman and Chief Executive Officer, Hans Vestberg; as well as our current Chief Financial Officer, Matt Ellis, and Chief Financial Officer designate, Tony Skiadas. Before we begin, I would like to draw your attention to our safe harbor statement which can be found on slide 2 of the presentation. 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. Earlier this morning, we posted to our Investor Relations website a detailed review of our first quarter results. Please note that, during the first quarter, in order to better serve our customers, we reorganized the customer groups within our business segment. We now report the following customer groups: enterprise and public sector business markets and Software as a Service and wholesale. Prior period operating revenue results within the business segment have been recast to reflect these changes. You will find additional details in the earnings materials on our Investor Relations website. With that, I'll now turn the call over to Hans.

Thank you, Brady. Good morning, everyone, and welcome to our first quarter earnings call 2023. We delivered a solid first quarter marked by strong performance as we continue to execute on our plan to grow the business across mobility, broadband, and private networks. We're making steady progress and expect to keep up the momentum going forward. We remain focused on delivering for our customers and driving service revenue, EBITDA, and free cash flow. We grew total postpaid phone gross adds by 5% year-over-year this quarter and achieved 3% wireless service revenue growth. We recorded $11.9 billion of adjusted EBITDA as well as a strong cash flow from operations of $8.3 billion, an increase of $1.5 billion versus the prior year. We're working every day to move the business forward by using the power of America's most reliable network to deliver the best experience for our customers. During the quarter, we reached more than 200 million POPs covered by C-band in just over a year since we launched the first site. With access to that spectrum and advancing the build-out as quickly as we have, we have enabled new sources of revenue growth and elevated our customers' overall wireless experience. In the first quarter, J.D. Power recognized us as the most awarded for network quality for the 30th time in a row. We're seeing improvements in already leading network performance validated by year-to-date root metrics testing, and our customers are taking notice. Where we offer C-band, we see significant benefits in fixed wireless access, consumer phone gross adds and retention, as well as premium take rates. We also see 4G customers benefiting as we offload traffic in some markets to our 5G Ultra Wideband network. The performance improvements will continue as 5G penetration expands market-by-market. We're excited about the remaining deployment of C-band spectrum and the potential dividend impact for both our business and consumer performance. Moving on to mobility. On the business side, even in the current economic conditions, our peers across different industries have conveyed confidence that mobility remains a priority in their spending. During the first quarter, Verizon business continued to deliver strong performance, with 136,000 postpaid phone net adds. This was accomplished in spite of some pressures around restructurings within the technology sector. On the consumer side, payment trends are at healthy pre-COVID levels, and consumers are shopping, evidenced by our increase in consumer postpaid phone gross adds, which were up 11% year-over-year with the new to Verizon ads leading the way. Our gross ad performance is proof that our surgical and segmented approach to the market is working. We're in a much better position than a year ago, entering the second quarter with sustained momentum around gross adds, as well as postpaid churn, where we saw improved performance each month across the first quarter. We remain committed to our strategy of not competing on discounts, but rather on offering the most value to customers, the best overall experience, and the best customer satisfaction. +play is a great example of this. We listen to our consumers and introduce exciting partners like Peloton and Netflix, providing exclusive deals on an easy-to-use subscription managed platform, and there is more to come. Our segmented approach to the market recognizes that one plan does not fit all, and we have continued the work to address our underperforming segments. I've talked about our efforts to be more targeted and surgical with our retention, and we saw that play out during the quarter. By reducing upgrade volumes and lowering inefficient spending, we were able to deliver working capital benefits while finishing the quarter in a good place with churn and executing on migrations to premium unlimited. Those are real cash savings and a key driver behind the large year-over-year improvements in free cash flow. You have seen us taking pricing action, most recently on some of our legacy unlimited plans. We continue to look across our base and evaluate opportunities to more closely align pricing to our value proposition. On prepaid, we are working diligently to realize the full potential of this segment. While net adds were down by more than 207,000 versus the prior year, this total was affected by two transitory factors. First, more than 100% of our net year-over-year decline came from higher disconnects within our SafeLink brand, which provides services to customers on government-subsidized programs. We're still in the process of migrating customers onto our network as well. Prepaid is an important part of our value segment strategy, and our investment here will continue as we're confident that it will pay off in the long-term. Turning to broadband, which is a major growth area for us across consumer and business. We achieved the highest net adds in over 10 years, adding 437,000 total net adds within the quarter, including 67,000 net adds from FiOS. We are very pleased with the FiOS performance, with net adds up 12% year-over-year. For fixed wireless access, we're seeing growth quarter-on-quarter, with 1.9 million subscribers at the end of the first quarter. Fixed wireless continues to scale and contribute increasingly to our revenue performance. Our business customers are increasingly turning to fixed wireless access as the primary source of broadband connectivity, won over by the reliability and the overall value of the product. In addition to taking share from our competitors, we're also seeing new use cases across all of our customer groups, leveraging the flexibility of the product to expand beyond what traditional wired broadband can do. Finally, in private networks, our Verizon business team continues to execute at a high level. We announced new deals with KPMG and Deloitte and have a strong funnel of business ahead of us. We have also established a leadership position as a top network provider in the public sector. This quarter we announced a 15-year critical infrastructure contract with FAA, worth over $2 billion to design, build, operate, and maintain the FAA's next-generation communication platform. This is in addition to many ongoing projects we're working on for large federal agencies. In creating the networks that move the world forward, we remain committed to running our business responsibly for our customers, shareholders, employees, and society. Last month, we published our 2022 ESG report, which highlights how business, ethics, governance, environmental stewardship, and human rights are at the center of everything we do. I encourage you to take some time to review the report and learn about how we are managing risk and unlocking opportunities surrounding the issues of utmost importance for our stakeholders. Our commitments here come right from our leaders and their teams. A few weeks ago, I announced new leadership for our two business units: the network organization and our Chief Financial Officer. These leaders come with nearly 100 years of experience within Verizon and bring a proven track record of successful execution. Let me take a moment to walk through these changes. Sampath takes over as CEO of Verizon Consumer. His objectives are clear: to enhance our consumer operation model and experience, deepen our segmentation approach, scale fixed wireless access and broadband, and drive financial discipline. Kyle Malady was appointed CEO of Verizon Business. CIOs are increasingly searching for technology-reach solutions, and nobody knows our technology like Kyle. His focus is clear: drive sustainable growth in mobility and deliver on the revenue growth opportunities within fixed wireless, 5G private wireless, and mobile edge compute solutions. Joe Russo takes over as President of Global Networks and Technology to continue our efforts to extend, enhance, and solidify the nation's leading wireless network and vast global IP and fiber network. Finally, Matt Ellis will leave us at the end of the month after 10 years at Verizon and six years as our CFO. I want to thank him for his many contributions to our business. Tony Skiadas will assume the title of Chief Financial Officer on May 1st. I appreciate Tony's work to improve operations and drive performance as we search for a long-term CFO replacement. So, let's now move on to talk about efficiencies. The teams are on the way to deliver better, simpler, and more efficient end-to-end processes for our customers and employees, spearheaded by the Verizon Global Services Group. We're looking into numerous areas across the business that will help drive bottom-line growth, including IT platform transformations, building advanced AI models for better diagnostic and predictive insights, optimizing our real estate footprint, and managing our supply chain efficiently. We have also reduced headcount over the last quarters. All in all, our cost efficiency program is on track to achieve our target of $2 billion to $3 billion of annual savings by 2025, which will help to fund our growth as well as drive margin improvements over time. With almost all of our $10 billion C-band capital expenditure program behind us, we expect our cash generation profile to expand over the next few years, driven by revenue growth, cost management, and efficiencies with capital expenditures. This helps support our objective to achieve consistent dividend growth with our 16 consecutive years of increases, currently the longest streak in the industry. As we look to build on the free cash flow growth generated in the first quarter, we expect to see significant improvement in our dividend payout ratio this year, putting the board in a strong position to increase the dividend once again and bring us closer to our debt targets over the following years. Going into the second quarter, I'm energized by the execution of the Verizon team and our new leadership across key positions. We remain focused on delivering for our customers and driving service revenue, EBITDA, and free cash flow expansion. And with that, I will now turn it over to Matt for the last time.

Thank you, Hans. And good morning. Our results for the first quarter reflect the steps we have taken to improve our performance. C-band and the investments in our network are having a positive benefit on customer and overall network experiences. And as Hans mentioned, we are seeing a direct benefit around fixed wireless and phone gross adds among other metrics, where we operate C-band but more work remains to be done. Taking a look at operating results for the first quarter, let's start with consumer postpaid phones, which had 263,000 net losses for the quarter compared to 292,000 net losses for the prior year period. Consumer postpaid phone gross adds were strong across the quarter, up over 11% year-over-year, continuing the momentum from the second half of last year. Our efforts around the segmentation of our base and our more targeted go-to-market approach and offerings to those different customer groups have been key drivers behind our improved gross add performance. Consumer postpaid phone churn for the quarter was 0.84%, up 7 basis points compared to the same period last year. We are now seeing a return of involuntary churn rates to pre-pandemic levels. As for voluntary churn, performance was mixed across the quarter, starting off elevated as we saw normal holiday season activity extend into the early parts of the first quarter. But as the quarter progressed, we saw improvements in terms of year-over-year churn performance, exiting the quarter with voluntary churn rates in line with last year. While we have more work to do to improve consumer net adds, we are encouraged by the double-digit percentage improvement in gross adds combined with the improved churn level at the end of the first quarter. We entered the second quarter with significantly better momentum than a year ago. Moving on to the business segment, Verizon business again delivered strong results. We saw solid demand across our three customer groups and had 136,000 phone net adds for the first quarter compared to 256,000 for the same period last year. The year-over-year change was primarily due to a couple of large deals that contributed to our net adds results a year ago. Additionally, we saw an increase in churn due to business customers being more cautious around spending and the restructurings Hans noted in his remarks. Moving along to broadband on a consolidated basis, we delivered 437,000 net additions in the first quarter, the most in a decade. As expected, we saw another quarter of sequential growth in fixed wireless with 393,000 net adds, up from 379,000 in the prior quarter. Customer satisfaction remains high as evidenced by NPS scores, as well as encouraging churn trends around the more tenured cohorts of customers. On the FiOS side, Internet net adds for the first quarter were 67,000, up from 60,000 in the first quarter of last year. Customers continue to be attracted to our high-quality broadband products, which is reflected in the year-over-year increase in FiOS gross adds, even in an environment with lower move volumes versus the prior year. FiOS retention rates continue to be strong with our best churn performance in more than five years. While the first quarter results were prepaid were below our expectations, we remain confident in the value market opportunities and the benefits of having a portfolio of assets and plans to satisfy the needs of all of our customers. You heard from Hans some of the actions we are taking to create long-term value. As expected in the short-term, these actions are having a negative impact on our prepaid net adds. Together with the elevated disconnects in our SafeLink brand that Hans referenced, we expect pressure on prepaid net adds to increase in the second quarter before they abate later in the year. Moving on to the financials. Consolidated revenue for the quarter was $32.9 billion, down 1.9% year-over-year, primarily due to equipment revenue being lower by 9% as well as continued declines in business wireline services. Wireless service revenue was $18.9 billion, up 3.0% year-over-year. As we discussed on our fourth quarter earnings call, results for the first quarter included a benefit of approximately 185 basis points associated with the large allocation of administrative and telco recovery fees from other revenue into wireless service revenue. This benefit was partially offset by the impact associated with the shutdown of our 3G network completed at the end of the fourth quarter. The shutdown resulted in the removal of approximately 1.1 million retail connections and the corresponding loss of revenue for the first quarter and beyond. We continue to see pressure on service revenue from the cost of promotions and the amortization impact in the first quarter. Additionally, we see pressure from prepaid revenue as a result of lower subscribers versus prior year. To help offset these pressures, we've recently implemented additional pricing actions across our business and consumer segments. We expect to see the benefits of these actions ramp across the second quarter as the business segment began billing customers closer to the end of the first quarter, while consumer started earlier this month. As a result of these combined pricing actions, we anticipate approximately $75 million of incremental quarterly revenue moving forward. Additionally, the consumer team is working to improve efficiencies around device promotions and credits that we expect to yield revenue benefits across the remainder of the year. We believe that the actions the teams are taking will grow the top line and drive both EBITDA and cash flow. To complement this, the team expects to make additional progress across 2023 on the development and implementation of cost efficiency initiatives resulting in a meaningful savings run rate at the end of the year. During the first quarter, operating expenses excluding depreciation and amortization were down 2.4% year-over-year, primarily due to lower cost of equipment from reduced upgrade volume, which helped to offset an increase in bad debt of approximately $200 million. Similar to involuntary churn rates, bad debt expense reflects the return of collections to pre-pandemic levels. While up year-over-year, bad debt expense is relatively consistent with the prior quarter. Cash flow from operating activities for the first quarter totaled $8.3 billion, compared to $6.8 billion in the prior year. This increase was primarily due to working capital improvements, driven by lower inventory levels, coupled with fewer upgrades, and a modest improvement in customer payment patterns, despite the current macroeconomic conditions. CapEx for the quarter came in at $6.0 billion, which includes most of the remaining $1.75 billion of C-band-related spending in our guidance. With the conclusion of the program, we would expect a step down in the pacing of overall CapEx throughout the remainder of the year and continue to expect 2023 capital spending to be within our guidance of $18.25 billion to $19.25 billion. The net result of cash flow from operations and capital spending is free cash flow for the quarter of $2.3 billion, up $1.3 billion versus last year. Total unsecured debt for the quarter was $132.0 billion, an increase of $1.4 billion compared to the end of 2022 and $5.3 billion lower year-over-year. This resulted in a net unsecured debt to adjusted EBITDA ratio of 2.7 times as of the end of the first quarter, a 0.1 times improvement compared to the first quarter of 2022 and flat from the prior quarter. We continue to have very low near-term unsecured debt maturities with only approximately $600 million due in the second quarter remaining in 2023. I wanted to take a moment to acknowledge that this will be my last earnings call as Verizon's CFO. It has been a fulfilling 10 years at Verizon and a privilege to serve as CFO, and I'm thankful to everyone that has made it such a rewarding experience. From our talented finance team to my fellow executive team members to all of you that I have had the pleasure of getting to know, I want to say thank you. Verizon is in good hands with Tony as its CFO. I've worked closely with him since my first day at the company, and I know he will always strive to drive the business forward in a way that puts Verizon and its shareholders first. I truly look forward to seeing what he and the entire Verizon team will achieve, as I cheer them on from the sidelines as an enthusiastic customer and shareholder. With that, I will now turn the call back to Hans for concluding comments before we open up to your questions.

Thanks, Matt. In summary, our disciplined approach has led to significant progress on our key strategic plans, and we need to keep the momentum and focus going. We're pleased with how 2023 has started. We continue to deliver the best customer experience on the most reliable network supported by the best people in the industry. In mobility, our segmented and surgical approach to the market is working, and we are taking pricing actions where possible. In broadband, the combination of fixed wireless access and fiber is winning, as we continue to capture market share. We'll continue to grow our cash generation profile and maximize shareholder returns, aided by our cost efficiency program and lowered capital expenditures. I remain confident in our strategy and our strong focus on execution. We are always identifying new ways to evolve our business and execute on opportunities. In everything we do, we focus on driving profitable growth. We measure our success in maximizing value across stakeholders for our ability to grow service revenue, EBITDA, and cash flow. Brady, over to you for the questions.

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

Great. Good morning, guys. And Matt, thanks for all the help over the years and best of luck to you in the future. If I could just start with a couple of wireless questions. First on the gross side of the consumer side, obviously, some strength there. Any other detail you can give us in terms of what's driving the double-digit improvement? I think AT&T saw a decline. Just any change in the promotional posture or anything you're doing there? And then on the other side of the ledger, churn, obviously, up a little bit year-over-year, but it sounds like you're making some trends. Did you guys make any pricing changes on the consumer side in the first quarter? And just any comments around the sustainability of those improvements as we look forward throughout the year? Thanks.

Thank you. Let me start, and then I'll hand it over to Matt. I think what we saw in the first quarter was very much the momentum we started building, I would say, at the end of the third into the fourth when it comes to both how we converted our customers to be part of our journey with the more segmented approach. We have seen this reflected through the quarter when it comes to our gross ads. Many of the initiatives we have had, such as the welcome plan, have been working well for us. Of course, we're much more focused now with the new team in place as well, where we have full alignment with Sampath when it comes to the execution here and seeing that we're getting the right customers on board. I think that has been helpful as well. As you have seen, we're coming in and out of the quarter with promotions, really taking the opportunity when we see that we have an opportunity to bring in customers. So that's how you're seeing the momentum continue. As Matt also mentioned in his opening, we have seen that momentum continuing for us. And for the churn, I will hand it over to Matt.

Thanks, Hans. Good morning, John. So on the churn side; we certainly saw improvement as the quarter went on. We had a lot of carryover from holiday-level churn in January. By the time we got to March, we saw much better momentum there. So that's the jump-off point as we progress into the second quarter. The pricing changes that you mentioned in your question really didn't go into effect until we moved from Q1 to Q2, so that will be incremental to the results of the business as we get into the rest of the year. So, as Hans said, it’s really a case of rebuilding from the momentum last year, which was not where we wanted it to be. At the midpoint of the year, we talked about taking actions, and you can see the results of those actions showing up.

Perfect. Great. Thanks, guys.

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

Yeah. Thanks for taking the question. I'd also like to reiterate my thanks to Matt for all his help over the years. My question is about fixed wireless. So when I look at the formal remarks document you provided, it looks like you still have just over 40 million households that can get your fixed wireless service. The reason I bring it up is that it would appear to be a fraction of the availability of your ultra-wideband network, which now covers over two-thirds of the population. So, I was wondering how we should think about the game plan for expanding the distribution of the fixed wireless service now that you have significantly expanded the ultra-wideband network? And how do we think about the cadence of quarterly fixed wireless additions? Is there still going to be a tailwind, or are we leveling off now? Thank you.

Thank you, Brett. First of all, we're really pleased with the performance on fixed wireless access. The team is doing great work. And remember, it's not only on the consumer side; it's the business side as well. On the business side, many new use cases are coming up using fixed wireless access. So, the team is scaling, and we're on scale right now. The rhythm I see on our sales motions right now, in the first quarter we added almost 400,000. In terms of the network, you know that later in the year we will get our next chunk of C-band. Right now, we're covering about 70 markets out of over 400. There are 330 markets left for us to launch C-band. We clearly pointed out that we are opening C-band. We're not only seeing fixed wireless access opportunity; we also see step-ups and a greater upgrade cycle for our customers because they see the improvements on the C-band. So we're very encouraged by the C-band's rollout. As I said, we're waiting for the clearance by year-end to get even more, but as we rollout, we are opening markets. Remember, we talked about decentralizing our network team so we can attack the local markets as we open fixed wireless access. So far, our success rate is high. We're just going to continue to do this effectively, taking learnings with us, improving all the time. But as I said, I'm very pleased with the rhythm and the market share we're taking. Remember, the C-band is mainly deployed in urban and suburban areas, while the majority of the upcoming spectrum will be in suburban and rural areas. We're expecting to see even more opportunities in the future.

Thank you.

Yes. Thanks, Brett. Brad, ready for the next question.

Thank you very much. Good morning, and again, my best wishes to Matt for the future. Just following up on Brett's fixed wireless question, you talked about scaling. It looks like you're almost hitting two million fixed wireless subscribers now. How is it working on the network capacity side of things? And what's your confidence in going to continue to handle increasing usage from the customers as this continues to scale? And then, if we could just go back to the announcement, I think it was March 3 of the new appointments. You talked a little bit about Kyle and Sampath. But what if we were inside Verizon? What are the big changes that have taken place over the past seven weeks or so that are really changing the trajectory of particularly the consumer business? Thank you.

Thank you, Simon. On the capacity, the situation is great. First of all, we're utilizing our initial trends of spectrum that we're using as I mentioned; we're deploying fixed wireless access on the ultra-wideband. We have significant capacity coming. On top of that, all the new features you have with advanced 5G carrier aggregation will enhance the capacity from the devices in both the handsets and the fixed wireless access devices. I feel really confident that we will manage this capacity without any problems to the levels we've talked about and beyond that. There will eventually come a moment when we see a surge in fixed wireless customers, and we will have opportunities for sales splitting, etc. But we're not close to that point today. I feel really good about how the teams are managing the network and the opportunities we're building using C-band. As I said, the expansion will cover communities and provide other ways to reach customers over time. The new team's changes are apparent; the first big change is that these guys are operational from day one. Both Kyle and Sampath immediately focused on execution. Sampath, in particular, is very much focused both on improving customer dimensions and seeing the progress we are making in gross ads and churn. He will ensure we're even stronger locally. Kyle is continuing Sampath’s great momentum in Business Wireless, with strong growth in the private networks segment. He is also managing the wireline decline to reduce costs while still executing ongoing contracts. There's no one better than Kyle for this task. So I feel confident and good about it, and it’s clear where our priorities are.

Sure. Thanks, Hans, and good morning, Simon. I'm excited to have the opportunity to succeed Matt as the CFO. In terms of my priorities, I have three of them. First, supporting our new leaders, Sampath, Kyle, and Joe, in executing their strategies. That includes narrowing our focus with a strong emphasis on operational performance; second, ensuring that we deliver the 2023 financial guidance we laid out in January; and third, ensuring that we continue to execute on our capital allocation strategy—the four capital allocation priorities that we shared with you last year remain unchanged. So, those are my three priorities right out of the gate. As Hans mentioned, the transition has gone exceptionally well.

Great. Thank you very much, and good luck.

Yes. Thanks, Simon. Brad, ready for the next question.

Hi. Thanks very much. Two if I can. First, can you expand on the bad debt and churn discussion and how that relates to the upgrades which seem to be fading through the quarter? And then second, can you talk about prepaid? Are the losses mostly happening in SafeLink, and what is happening in this and the different brands and any conversion of prepaid to postpaid this quarter? And how would you report that if it was happening? Thanks very much.

Okay. That was a lot of questions in one. I'll start on a high level here. As we said earlier, the payment patterns are essentially the same as pre-COVID—our customer base is of high quality. We see this as very healthy at the moment all the way through. I will ask Matt to expand on that because looking backwards. As for the question on prepaid or value segments, yes, as we said in the opening, the negative impact is largely from SafeLink, which is a government-subsidized brand. There are other dynamics at play as well. I think the Visible brand is doing well. We're in the process of ramping up Total Wireless, which is also important. The ongoing network migration is also affecting things. So it’s a combination of factors across the different brands. Our confidence is that we will improve that at the latter part of the year as some of these issues resolve themselves. So, that's a general comment. Maybe Matt can add something regarding churn.

Yes. So, thanks, Phil. On the churn and the bad debt side of things, it's important to note that we've seen an uptick year-over-year, but it's flat sequentially. The first quarter last year still had some residual impacts from COVID-related activities—those have now fully resolved. We're seeing a return to a more normalized run rate. Additionally, with the lower upgrade activity, as Hans noted, a lot of our gross adds were from customers new to Verizon. Those new customers generally have different bad debt accrual rates than upgrades, which relates to existing customers that we already know well. One more thing to note about bad debt is our FICO scores across the entire base remain very strong. We've spoken about our high-quality postpaid customer base for many years now, and that continues to show through. Also, our customer payment patterns were slightly better sequentially in terms of aging—this indicates good behavior and payment activity, which explains the flat bad debt sequentially given that we're fully past the COVID period.

Thanks. If I can just follow-up, was there any conversion from prepaid to postpaid, or may have I missed it?

A little bit, but nothing material. However, that's certainly an important area the team is very focused on going forward. We believe there’s still potential for more conversions to be a meaningful contributor over time.

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

Hey, guys. Thanks for taking the question and thanks for all the help, Matt. I guess in the prepared remarks, Matt, you mentioned that there would be some cost efficiency benefits in 2023. I was wondering if you could detail how you see that $2 billion to $3 billion target unfolding in the second half of this year and into the coming years? And then on the second question, one of the things that has contributed to the momentum you guys have been talking about a lot on the call has been a combination of the new, more affordable welcome and limited plan and a lot of marketing you've been doing. Could you talk about what the new management team wants to do to enhance that this year? What are the goals—flat subscriber growth or is market share the goal? That would be helpful. Thank you.

I will start and then, Tony can provide details related to cost efficiencies. Regarding your second question, the team is very aligned on the substantial growth trajectory we have in both mobility and fixed broadband. We are also mindful of sustaining strong user metrics and profitability. The priority is to sustain service revenue growth while effectively managing churn. Now, Tony, can you share some insights on costs?

Thank you, Hans. In terms of our cost efficiency program, we are indeed making progress with Verizon Global Services. As we mentioned, we're on track to achieve our target of $2 billion to $3 billion in cost reductions by 2025. We anticipate seeing some benefits manifest themselves in the second half of this year, with significant savings accruing in 2024. Our focus areas will include IT transformations, sourcing transformations, supply chain optimizations, and the use of AI models to improve operational efficiencies.

Yes. Thanks, Dave. Brad, we're ready for the next question.

Thanks and good morning. Matt, I also want to express my thanks and best wishes as you leave Verizon. If I could focus on two topics. First, on the ARPU side, can you unpack a little more in terms of what you're seeing on the unlimited and premium unlimited take rates and where those can go over time in terms of continuing to monetize the network and the bundles that you offer? And then on the lower upgrade rate, are you seeing a fundamental change in customer holding periods for devices, and what does that mean for the size of the switcher pool in the industry going forward?

I can start. We continue to see the trend from our customers on postpaid moving toward unlimited and then further towards unlimited premium. The team is doing a great job in facilitating that transition. However, there are still opportunities to convert customers who are on existing plans. We see that as an important growth trajectory for our ARPU going forward. Regarding contract upgrades, we have indicated that the market seems to signal a smaller switcher pool; however, we are committed to capturing our fair share and growing our current customer base. The momentum with our offerings is encouraging, and I expect our consumer team to introduce new products as well. So, it’s an exciting time ahead for us.

Exactly. The strategy remains one of getting customers in and then finding opportunities to move them up the stack. As you accurately noted, we've already seen meaningful progress there. We're always looking to expand share of wallet by adding services like fixed wireless or additional devices to accounts. The consumer team will certainly continue to refine pricing and offerings, allowing steady growth in ARPU. There's still significant potential ahead of us.

Thanks. If I could just throw one other out there. Just from a government program perspective, can you share how Verizon participates in ACP? And any new thoughts on potentially participating in the BEAD program?

Sure, happy to address that. ACP is an important program to us. As you've observed from our actions over the past few years, including the acquisition of TracFone and the introduction of plans like Welcome, we want to cater to all customer segments. This includes those eligible for ACP services. We're also looking into BEAD as it emerges. We've long been engaged in building fiber to homes, and we plan to continue hitting similar targets in 2023 as part of our ongoing effort in that area.

Yes. Great. Thanks, Mike. Brad, go ahead for the next question.

Hi. I want to sort of step back to a more strategic question about the wireless business if I could. For years, your business model and way of coming to market was based on a very low churn strategy, therefore, arguably, you didn't need the same number of gross adds to sustain growth. And it was based on a very clear value proposition of the best network. It seems like all of those pieces are quite different now. Despite what you said about the prospects for churn, it's quite a bit higher relative to not so long ago. How do you win the battle for the hearts and minds, particularly in the consumer segment, by returning to convincing customers that yours is truly the best network, and how do you deliver on that value proposition?

I will start here. First of all, what we see right now is we have a clear value proposition when rolling out the C-band. We have great uptake and step-ups from our customers when they see these improvements. And with every measurement we execute right now, we come out as the number one network provider. We will extend that leadership with the C-band as it continues to roll out. Our proposition is clear: deliver the best network while offering strong customer value. We're also listening to the changing consumer needs, illustrated by the introduction of +play. So, I'm confident that we are building on a strong foundation, and that strength is continuing to grow.

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

Thanks, guys. Can you be a little clearer on network upgrades? It looks like you're more than doubling the amount of spectrum by year-end. What does that imply for coverage and capacity? And when will we reach 300 million homes passed, and more like 70 million or 80 million that will be able to access fixed wireless? Thanks.

On the network, you're absolutely right. We are implementing the C-band rollout, and we're starting to focus heavily on upcoming spectrum—that will more than double our capacity. A significant difference in capacity will take us to 300 million homes covered, with more households accessing fixed wireless services. We'll be deploying some new sites and expanding coverage strategically in areas where we have existing 4G infrastructure. Finally, our planned expansion projects are designed to maximize our reach efficiently and effectively.

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

Thank you. Hans, strategically, you face a few choices, which I think are contradictory in some way. You're attempting to grow gross ads, but SG&A is growing faster than revenues, which puts pressure on margins. You're also increasing prices to offset this margin impact, but that often results in churn trade-offs. What’s the growth model to focus on? Is it unit growth? Are you willing to sacrifice margins and cash flow for turnaround? Or are margins your priority even at the expense of unit growth? It seems like there’s a choice to be made, and I’m wondering which metric you are focused on?

Our metrics are crystal clear. We measure ourselves primarily by service revenue, EBITDA, and cash flow expansions. We need customers to hit those targets, but our foremost goal is maximizing these financial metrics. That's what you've seen reflected in our operations. So yes, units are important, but the key is maintaining growth metrics that positively reflect on the company's financial health.

To just reinforce what Hans mentioned, we must be disciplined and segmented in our market approaches. Our goal is to ensure volumes lead to profitable revenue growth. The team is focused laser-sharp on those results.

Good. Thanks, Kannan. Brad, we're ready for the next question.

Hi, thanks. Question back to fixed wireless. Obviously, the expansion to suburban and rural markets is a big opportunity; however, back in urban areas where your C-band depth is going to double in 2023—shouldn't that expansion support faster marketing approval of inbound fixed wireless access so that you can drive up net ads in these markets as well?

That's absolutely clear. The organization has been structured, both on the consumer and business side, along with our network team, to be more regional. This way, our marketing is more targeted and effective as we roll out fixed wireless access. Clearly, there are opportunities in urban areas where we will take advantage of more capacity and coverage, continuing our growth in this segment.

Great, thanks, Peter. Brad, we have time for one more question.

Great. Thank you. With the business changes, can you walk us through the SaaS line? What is the SaaS revenue in total, and where do you see potential growth? And then back to the phone adds—given the new level of gross adds you're seeing, are there any characteristics about this type of customer you're tracking now that might be different than, say, two years ago, and what their long-term churn characteristics could be?

You need to repeat the first question. Are you asking about SaaS revenues?

We don't disclose SaaS revenue specifically, but overall, it’s fair to say it's not the largest part of that segment.

Okay. And what was the second part of the question, Frank?

So, with the gross adds you're getting, are there any characteristics about these customers you're tracking that are perhaps different from two years ago? And I'm curious about what you think about the long-term churn characteristics of customers you're tracking today, especially given the higher promotional activity you're doing versus what you did historically?

Overall, I think the churn characteristics for new customers coming in are even better than before for various reasons. The gross adds we're now acquiring include many new customers to Verizon, and we have ample opportunities to engage them in upgrades and service expansions down the line. We feel confident about the growth momentum along with the quality of the customers that we’re acquiring.

Yes. Thanks, Frank. Brad, that’s all the time we have today.