Good morning, and welcome to the Verizon Second Quarter 2020 Earnings Conference Call. It is now my pleasure to turn over the call to your host, Mr. Brady Connor, Senior Vice President, Investor Relations.
Good morning and welcome to our Q2 earnings conference call. This is Brady Connor and I'm here with our Chairman and Chief Executive Officer, Hans Vestberg and Matt Ellis, our Chief Financial Officer. As a reminder, our earnings release, financial and operating information and the presentation slides are available on our Investor Relations website. A replay and transcript of this call will also be made available on our website. Before we get started, I'd like to draw your attention to our Safe Harbor statement on Slide 2.
Information in this presentation contains statements about expected future events and financial results that are forward looking and subject to risks and uncertainties. Discussion of factors that may affect future results is contained in Verizon's filings with the SEC, which are available on our website. This presentation contains certain non GAAP financial measures. Reconciliations of these non GAAP measures to the most directly comparable GAAP measures are included in the financial materials posted on our website. The quarterly growth rates disclosed in our presentation slides and during our formal remarks are on a year over year basis unless otherwise noted as sequential.
Now let's take a look at consolidated earnings for the Q2. In the Q2, we reported earnings of $1.13 per share on a GAAP basis. Reported results included a pre tax loss from special items of approximately $255,000,000 including a net pre tax loss of $102,000,000 related to early debt redemption costs and a net charge of $153,000,000 related to a mark to market adjustment for our pension liabilities. Excluding the effects of these special items, adjusted earnings per share was $1.18 in the 2nd quarter compared to $1.23 a year ago. Let's now move to Slide 4 and take a closer look at our 2nd quarter earnings profile.
Consistent with the approach we have shown for several quarters, we have illustrated the ongoing 2018. As a reminder, we expect 2020 to be the final year that the adoption of this standard will have a material year over year impact on our income statement. As we illustrated in previous quarters, we realized the lesser benefit from the adoption of ASC 606 during the Q2 compared to the prior year, primarily due to the deferral of commission expense. The reduction of the benefit realized creates a year over year headwind to both reported and adjusted earnings per share, which will continue throughout 2020. The impact was $0.02 for the quarter and $0.05 year to date.
For full year 2020, we continue to expect the headwinds from the deferral of commission expense to be approximately $0.09 $9 Matt will go through the COVID impacts that we experienced throughout the quarter in detail in his section. Overall, we estimate that there was a dollars headwind included in the reported and adjusted EPS from COVID during the quarter. In addition, we recognized an aggregate tax benefit of $156,000,000 in connection with a series of legal entity restructurings related to an internal reorganization, which resulted in a benefit of approximately $0.04 within our reported and adjusted EPS. So adjusted EPS was down 4.1% in quarter as a result of the impact of COVID and ASC 606, we continue to see underlying growth in our operations. With that, I'll now turn the call over to Hans.
Thank you, Brady, and thank you, everyone, for joining this earnings call. Let me reiterate what I said in the after the Q1. We are in unprecedented times with multiple crises and business that we need to run at the same time. I can only say to all of you, I'm extremely proud and our employees has responded to all of it. I think of this quarter as a quarter where the stakeholder capitalist strategy of Verizon really bear fruit.
I have reported many earnings calls in my life. This quarter it comes together with a good support to our employees, a great support to our customers when it comes to our network and our flexibility, a big contribution to our society when it comes to how we're acting and supporting the society in these tough times, but also a very good and solid financial result for our shareholders. That's a really good sort of ending second quarter or the first half of a very unprecedented year. We have continued as a leadership team to work in a 3 pronged governance. Part of our team is working with a daily crisis to see that we are doing the right things and with the right priorities in this pandemic, economical downturn, racial injustice that is ongoing in the country.
The second part is, of course, work in business as usual and seeing that we continue to lead and deliver results for all our stakeholders. And finally, in the 3rd prong is to work with what are opportunities created from this pandemic, economical downturn, so we come out even stronger as a company after this is coming out to a new normal. Our strategy and our underlying strategy priorities has not changed during this time. They have reconfirmed that we are on the right path with our network as a service and our go to market. Many of the things that we outlined in the Verizon 2.0 are really playing a vital role for us being able to deliver to all our stakeholders, especially to our customers in times like this.
One of the transformations was, of course, to have a purpose driven company where our employees are very engaged and excited of our future, but also seeing that we're doing the right thing for our society. If I look back on the first half and looking back on our response to the COVID-nineteen, I think we have done very well. We have decided to prioritize the health and safety of our employees. Not only that, we have also started to return to office with very safe protocols to see that our employees actually can work in the offices if they want to do. But if you then look at our frontline, which never closed and never worked from home, they have continued to innovate.
They innovate with curbside delivery in our stores, Fiosity Box, in the box, etcetera. And as Matt will later on talk about, we have seen a great uptake on those innovations when we look into the latter part on the quarter. If we then talk about the racial injustice that we have seen in the country the last couple of months, I'm also proud for how we have brought that together with our team to discuss this, having a conversation in the company, but also with our partners and externally. No one can say we have done enough, and we just need to continue to do that. At the same time, we have donated money for some of the most important foundation that can support that transformation.
Finally, I am also proud that we have packaged all our activities that we are doing for our social stakeholders in what we call the cities and Verizon. I will dwell on that today, but it's an important piece of our overall strategy. In addition to serving our employees and society, we have, of course, also been very focused on execute on our core business and our core strategies and continue to develop our platform for the network as a service. I'm extremely pleased to report that once again for the 25th time, we are winning the award for the best LTE network from the JD Power. I have to say the engineers continue to amaze me, and they will continue to do so in the future.
Remember, in February, we made some bold statements about our deployment on 5 gs in 2020, all the way from the mobile edge compute, 5 gs home cities, 5 times more small cells on 5 gs and some 60 cities on 5 gs ultra wideband as well as a nationwide coverage on 5 gs with DSS. I'm happy to report we're on track on that and in some cases even ahead of the plan. We have continued deploy our technology. Our test with ESS is going very well. And as well, we have launched some of the 60 markets when it comes to mobility and some additional markets on 5 gs Home.
However, you're going to see that in the second half of this year, we have a lot of new things happening and building on the foundation of the strategy and the strategic priorities that Verizon has outlined the last couple of years. If you then look into the different segments and first of all, starting Verizon Consumer Group in the Q2 continue to gain improvements when it comes to the customer loyalty, not only in measurement, but also by creating new services. We saw them coming out with a Verizon credit card in the second quarter, and they continue to gain a lot of accounts based on their mix and match and the way we have developed the ladder with different unlimited offerings. I'm really happy with what Roman and his team has done, and you're going to see in the financials and operation numbers that even with the challenges we had, they have performed very well. If you look at the Verizon Business Group that are in the middle of the transformation, and I have to say the way they are now dealing with customers are bearing a lot of fruit.
They are progressing well with the transformation. And I'm also happy to report acquisition we did in the Q2 of BlueJeans are performing well, and the growth both on usage and new customers are continuing going very well. And I was also happy last week to announce a large partnership with Airtel, one of the largest carriers in the world, to use BlueJeans for their corporate customers in India. Finally, on the Ryzen Business Group, 5 gs Mobile Edge Compute, an important piece of our growth strategy. We have said that we're going to have 10 5 gs Mobile Edge Compute sites this year deployed.
And now we also start gearing up our partners. We have announced IBM, and we also talked about SAP as 2 very important application providers that's going to take part of our deployment and that we're collaborating with right now. So we're creating a lot of excitement around the 5 gs Mobile Edge Compute and a lot more to come in the second half. Finally, Verizon Media Group, of course, being impacted by the advertising market coming down. We see them coming back a little bit in June.
But anyhow, they have done also quite a lot of work to see that we continue to create more monthly active users on our own and operated properties. And they also made agreement with Walmart, which is, of course, one of the largest companies on Earth, to see that they are using Yahoo! Mail as a grocery and purchasing platform. Finally, our financial team under Matt has continued to do good work on our balance sheet. We are coming out from the quarter with elevated liquidity.
But not only that, we have continued to work well on our net debt. And we have reached credit metrics levels similar to pre Vodafone levels. So that's really good work, but it's easy. If we look into the financials of the Q2, and Matt will cover that in more length, I only want to say that we had a very good quarter. We show resilience.
Of course, there are challenges in certain customer groups like Verizon Media Group, small and medium businesses, but many others have actually been performing well. We also need to remember in the quarter, we have had not all our stores open when it comes to consumers as well as limited sort of visiting hours, etcetera. However, if you see in the momentum we have created on the consumer side, we added 26,000 consumer postpaid accounts this quarter, which is, I would say, good work compared to what we had lost 1 year ago in the second quarter. We also are on historical lows on our share. And all in all, that is giving us a good beta in the Verizon Consumer Group.
Finally, I would just want to highlight very strong cash flow. Of course, we have some extraordinary tax items there. But in general, it was a strong cash flow quarter. And as Matt will talk about you later, we have not increased our bad debt reserves in the second quarter. He will also allude to we have good metrics when it comes to what happened in June compared to the rest of the quarter.
So all in all, I think we have executed well for all our 4 stakeholders in this quarter. And by that, I hand it over to Matt to go through the financials in more detail.
Thank you, Hans, and good morning, everyone. Let me echo what Hans said. The Q2 is unlike any other we have seen, and I'm extremely proud of our team and our performance. The results demonstrate the resiliency of our business and the agility of our employees to not only adapt to rapidly changing conditions, but to deliver for customers and communities while also producing strong financial results. Due to the strength of our business model, we delivered $1.18 of adjusted earnings per share.
This includes an estimated net impact due to COVID of approximately $0.14 primarily driven by impacts to wireless service revenue and lower advertising and search revenues from Verizon Media Group. While the company's performance year to date has been strong, there is still a high degree of uncertainty regarding when and how quickly the economy will recover. We are confident that we are implementing the right approach to meet demand as consumer and business activity increases. Let's begin with a review of our consolidated operating financial results on Slide 7. In the Q2, consolidated operating revenues were $30,400,000,000 down 5.1%.
Results reflected significant declines in wireless equipment revenue, which was down approximately 20% in the 2nd quarter, primarily due to limited in store engagement and the impact of COVID on customer behavior. As we highlighted in the previous earnings call, consolidated wireless service revenue was impacted by the commitments Verizon made to waive certain fees and provide additional data for our customers as well as significant changes in customer roaming activity during the quarter. In addition, we experienced lower advertising and search revenues within Verizon Media Group as customers scaled back their advertising campaigns. Including the impacts from COVID, adjusted EBITDA was $11,500,000,000 as compared to $12,100,000,000 in the prior year. This is primarily the result of the wireless service revenue impacts and lower advertising and search revenues.
2nd quarter adjusted EBITDA margin was 37.9% as compared to 37.7% in the prior year and includes headwinds of approximately 30 basis points from the deferral of commission expense that Brady discussed earlier. Through our business excellence program, we have realized cumulative cash savings of $7,200,000,000 and remain on track to achieve our goal of $10,000,000,000 of cumulative cash savings by the end of 2021. We will continue our focus on operational efficiencies even after the current target is achieved. The current environment provides us with the opportunity to explore additional longer term business transformation initiatives and related cost savings. Let's now turn to our segment results, starting with Consumer Group on Slide 8.
Our Consumer team quickly pivoted to adapt to the new environment. In mid March, we temporarily closed the majority of company operated retail stores and transitioned most of our employees to work from home, including telesales and customer service roles. We optimized our sales channel to drive more activity through online and through telesales while introducing touchless retail and curbside pickup to streamline the customer experience as we reopened our retail stores. People are depending on connectivity now more than ever, and they need reliability and quality of service. And because of that, we are seeing them increasingly choose Verizon.
For the quarter, we increased postpaid customer accounts by 26,000 as compared to a loss of 34,000 in the prior year, highlighting the momentum in the business and value of the Verizon customer experience. We have seen activity levels increase during the quarter with an expansion of overall volumes in May June. Customer retention is at an all time high and is both a function of customer activity as well as a testament to the Verizon network performance and customer experience. As a result, postpaid phone net adds were 97,000 for the quarter as compared to 73,000 in the prior year. While phone gross adds were down approximately 26%, we experienced phone churn of 0.51 percent, an improvement of 21 basis points from a year ago.
Our retail postpaid upgrade rate remained low at 3.9% during the quarter, contributing to the decline in wireless equipment revenue. Fios Internet net additions of 10,000 were down sequentially and year over year as Fios installations were limited during the quarter due to temporary restrictions put in place on work inside customers' homes. Our team responded with innovative solutions in developing self installed capabilities. And beginning in June, we resumed technician in home visits across our footprint. Fios video net losses were consistent with previous quarters as cord cutting trends continued.
Now let's move to Slide 9 to discuss the consumer financial performance. Consumer operating revenues were down 4%, primarily driven by a significant decrease in wireless equipment revenue due to low activation levels. This decrease was offset partly by growth of 15% in other revenue, primarily driven by recurring services such as device protection. Wireless service revenue was down 2.7%, primarily driven by declines in roaming, usage and waived fees that accounted for approximately 3 20 basis points of pressure in the quarter. Consumer EBITDA margin was 47.0%, which was up 50 basis points from the prior year and includes approximately 40 basis points of headwind from the deferral of commission expense.
Margins benefited from lower equipment volumes in the quarter, though as a reminder, lower equipment revenue has a limited impact on consumer EBITDA dollars as the segment primarily operates on a device payment model. Now let's move to Slide 10 to review the business group results. Reliable and secure connectivity have never been more critical as companies continue to adapt to new ways of supporting their employees while simultaneously driving their businesses forward. During the quarter, our business team responded to the challenges of COVID, handling increased traffic needs while also meeting a surge in demand for connectivity and devices, particularly from public sector and enterprise clients. While wireless demand remained high throughout the quarter in public sector, we experienced offsetting pressures in both small and medium business as well as global enterprise.
As a result, segment phone gross adds were down approximately 17% from the prior year, contributing to postpaid phone net adds of 76,000, down from 171,000 in the year ago period. Business segment phone churn of 0.90 percent in the quarter was down 7 basis points year over year driven by strength in public sector. Let's now move to Slide 11 to review the business financial performance. Total operating revenues for the business segment were down 3.7% in the prior year. Wireless revenue was down year over year due to declines in wireless equipment revenue, offset by 3 0.1% growth in wireless service revenue, primarily driven by small and medium businesses as well as public sector customers.
Wireless service revenue growth included approximately 400 basis points of headwinds from lower roaming and usage revenues in the quarter, which are likely to continue in the Q3. Suspended lines as a percentage of the base have come off the highs we saw early in the quarter, but remain above pre COVID levels. The likelihood of these lines returning to active status is primarily a function of macroeconomic conditions and will be a significant factor in upcoming wireless service revenue growth rates. Operating revenues were also impacted by legacy wireline declines. However, global enterprise wireline revenue was nearly flat in the quarter, a significant improvement, primarily resulting from strong demand for advanced communication services during the pandemic.
Business EBITDA margin in the quarter was 26.2% as compared to 27.3%, which included approximately 20 basis points of headwind from the deferral of commission expense. Now let's move on to Slide 12 to discuss Verizon Media Group. As expected, the economic environment around COVID had a meaningful impact on both search and advertising performance in the quarter. Total revenue was $1,400,000,000 down 24.5% compared to last year, primarily as a result of COVID related impacts. We continue to drive increased customer engagement on our owned and operated properties and saw monthly active users up approximately 4% with strength in both Yahoo!
Finance and News, which were up 45% and 25%, respectively. For the quarter, we added a third more client accounts on our demand side platform compared to the prior year and signed key partnerships with leading content and e commerce companies. As a culmination of this strong momentum, Verizon Media won Adweek Readers Choice Best of Tech Partner Awards for all 4 nominated categories: DSP, SSP, ad network video and ad network mobile. Let's now move to Slide 13 for a quick look at the overall wireless performance. Slide 13 shows the key metrics and financial data of the combined wireless products and services for the consumer and business segments for the Q2.
Total wireless service revenue was down 1.7% over the prior year, including the headwinds mentioned in both the consumer and business segments. Phone gross adds were down 23.3%, while phone net adds were 173,000 as compared to 244,000 in the prior year. Phone churn was 0.58 percent, down 18 basis points from the prior year. Additional details are provided in the financial and operating information and our supplemental earnings release schedules on our website. Now let's review our cash flow and balance sheet for the quarter on Slide 14.
Year to date cash flow from operating activities totaled $23,600,000,000 an increase of $7,700,000,000 from the prior year. The year over year growth was driven by strong performance in the business as well as nonrecurring items and timing differences. These items include the COVID related postponement of approximately $2,000,000,000 of second quarter tax payments to July 15, the receipt of the previously disclosed $2,200,000,000 cash tax benefit related to preferred shares in a foreign affiliate sold during the Q4 of last year, improvements in working capital primarily due to lower volumes and payments related to the voluntary separation plan in 2019 that did not repeat this year. Capital spending for the first half of the year totaled $9,900,000,000 which was up approximately $1,900,000,000 year over year. The beginning of the year, we indicated that we expected capital spending to be more front end loaded, and we see that in our first half results.
Our capital expenditures further support capacity for traffic growth across our networks, while we continue to deploy more fiber and additional cell sites to expand our 5 gs rollout. We maintain our full year 2020 CapEx guidance of $17,500,000,000 to 18 point $5,000,000,000 The net result of cash flow from operations and capital spending is free cash flow for the first half of the year of $13,700,000,000 a year over year increase of 74%. Despite the pandemic, our balance sheet was further strengthened in the quarter. We continue to operate with elevated liquidity levels, which we believe is appropriate in this environment. During the quarter, we further lowered maturities through year end 2022 by $3,800,000,000 with liability management transactions, which also improved overall portfolio borrowing costs.
We now have no unsecured bond maturities for the remainder of this year and less than $1,000,000,000 in 2021. Overall net debt for the quarter decreased sequentially by $5,700,000,000 Net unsecured debt totaled $94,400,000,000 for the quarter, resulting in a net unsecured debt to adjusted EBITDA ratio of about 2.0x, down slightly from last quarter. Though we are at the high end of our targeted range of 1.75x to 2.0x, we continue to manage our balance sheet under our capital allocation policy. Our estimates of the leverage ratio Standard and Poor's uses to their credit rating analysis is now less than their boundary for an A- rating. Therefore, we have now met our commitment to return to our pre Vodafone credit rating profile.
Let's move on to Slide 15 to take a deeper look at the trends we have seen exiting the 2nd quarter. This slide highlights select key metrics of year over year results for both the full quarter and the month of June. Our various customer groups experienced a wide range of trends in customer demand during the quarter and exited the period with different trajectories. As restrictions began to ease during the Q2, we gradually started reopening our company operated stores with limited hours and our new touchless retail approach to further employee and customer safety. At quarter end, more than 60% of our stores were opened, up from roughly 30% in April, and we expect to be closed to fully open by the end of July, conditions permitting.
As a result, we exited the quarter with significantly better levels of consumer activity than at the beginning of the quarter. Consumer postpaid wireless gross adds declined approximately 21% in June, a material improvement over the decline seen in April. In June, upgrades were relatively flat versus the prior year given pent up demand, the availability of more 5 gs devices and a new lower priced iPhone. Despite the increased gross ad activity, churn remained historically low in June. In Fios, we transitioned from an initial period of not performing installations to the introduction of Fios in a box in late April to having technicians resume entering customer homes in the beginning of June, and we are constructively working to bring our installation pipeline to normal levels.
This activity led to a significant improvement in Fire's Internet gross adds in June, which has carried into July. In our business group, we have separated results for the different customer groups as they have experienced different trends. We continue to see significant pressures in small and medium business. June grossed out declines of approximately 23% for small and medium business were in line with the impacts experienced at the onset of the pandemic, while firm churn was marginally higher. Similar to consumer, upgrade activity was more robust in June.
While we are encouraged by the June trends, we may see ongoing impacts to this cohort. In April, we highlighted the surge in demand connectivity within our public sector and certain global enterprise customers. As we exit the quarter, we continue to see robust demand for both phones and connected devices within the public sector. In global enterprise, we experienced a year over year reduction in wireless volumes beginning in mid April, but exit the quarter with improvements in gross ad activity. We remain committed to serving the needs of these important customers, including all those on the front line as they continue to adapt to new ways of doing business.
Throughout the quarter, we made a number of voluntary commitments, most notably participating in the FCC's Keep Americans Connected pledge to ease the impact on consumers and small businesses by waiving various fees, agreeing not to disconnect eligible customers to non payment and providing increased data to meet with customers, among other initiatives. The effect of these commitments, along with reductions in roaming and other usage based activity, resulted in headwinds on total wireless service revenue in the quarter that were in line with the expectations shared on our Q1 earnings call. Ongoing impacts to customer behavior from the pandemic mean that usage based revenue, including roaming revenue and travel pass, is likely to be suppressed for some time. And we expect total wireless service revenue in the Q3 to increase sequentially and for the year over year growth rate to improve from the Q2 and be within a range of negative 1% to flat. We are encouraged by the payment trends of consumers and small businesses that opted into the Keep Americans Connected pledge, with the majority of these accounts making some payments while under the pledge and more than onethree of such accounts current at the end of the pledge.
At this time, we have taken no additional bad debt reserve. We continue to monitor payment trends and will reassess as needed. We are working with affected customers and have a long and successful track record in this area. These customers value the communication services that are vital to their everyday lives, and we value the longevity of these relationships. To that end, we have enrolled many impacted customers in a repayment program beginning in July, providing extended terms for past due service and device payments.
We believe the vast majority of these accounts can be cured over time, but it will heavily depend on the macroeconomic environment. As previously mentioned, declines in Verizon Media revenue were consistent with the anticipated range provided in April, although trends improved in June and were down approximately 19% as compared to the prior year. Advertising is rebounding faster than search with strength in our owned and operated properties. Given this trajectory, we anticipate that the revenue decline percentage in Verizon Media will be in the teens in the Q3. Now let's go to Slide 16 to discuss our guidance and outlook for 2020.
We are very pleased with the momentum we saw building throughout the quarter, but would also note that a fair amount of uncertainty remains in the operating environment, particularly as many states now confront rising COVID cases and some are reimposing restrictions. The 2nd quarter demonstrated our ability to produce strong earnings even in a challenging operating environment. We are maintaining the outlook provided in April for adjusted EPS to be within a range of negative 2% to positive 2% for the full year. It is important to note that our guidance assumes no significant deterioration to the macroeconomic environment or material changes to our bad debt reserves. Guidance for other income statement items, including depreciation and amortization, interest expense and the adjusted effective tax rate remain unchanged from our initial outlook.
As mentioned previously, we are maintaining our full year CapEx guidance of $17,500,000,000 to $18,500,000,000 At the beginning of the year, we communicated expectations for CapEx to be front end loaded in 2020, and that is exactly what we have seen. We continue to have good access to the supply chain for equipment and related items and remain confident we can achieve our build out plans for the year. In summary, I am proud of this team's performance in the Q2, adapting to unprecedented circumstances while continuing to make strides moving our business forward. Our balance sheet remains strong and provides us confidence to continue to invest in the business while also supporting all of our stakeholders. With that, I'll turn it over to Hans to discuss our priorities for the remainder of the year.
Thank you, Matt. And let me summarize a little bit where I think we stand when we're now entering the second half of 2020. First of all, I think we are entering with strong fundamentals where the network that is performing very well. I talked about the J. D.
Power and the LTE network is really performing well. We're entering the 2nd part of 2020 with a growth mindset, with a lot of key strategic partnership as well as activities. Our 5 gs are, of course, of essence coming into the second half, but has already been built in as we're building so much in the first half. The way we have been dealing with the pandemic and all the other crisis will continue, of course, in the second half. And I think we are coming in with a good foundation, with a strong brand, but also strong employee sentiment, how we are actually dealing with the situation.
And as I said before, Matt has prepared the balance sheet for us to be strong when it comes to going into the second half. And if I look into the second half of twenty twenty, we're, of course, exciting for scaling the 5 gs to nationwide, scaling the ultra wideband to over 60 cities, scaling the 5 gs home to more than 10 cities and, of course, start to monetizing that. That's going to be a key focus for our executive team as well as capturing all the opportunities, especially on the 5 gs Mobile Edge Compute, where our business to business applications and the way we're working with our partners as well as the partners that we have acquired like BlueJeans. Finally, we also have a lot of customer innovation when it comes to our mix and match as well as how we're seeing that our customer can follow us on the journey all the way from the needed plan up to the unlimited plan. And as we've heard previously, the way that Ronan and the Verizon Consumer Group has been working in the second quarter, we have continued to gain success with our unlimited.
Our customers are moving together with us up the ladder. And we're also continuing to expanding into new customer groups with Visible, Yahoo! Mobile and others. And we're working to see that we are addressing the full market with opportunities regardless how the second half will look like in 2020. So all in all, I think we are in a very good position for executing and leveraging all the things we now have prepared the last 18 months.
So by that, let me kick it back to Brady for starting the Q and A.
Yes. Thanks Hans. And just a quick note before we get into Q and A, I just want to remind everybody we're in a quiet period for CBRS given the auction and the anti collusion. So the comments we make around Spectrum will be very limited. With that, Angela, let's get started and take the first question.
Thank you. We will now begin the question and answer session. Your first question comes from Simon Flannery of Morgan Stanley. Please go ahead with
Matt, thanks for all the color on the trends in June, very helpful. I wonder if you could unpack the $0.14 of COVID impacts and how much of that is sort of particular to Q2 with the Keep America Connected plan and what elements you think will continue on into Q3 and beyond? And related to the outlook, you did talk about some of the SMB pressures, but that generally global enterprise wireline revenues were holding up given presumably some increased demand for capacity, etcetera. But how are you seeing we're seeing stories about IT budgets getting cut. Are you seeing any signs that we may see more pressure on that side in the second half of the year?
Thanks.
I can start and Matt will chip in. I can say that in the quarter, Simon, we have met so many enterprise customers. And yes, there are, of course, some that are more hit than others that, of course, are very cautious on the IT budget. But the majority of the large enterprises, they feel that this is the time to digitalize. This is the time to actually use the momentum to be more digital using capabilities all the way from SD WAN to video conferencing to 5 gs Mobile Edge Compute.
So I actually see a very good momentum with these type of customers. And I just wanted to chip in there before Matt comes in and comment to COVID-nineteen impact. So Matt?
Thank you.
Thank you, Hans. Thank you, Simon, for the question. So $0.14 of the impact from COVID in the quarter. The vast majority of that is driven by revenue, both service revenue within the wireless side of the business, predominantly in consumer, but some in business and then also the impact in Verizon Media Group. So the service revenue, obviously, there was a couple of major components to that.
One is the actions we took. We talked about the Keep America Connected pledge, but also the increases to customer data plans, those who aren't on unlimited, had that during the course of the quarter as well. And then you had the impact from customer behavior, primarily around roaming. So when as you think about coming into the Q3, as we said, we expect service revenue to be better in 3Q than it was 2Q, getting closer to flat on a year over year basis versus the negative 1.7%. That's going to come from the growing the accounts, growing the net adds that we had coming through, but also because we don't have all of those things taking place in the Q3 at the moment that we had in 2Q.
But we do also expect customer behavior to continue to reflect what's going on. So we certainly don't expect roaming revenues to be at the levels they would have been without COVID. That will continue. And then you mentioned on the business side, especially within SMB, that's a customer group we're paying close attention to in terms of how they navigate this obviously very difficult environment, working very closely with them. But certainly there could be some pressure there.
But all in all, the pressures that we saw in the quarter from COVID were as expected. And so we'll have some of those as we continue into Q3 and hope to see some improvements in other areas as well.
And so it will be below $0.14 but it will still be an enduring impact on
some of this. We'll wait and see how the environment plays out here. But certainly, we some of the things we'd expect to be a little bit better. As we mentioned on Verizon Media Group, they were negative 25% in revenue in Q2. We said we expect that to be in the teens in 3Q.
That should give less of an impact there. Service revenue, we'd hope we'd see a lower impact. But we'll see how the quarter plays out. Obviously, over the past 30 days or so, we've added a level of uncertainty to the forward view with everything the number of COVID cases around the country. So we'll see how the quarter plays out here.
Great. Thanks for the color.
Thanks, Simon. Angela, we're ready for
the next question.
Thank you. Our next question comes from David Barden of Bank of America Merrill Lynch. Please go ahead with your question.
Hey guys, thanks so much for taking the questions. I guess I want to follow-up on that answer, Matt. Obviously, at the top line, we're seeing some sequential improvement. The question I think that people have is, as we start to see the equipment revenue velocity or the equipment volume velocity improve in the 3rd quarter, are we going to see an equal or even offsetting effect on margins as we kind of look ahead? And then I guess the second question I'd have would be just kind of zooming out a little bit and thinking about, the 5 gs millimeter wave.
Obviously, the critique has been that 5 gs millimeter wave availability is not that great. Is there any way that you guys can kind of offer some kind of metric or some kind of KPI on 5 gs millimeter wave availability in the markets where you've put it out so we can kind of measure its growth? Thank you.
Hi, David. Let me start on the millimeter wave discussion about that. So as I said, we are on plan to deploy more than 5x more millimeter wave base station this year compared to last year. So the footprint will be much broader. And we will be into cities, and those cities will be much more covered than they were last year.
So and we are disclosing that, I mean, usually on a fairly frequent basis, how that map is growing. As you've seen, we have launched fairly few markets in the first half when it comes to the 60s. So you should expect quite a lot of noise from us in the second half, and we're really excited about that. But you also need to think about our model. We'll also include a nationwide.
So think about our model being a millimeter wave that is transformative. No one is even closer in the world. Then we will have a national coverage on top of that. And then in the bottom, we have the best 4 gs network in the world. I mean, I don't think that our customer will be disappointed with that.
We build things that are transformative, that are so different than the others. So I would be excited for the 2nd year if I would be you. I mean, this is time when it's crunch time for Verizon. We have been here we have been talking about this for 1.5 years. I think our customers will be very excited in the second half.
Matt?
Yes. So David, your question around equipment volume, certainly, we saw in June an improvement in the volumes have a material impact on volumes in the Q3 versus the Q2. And that's largely because of the way we do the accounting now being on the device payment plan model. So you have if you get that increase in equipment revenue, you also get kind of very similar increase in on the expense side. And even any higher commissions and so on under 606 now get recognized over the expected life of that customer.
So the increase in volumes should not be causing a significant change in the margin, a hit to the margin there that as you phrased in the question. One area where the volumes do maybe have any EPS or EBITDA impact is in especially Enterprise and Public Sector, where you still have some of those sales on a subsidy model. But overall, the vast majority of our wireless business is now on device payment. And then you get a much closer matching of the revenues and the expenses. So I'm not expecting to see a significant headwind to the EBITDA in 3Q as volumes pick up.
Great. Thank you
so much guys.
Yes. Thanks, Dave. Angela, we're ready for the next question.
Thank you. Our next question comes from Brett Feldman of Goldman Sachs. Please go ahead with your question.
Yes. Thanks for taking the question. And I was hoping we could just follow-up again on the outlook for improving wireless service revenue growth in the Q3. It sounds like from your comments, you're not expecting any further pressures from fees and usage based revenues. And so I was hoping you could talk about what's going on with the mix at an ARPA level.
Are you seeing customers continuing to upgrade into unlimited plans or has that slowed? And really what's your outlook for what that pace of upgrading is going to be? And then you did talk about the efforts you're making to help customers who've had payment issues. Can you give us any update on the number of accounts who are in some type of payment program? And I think that the thing most people are really interested in is how many customers have fully stopped making payments at this point in time?
And what are your assumptions about how you're going to manage that base in the Q3 as you structure that outlook? Thank you.
Matt, I think you were on mute.
All right. There we go. 2 earnings calls in a row. I forgot to come off mute. Great.
Brett, as you thanks for the question. As you think around service revenue, it starts with having more customers as we come into the Q3 and the Q2. I mean, you saw the 1 100 and 73,000 ads in the quarter and especially the 97,000 in consumer and adding accounts. So that obviously is going to help us sequentially with billing those customers. You mentioned some of the fees.
We'll see how those play out. But certainly, that will be a factor. The usage from a roaming large part of our roaming revenue is international and we don't expect either business or personal travel to be at the levels this year it was last year for some time. So all of those things will play in to service revenue being up sequentially. But it starts from increasing the base of our customers as we've done for a long time now and that will continue to be the largest driver.
We still have the ability to upgrade customers to unlimited. We made further progress on doing that during the course of the quarter. And now well over 50% of our base opportunity to step more customers up there as we go forward. Pivoting to your questions around the customer payments and where we are with the Keep Americans Connected pledge. Obviously, that pledge ended as of June 30.
We ended at around 1.5 1,000,000 accounts. It was right in line with our expectations 90 days ago. I'll tell you what's most encouraging though is what we're seeing in terms of payment patterns from the customers. We have approximately onethree of the customers are current as of the end of June. I said in the comments that the vast majority have made some payments during that time period.
Mean, it's more than 80% of those customers, of those wireless customers who took the pledge have been making payments. So I am very, very encouraged by what we've seen. And my expectation is the vast majority of these customers will be customers of ours a year from now.
Great. Thank you for that.
Thanks, Brett. Angela, we're ready
for the next question.
Thank you. Our next question comes from Bill Cusick of JPMorgan. Please go ahead with your question.
Thanks, guys. First, following up on that last comment, Matt. So have you contacted everyone at this point as you've gone through July? And I think I believe you're on sort of a 60 day cutoff cycle at this point. So you would know by September 1, give or take, who
of the pledges is going
to come out or not? And then for Hans, can you talk about sort of CapEx priorities and maybe how things might shift over the next year, assuming you get more mid band spectrum? I know you can't talk too much about spectrum, but how may capital spending shift there?
Thank you. Phil, thank you for the questions. I'll go first on the follow-up question, then Hans can get on to CapEx. So here's what we did at the end of the quarter. For those customers who weren't current, as I mentioned, more than onethree of them were current.
So we saw that customers want to continue to pay for the service they get from us. We have a well established process for customers who late pay. We do this every day. We've done it for years. But what we did for these customers in the Keep American Connected pledge, we rolled them into a program that took whatever balance they had built up at the end of the pledge and put it to be paid off for a month.
And so we've applied that to them. As you said, because of the billing cycle and so on, we won't get to see where they are here for another few weeks. We're watching that closely. But as I mentioned, we've seen obviously an intent for these customers to continue to pay. We have a great track record of working with customers.
And when they have difficult personal circumstances, helping them get back current over time and allowing them to remote customers. And I expect nothing different with this group of customers in this situation.
Thank you. And about the CapEx, I mean, I'm just looking back at 3 years I have been in Verizon. Even though the overall absolute number of CapEx has been very stable, what is inside is dramatically changed all the time because we, together with our engineering team, is all the time doing the right priorities given the assets we have. I mean, you think 1 year ago, we didn't talk about DSS. But of course, our team was working to prepare all the networks so we can actually deploy DSS all the radio base stations we have.
So we constantly are ahead of the game thinking where what is needed to be preparing for the network, So I think but right now, our focus is very much about the commitments we have to our customers when it comes to 5 gs, but also to keeping the best network on 4 gs. That's where we have it. And then do that fiber rich. Those are the priorities, and it will continue. So then any speculation on the future spectrum or something, that's a little bit too early to have right now.
But I can tell you, my team is always proactively thinking about how to do this network, continue to be the best in Americas. I mean, there's no debate about that. And I have a high confidence that they will continue to do so when it comes to our CapEx allocation as well. Thanks, Phil.
Thanks, guys.
Yes. Hey, thanks. Okay, Angela, I think we're ready for the next question.
Thank you. The next question comes from John Hodulik of UBS. Please go ahead with your question.
Great. Thanks, guys. Maybe a question about wireless competition. Obviously, T Mobile just did some refreshing of their low end pricing. Do you guys see this as sort of something new or aggressive or is it just sort of regular course of business?
And then as we look out into the second half, obviously, the industry has been talking about 5 gs for a while. We sort of have some pent up demand given the low upgrades. Do you guys see the launch of the 5 gs iPhone, which looks like it's being kicked out into the 4th quarter as a sort of a big event for the industry and one where similar to what happened with the LTE iPhone, an opportunity for Verizon to take share? Thanks.
Thank you, John. I mean, first of all, I think we're as prepared as we can be. I mean, we are prepared ourselves with our models when it comes to mix and match on the consumer side. We have taken out cost. We have the best network.
I feel very good about the competition. I mean, we have always had competition. This is nothing new. And so I think Ronan and the team, because that's primarily where, I guess, your question is related to. So I think they're well prepared.
And as I said, I'm really excited for our second half and what we are doing right now, and we are prepared for it. And when it comes to 5 gs phones from Apple, I can comment on that. But of course, it's a big event whenever it comes because the U. S. Market has a very high penetration on iOS.
And then of course, customers are reluctant to change between the different operating systems. So that's why 5 gs from Apple is a very important event and especially if you have built a network like us, where it's so transformative that transformation and that difference in usage of the network compared to some other networks that will not be a big difference. So I'm excited. I think Ronan is super excited for going in the second half and compete. And we have been prepared for this for years.
So we have been doing it for years.
Okay. Thanks, Hans.
Yes. Thanks, John. Angela, ready for the next question.
Thank you. Our next question comes from Michael Rollins of Citi. Please go ahead with your question.
Hi, good morning and thanks. 2, if I could. First, as you've done more with service bundling with things like Disney plus can you share some of the results of customers entering into those bundles and how it's affecting the economics of your customers? And second, if I go back to when you talked about 5 gs in the past, you outlined some timeframes of when you thought there'd be material financial contributions to the consumer and business segments. And as we're getting closer to those points in time, I was curious if you can give us an update on where that stands and maybe some examples of the ways that you're anticipating getting that monetization in each of the consumer and business segments?
Thanks.
Thank you, Mikael. Good questions. On the first one, on the bundling we're doing, I think this is a key differentiator for us. We have been able to do partnership with the greatest brands that we have on Earth and combining that with the best network, the best brand and our distribution. And as I said several times before, our metrics has proven to be far better than we even initially thought, meaning how many is taking the premium from the beginning and how many were converting to paying customers.
But not only that, I mean, it tells you a difference when you start comparing the competition. What do you get when you work with Verizon? You get not only best network, you get some of the best services that are running at the moment. And I think that's unique for us. And that's why if you look at our share numbers, we are record low.
I mean, I think that hangs together for us, and we will continue to do so. But we are very picky. Who we are choosing, it has to be the right brand. It has to be addressing our full customer base that they really appreciated. So again, the Verizon Consumer Group with the lead of Ronan and all his team, they are working with it daily.
And I would say we have many services that want to join us because they have seen the model panning out in a very good fashion. I mean, the examples you are mentioning, Disney Plus or Apple Music, both of them have, I would say, been very successful for both parties, and that's how we see it. On the 5 gs, when it comes to our commitments and what we outlined when it to our revenues, we have not changed those. Those are the same. We are gearing for sort of the consumer part of it, home and mobility in 2021 to see some revenues from there or and then in 2022 from the 5 gs Mobile Edge compute.
But you're going to see much more sort of milestones right now of customers, sites and all the early indicators of that we're heading into that. And that's what we're trying to provide you with. You see that now we are preparing for that with announcement. I mean, if you think about the Mobile Edge Compute, I mean, yesterday last week, we announced partnership with IBM and with SAP, that's going to be part of the 5 gs Mobile Edge Compute in order to serve our customers. So you're going to see that how we are doing sort of laying out early indicators on that path to revenue that we have outlined both internally as well as externally.
Thank you.
Yes, great. Thanks, Mike. Operator, we're ready for the next question.
Thank you. Our next question comes from Craig Moffett with MoffettNathanson. Please go ahead with your question.
Hi, thank you. Hans, I want to stay with the same theme as the last few questions where we talk about 5 gs. You've talked a lot about mobile edge compute, but I wonder if you could just sort of 2 things. 1st, drill down a little bit into the actual use cases for 5 gs that you're seeing from your particularly business customers that you think are starting to materialize? And then just I wonder if you could just talk about the health of your customers and I think in particular about municipalities and cities and towns for some
of those
applications where budgets are now very, very perilous, but even large enterprises where they're seeing big downturns because of the recession. And how much that really affects the likely uptake of 5 gs in terms of timelines?
Thank you, Greg. Good questions. Let me start at the last question and I'll come back to the other. When we see the customers, I think that first of all, when it comes to our governmental business, as you have seen, that has been really going well for the last few quarters here in the pandemic. Many of these states, municipalities, of course, need to go to new models of delivering services to their to the students or to the community at large.
And that's why we have seen I mean, we just announced yesterday several different states that are now using our services for remote learning, for example. So there we see that there's a craving for actually go to digitalization. That's the only way, and that's not a one time thing. For me, I think it's at the new normal. We're going to see that going over.
So I'm really encouraged about that and our strength working with these customers. Then, of course, there are some advanced customers. I mean, you saw also earlier this week, we together with the Defense Department are now doing 5 gs tests, etcetera. So they're also both advanced, but also so there I feel really good. We have a really good go to market.
We have great networks, so which is the main thing here. Then on the enterprise side, you're absolutely right. Here you see a divider. I mean, of course, the travel enterprises, the airlines companies, the restaurant, large enterprises, they, course, are in furlough and actually trying to reduce the cost as much as possible. But on the other hand, you have the large enterprises that actually see the change and see the opportunity right now to transform.
I probably do 5 to 7 large enterprises executive meetings per week right now discussing how to do the digitalization of these enterprises. And many of them are accelerating the plans rather than delaying them. Then, of course, we know that a lot of infrastructure is already in place of these enterprises. So still, it takes time to do it. And this can be SD WANs, video conferencing, fiber or whatever.
So it's more things we sell today. Then you come to the 5 gs Mobile Edge Compute. I think that the use cases we see today is very much real time decision making. If that's a big distribution center, that's going to have 5 gs enabled distribution center to actually take real time decisions or if it's a big manufacturing plant that's going to use 5 gs Mobile Edge compute by wireless connecting to all the robotics where many of those cases. And then you also see cases where sort of IoT devices with 5 gs will actually enable a new way of delivering a service.
And finally, the whole Doctor and AR for large enterprises where you need a low latency on the campus or in the manufacturing or whatever it might be. Those are the early cases. Many of them right now are based on low latency. We see it's creeping into security because the data can then be contained with the company, meaning they can actually process and have all the processing and storage at the edge, which means they can keep the data for themselves. So those two capabilities are the first one.
I think in the next, we're going to see enormous bandwidth of enterprise that need to send a lot of data to the edge in order to take decisions. But so far, latency and security, that's how the 5 gs Mobile Edge compute scenarios are working out. And we basically have 2, 3 or 2, I would say, per industry vertical that are lead customer for us, and we work with them to do the solutions and sometimes we have a third party as we don't have all application ourselves. That's how we're working it right now. And I'm encouraged.
And of course, as I said before, acceleration has been seen because all the digitalization and touchless that is needed going forward.
Great. Thanks. Thanks, Craig. Operator, we're ready for the next question.
Thank you. Our next question comes from Mike McCormack of Wuhanheim. Please go ahead with your question.
Heng. Hans, maybe just a quick comment again on the enterprise side. So it sounds like you're not seeing any sort of delayed decision making contracts that have been in process or still going through? And then secondly, one of your competitors was talking about 5 gs as a home broadband replacement not really being such a great replacement. Any thoughts around that?
And then I guess does that change any of your view on the importance of Fios going forward? Thanks.
On the enterprise, I mean, to some extent, you're right because certain customers are delaying and not doing decisions. Those are usually in industries that has huge impact from COVID-nineteen. That's extremely clear. But we work with them anyhow because ultimately they are going to be our customers when these come out and those industries will flourish. So we are resilient.
We support our customers in good and bad time. And that our business model is actually working in good and bad times, which is really, really good. So that's working. The comments on 5 gs Home from people that are not doing it, of course, I cannot even comment on that. We feel really good about our model.
As we have said before, minimum of 10, 5 gs homes, 50s. We're going to have the CPEs with a much better chipset. That's on plan for this second half. So again, we feel good about it. Our learnings are deep on building, coverage, throughputs and all of that and the self install, which I have been talking about now for 1.5 years, which excites me that our customers should be able to receive the gear, the CPEs and be able to install it themselves in a short time frame.
It's not that I'm down to the times that I have envisioned. I want it to be below 1 hour, but we are coming far away from the 8 hours we started with. And compared to fiber installation, where you need to first put it on the agenda, wait for a couple of weeks, then you have to come there and install it, and it takes hours to do. This is a totally different way. It's transformative.
As I said, we are building a 5 gs that's transformative, not just the me too on my 4 gs.
Great. Thanks, Mike. And hey, special shout out to Mike today that I heard it's his birthday. So happy birthday, Mike.
Thank you.
Hey, Andrew, we're ready for the next question.
Thank you. Our next question comes from Peter Cispino of Bernstein. Please go ahead with your question.
Hey, thank you. On 5 gs Home, wondering as you look out at the arrival of the high powered CPE, which I think comes in Q4, what the key unanswered questions are for you in terms of performance and unit economics that would allow you to speak a bit more clearly about expectations. And I'm curious whether you think it can scale in 2021? Thanks.
I think we have answered the majority of the questions when it comes to how it can scale. And there are always things I mean, we are at the forefront on technology. We're 1st in the world doing this. There's no one even close to thinking it like this. So of course, there are challenges.
I we as an executive team, we sit down once a month, the whole executive team reviewing all this with our engineers to be better all the way from the installation to the marketing. So I feel that we have a good plan. Of course, there are still things outstanding, and we can do better over time. But I think we're in a good place to relaunch when the more powerful CPE is coming. That's all that and that should enable us to go into 2021 with a better understanding how we can scale it and where we will scale it.
I think one thing that we have learned also is that, of course, fixed wireless access, we think a lot about consumers, but there is an opportunity clearly when you see this also as a fixed wireless access opportunity for small and medium business, etcetera, that we will start working on later on.
Hey, Peter, it's Matt. Just a couple of follow ups there. One, remember, you're driving these revenues off of the same network that you're getting 5 gs mobility revenues on. So this is the first time we've had that opportunity to drive multiple revenue streams off of the same investment. And so as we roll out the network, we'll have the opportunity to add more markets here.
And so we're very excited about that as we head into 2021 with the progress we're making this year.
Yes. Thanks, Peter. Hey, Angela, we have time for one more question. Let's do one more from the audience here.
Thank you. Our last question comes from Colby Synesael of Cowen. Please go ahead with your question.
Great. Thank you. I have 2 for Matt, if I can. One, just given the various moving parts as it relates to free cash flow and some of the bigger benefits you saw in the second quarter that were one time. I was wondering if you can give us some color on what free cash flow could look like for the back half of the year more simplistically, whether or not you would expect free cash flow in 2020 to be above or below that of 2019?
And then secondly, as it relates to the upcoming C band auction, which I know you're not going to talk too much about, but when you think about how you're going to finance that, do you think at that point you'll have enough as it relates to cash on hand and room within your debt financing to pay for what you'll ultimately spend at that auction? Or do you think that there could be a point where you might have to curtail at least temporarily your level of investment just ensure that you're able to get the most out of that option that you want to?
Thanks, Colby. So look, in regards to the last question, we're certainly excited about the opportunity to come with the C band auction. One of the great things about having got the balance sheet in the position that we have is it gives us the opportunities to take advantage of items like that when they come along. And so I don't think that as I look at the balance sheet and I look at the auction, that, that will provide any inhibitors to us either in terms of what we do in the auction or how we invest in the rest of the business. In terms of the free cash flow for the Q2, as you say, a couple of items in there.
We had the tax benefit from the item that we recognized in Q4 last year. We also had a timing difference of about $2,000,000,000 moving just regular cash payments from Q2 to last week. But all in all, our cash flow will continue to be strong because we have obviously, we have a strong business with a recurring revenue stream that will continue into the second half of the year. Working capital provided a benefit in the first half with the lower volumes. We'll see how that plays out in the second half of the year.
And I think that will be one of the key determinants of how cash flow looks for the full year on a year over year basis. So we'll see how it plays out, but I certainly expect free cash flow to continue to be strong for the business.
Okay. Thank you.
Yes, great. Thanks, Colby. And with that, I think we're going to wrap up the call and just want to make sure everybody's safe. And thank you for everything today. And Angela, back over to you.
Ladies and gentlemen, this does conclude the conference call for today. Thank you for your participation and using Verizon Conference Services. You may now disconnect.