Good morning, and welcome to the Verizon Second Quarter 2019 Earnings Conference Call. Today's conference is being recorded. If you have any objections, you may disconnect at this time. It is now my pleasure to turn the call over to your host, Mr. Brady Connor, Senior Vice President, Investor Relations.
Thanks, Brad. Good morning, and welcome to our Q2 earnings conference call. This is Brady Connor, and I'm here with Hans Vestberg, our Chairman and Chief Executive Officer and Matt Ellis, our Chief Financial Officer. As a reminder, our earnings release, financial and operating information and the presentation slides are available on our Investor Relations website. A replay and transcript of this call will also be made available on our website.
Before I get started, I'd like to draw your attention to our Safe Harbor statement on Slide 2. Information in this presentation contains statements about expected future events and financial results that are forward looking and subject to risks and uncertainties. Discussion of factors that may affect future results is contained in Verizon's filings with the SEC, which are available on our website. 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 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 period. The Q2 of 2019, we reported earnings of $0.95 per share on a GAAP basis. These reported results include a pretax charge of approximately $1,500,000,000 related to early debt redemption costs. The impact after tax was approximately $1,100,000,000 or $0.28 per share, resulting in adjusted earnings per share of $1.23 This represents growth of 2.5% on an adjusted basis compared to $1.20 a year ago.
Let's now move to Slide 4 and take a closer look at our earnings profile for the 2nd quarter. Consistent with the approach we discussed last quarter, we have illustrated the ongoing impacts to earnings from the adoption of accounting standard ASC 60 6 for revenue recognition as well as the adoption of ASC 842 for leases. As we pointed out last quarter, we expect a smaller benefit in 2019 than we realized last year from the adoption of ASC 606, primarily due to the deferral of commission expense. The reduction in benefit creates a year over year headwind to both reported earnings per share and adjusted earnings per share. The impact was a $0.03 headwind in the quarter and $0.06 year to date.
As a reminder, this headwind is expected to continue until the end of 2020. At the beginning of this year, we adopted accounting standard ASC 842 for leases, which resulted in a gross up on the balance sheet for all operating leases. In addition, the lease standard affects our earnings per share, primarily due to the expensing of certain lease costs. As highlighted previously, we expect this to result in a $0.01 to $0.02 per quarter headwind on earnings per share throughout 2019. For the Q2, this headwind was $0.01 on earnings per share.
As you can see on the slide, the 2.5% growth in adjusted EPS includes both the impacts from the deferral of commission expense related to the revenue recognition standard and the adoption of the leasing standard. This highlights the strong underlying performance of the business. Matt will take you through the details and key drivers later in the call. With that, I'll now turn
the call over to Hans. Thanks, Brady, and thanks, everybody, for joining this Q2 earnings call. We had a strong Q2. It was fueled by a very good wireless service revenue growth as well as a strong EPS adjusted EPS growth as well. So I think the team had a good quarter with a lot of focus on the execution.
At the same time, our operational metrics was good with net additions on the wireless side as well as a very low churn. That, in combination with the very solid capital allocation as well as efficiency coming out from our capital allocation process, all in all, also ended up to a very good cash flow. So if I sum it up very quickly, a very good quarter from us financially. Together with our work in the network, which is so important to us when we're building our network as a service, we also won all the top third party measurements. We won from J.
D. Power that for the 3rd consecutive time. When it comes to route metrics, a 12 straight win there as well. So we are really getting the right feedback from the market and the measurements that is really valuable in this market. At the same time, we won some more spectrum in the intermediate wave.
Auction, which is now adding up to our portfolio, which means that we have a portfolio for the 5 gs era where we can build capacity and we can build coverage, which we have said all the time, we're going to build the real 5 gs with all the 8 currencies that I've talked about before. We also have launched quite a lot of cities here lately, adding up. So we are on track for the 30 markets that we have said we will do this year. At the same time, we continue to add new devices to the portfolio. The latest one was the Ensego MiFi 5 gs device that we launched recently and we're now 4 different devices on 5 gs.
We also are very focused on the fiber because ultimately, if you're going to do 5 gs, you need fiber. And our fiber deployment is now in more than 60 cities, and we had 1400 route miles a month in average in this quarter, which means that we increased from the Q1, continue this so important build for our overall Intelligent Edge network and for the 5 gs deployment we're doing. When it comes to Verizon 2.0 and in transformation, one of the proof points is, of course, today that we now are reporting Verizon Consumer Group and Verizon Business Group as segments in the earnings release that we're doing today. I can also say that we get a lot of good traction with our customers, especially with enterprise customer, with the new support and the new go to market we have where we can show the full portfolio of Verizon and seeing that we have the right support also for the people in the line meeting our customers every day. At the same time, we continue with the network as a service concept where we have now announced our collaboration with YouTube TV where we're going to offer that both to our Fire's customers but also to the wireless customers.
Again, working on the model where we outlined earlier this year, how we can partner with some of these content players instead of investing ourselves in it and seeing that we can bring a seamless service for our customer, but also making it very efficient for ourselves and for our customers. We also have continued and finalized the voluntary separation program in the quarter, and we have done quite a lot of that. And that in total now puts us up to have a competitive cost base and actually done quite a lot of these changes recently. So I would say that we are doing this transformation from a position of strength. And I'm really proud of the team that have done all of these changes and transformation in the last 12 months and delivering these results at the same time.
And it really sets us up for continue to be very competitive in this market and definitely continue to be the leader in this market. So I'm proud of the team and what we're producing this quarter. By that, I hand it over to Matt to go over the financials more
in detail. Thanks, Hans, and good morning, everyone. Let's start with a recap of our consolidated operating and financial results. On a reported basis, 2nd quarter consolidated revenue was $32,100,000,000 which was down slightly as compared to the prior year. Wireless service revenue growth was offset by lower wireless equipment revenue and wireline service revenue.
On a year to date basis, consolidated revenue was up slightly at 0.4%. We are maintaining our full year GAAP consolidated revenue guidance of lowsingledigit percentage growth for 2019. On a consolidated basis, 2nd quarter adjusted EBITDA margin was 30 7.7%, which was up from 36.8% in the prior year and includes headwinds of approximately 80 basis points from the deferral of commission expense and the impact of the lease accounting standard that Brady mentioned earlier. Adjusted EBITDA increased more than $200,000,000 or 1.8 percent over the prior year due to wireless service revenue performance as well as continued improvement in operational efficiencies across the business. Our business excellence initiatives have realized cumulative cash savings of $4,100,000,000 since the program started in 2018.
We have now completed all three phases of our voluntary separation program and have realized approximately $480,000,000 of expense savings year to date. With the last tranche of employees exiting in late June, we expect additional incremental savings in the 3rd quarter. We remain on track to achieve our goal of $10,000,000,000 of cumulative cash savings by 2021. As Brady mentioned, adjusted earnings per share for the quarter were $1.23 up from $1.20 a year ago. The increase in our earnings per share was driven by growth of more than $200,000,000 in adjusted EBITDA, slightly offset by a higher tax rate.
The higher tax rate resulted in an approximately $0.01 headwind to adjusted earnings per share. As a reminder, last year's tax rate included certain onetime benefits related to the Tax Cuts and Jobs Act, which do not repeat this year. For 2019, our adjusted effective tax rate is now expected to come in at the lower end of the 24% to 26% range. Continued wireless service revenue momentum and solid margin performance keep us on track to achieve our guidance of low single digit percentage growth in adjusted EPS, excluding the impact of the new lease accounting standard. Our expectation of the lease accounting headwind remains unchanged at approximately $0.04 to 0 point 0 $8 for full year 2019.
Now let's move on to the review of the new operating segments under Verizon 2.0, starting with Consumer on Slide 7. As a reminder, our new Consumer segment encompasses both wireless and wireline products and services targeting retail customers as well as our wireless wholesale operations. In the Q2, total consumer operating revenue was $22,000,000 which is flat compared to the prior year. These results were primarily driven by continued strong growth in wireless service revenue and file service offerings, offset by declines in wireless equipment and legacy wireline services. Consumer wireless service revenue increased by 2.5%, driven by customer step ups to unlimited plans and migration within unlimited to higher tier plans as well as an increase in connections per account.
Less than 50% of our customer account base are on unlimited plans. In the Q2, consumer wireless equipment revenue decreased 8.2% as lower upgrade rates more than offset an increase in phone gross adds. Consumer files revenue increased by 1.2% due primarily to the demand for our broadband offerings. Consumer EBITDA margin as a percentage of total revenue in the quarter was 46.5%, which was up 80 basis points from the prior year. This includes headwinds of approximately 100 basis points from the deferral of commission expense and the new lease accounting standard as previously mentioned.
Let's now turn to Slide 8 and take a close look at consumer operating metrics. Within consumer, wireless performance is very strong while operating in a highly competitive environment. Phone net additions were 73,000 for the quarter as compared to 17,000 last year, including postpaid smartphone net additions of 209,000, up 17% from the prior year. This was driven by phone gross additions, which were up more than 5% year over year. Postpaid net additions totaled 126,000, including other connected device net additions of 187,000, primarily wearables, offset by tablet net losses of 134,000.
Postpaid phone churn of 0.72% improved sequentially due to focused retention efforts around our high value customer base as well as normal seasonal patterns. This performance was in line with last year's strong results. Our superior network quality and personalized offerings continue to resonate with our customers. Total retail postpaid churn of 0.97% was up compared to 0.93% last year. Total postpaid device activations, of which 81% were phones, were down 7.6%.
Our retail postpaid upgrade rate was 4.3%, down from 5.1% a year ago, reflecting the continued elongation of the handset upgrade cycle. In the 2nd quarter, prepaid net losses were 200 and $13,000 compared to a loss of $236,000 last year. We continue to focus on high value accounts and profitability in our retail prepaid wireless offerings. Fios Internet net additions of 28,000 were driven by continued demand for our high quality fiber broadband products. Fios video losses totaled 52 1,000 as consumers continue to adopt over the top video services to replace traditional linear video offerings.
Now let's move to our business segment on Slide 9. Our business segment includes wireless and wireline products and services provided across 4 customer groups: global enterprise, small and medium business, wholesale and public sector and other, which includes Verizon Connect. Total operating revenues for the business segment decreased 1.1% in the quarter as growth in wireless services and our high quality fiber products were offset by ongoing secular pressure from legacy technologies. In the quarter, revenue from our business wireless products grew 5.6 percent, including 6.1 percent wireless service revenue growth. This strong performance reflects Verizon's best in class network quality, reliability and solutions based approach with our business customers.
Revenue from our wireline products declined 7.6% in the quarter. From a customer group perspective, global enterprise and wholesale declined 4.8% and 15.1%, respectively, driven primarily by legacy pricing pressure and technology shifts. Small and medium business revenue increased 5.4%, driven by wireless service and files growth, partially offset by ongoing declines in traditional data Public sector and other revenue increased 3.8% as a result of growth in wireless and wireline products and services. Business segment EBITDA margin for the quarter was 27.3%, which was down 20 basis points compared to the prior year, driven by declines in legacy wireline product revenues. This includes headwinds of approximately 10 basis points from the deferral of commission expense and the new lease accounting standard as previously mentioned.
Now let's move on to Slide 10 to discuss business operating metrics. Business wireless trends remain consistent and strong. Postpaid net adds were 325,000, which includes 172,000 phones, 90,000 tablets and 63,000 other connected devices. Phone churn of 0.97 percent improved sequentially, while total postpaid churn of 1.21% increased 5 basis points compared to the prior year. Total postpaid device activations were up slightly at 0.6%, while our retail postpaid upgrade rate was 4.2%, down from 4.6% in the prior year.
Let's now move on to Slide 11 to discuss Verizon Media Group. For the Q2, Verizon Media Group revenue was $1,800,000,000 which was down 2.9% versus the prior year, a significant improvement from the 7.2% year over year decline reported in the Q1. Gains in native and mobile advertising continued to be offset by declines in desktop advertising, though the business continues to build on positive momentum in key areas. We are continuing to migrate customers to our recently integrated advertising platforms, simplifying interactions with partners and driving synergies within the business. We remain focused on growing our audience, engagement and monetization across our super channels, which includes sports, finance, news, entertainment, home and mail.
During the quarter, we launched Yahoo! Finance Premium and HuffPost Plus, which are subscription services that enhance the experience of 2 of our most popular media assets. Let's now move to Slide 12, which reconciles Verizon 2.0 results to our legacy Verizon 1.0 results. As we mentioned during our Verizon 2.0 segment reporting webcast in mid June, we will be providing overall wireless and wireline results for the remainder of this year. You can find these results in our supplemental information included on our website.
Slide 12 shows a reconciliation from Verizon 2.0 to Verizon 1.0 for both consumer and business revenue. The waterfall charts show the bridge from consumer revenue to wireless and from business revenue to wireline. The top chart shows consumer, which had $22,000,000,000 of revenue in the quarter. Subtraction of consumer wireline removes $3,100,000,000 and the addition of business wireless brings in $3,800,000,000 resulting in total wireless revenues of $22,700,000,000 The bottom chart shows a similar reconciliation from business to wireline and $200,000,000 of Verizon and $200,000,000 of Verizon Connect and then add $3,100,000,000 of consumer wireline to ultimately arrive at total wireline revenue of $7,100,000,000 in the quarter. Total wireline operating revenues in the quarter declined 4.5% while wireline margins were 19.3%.
Let's move to Slide 13, which highlights our overall legacy wireless results. Looking at overall wireless results, which includes both consumer and business wireless, total wireless operating revenue increased 1.0 percent to $22,700,000,000 in the 2nd quarter, primarily driven by a 3.1% increase in service revenue. For the remainder of the year, we continue to expect overall wireless service revenue growth to be within the mid-two percent to 3% range. Total wireless EBITDA margin as a percentage of total revenue in the quarter was 48.2%. This includes headwinds of approximately 100 basis points primarily from the deferral of commission expense and the new lease accounting standard as previously mentioned.
Excluding the impact from the accounting standards, 2nd quarter EBITDA margin was 49.2%, up 140 basis points year over year. Total postpaid net adds were 451,000 in the quarter. This includes phone net adds of 245,000, which were up from 199,000 a year ago. Postpaid smartphone net additions in the quarter were 420,000. Postpaid phone churn of 0.76% was similar to last year, while total retail postpaid churn of 1.02% was up 5 basis points year over year.
For the quarter, we increased customer accounts by 8,000 as compared to a loss of 24,000 in the Q2 of last year. Total postpaid device activations were down 5.7%. This was driven by an increase in postpaid gross additions to $3,900,000 from $3,800,000 in the prior year, offset by a decrease in our retail postpaid upgrade rate of 4.3% from 5.0 percent a year ago. Let's now focus on our consolidated cash flow results and the balance sheet on Slide 14. Year to date cash flow from operating activities totaled $15,800,000,000 down from $16,400,000,000 during the prior year.
Benefits from operational improvements were offset by higher cash tax payments and payments related to the voluntary separation program. The onetime benefits realized last year related to tax reform were primarily recognized in the first half of twenty eighteen. Capital spending for the first half of the year was $8,000,000,000 which is up slightly from the prior year. Our capital expenditures continue to support the growth in data and video traffic on our industry leading 4 gs LTE network, the launch and continued build out of our 5 gs ultra wideband network, the upgrade to our Intelligent Edge Network architecture and significant fiber deployment in 60 plus markets outside our ILEC footprint. We maintain our full year 2019 CapEx guidance range of $17,000,000,000 to $18,000,000,000 The net result of cash flow from operations and capital spending is free cash flow for the first half of the year of $7,900,000,000 We ended the quarter with $113,400,000,000 of total gross debt, which is $1,300,000,000 lower than the prior year.
The unsecured debt balance was $102,100,000,000 which is lower year over year by $3,900,000,000 and lower sequentially by $1,200,000,000 Our net unsecured debt to adjusted EBITDA ratio at the end of the quarter was 2.1x versus our targeted range of 1.75x to 2.0x and is down from 2.3x last year, reflecting the continued strength of our balance sheet. We continue to actively manage our debt portfolio to minimize near term maturities, optimize our overall funding footprint and lower our cost of capital. During the quarter, we tendered $4,500,000,000 of notes that resulted in the pretax charge of $1,500,000,000 that Brady mentioned earlier. The charge is predominantly noncash. Our balance sheet strength provide us with financial flexibility to execute on our strategy.
We continue to maintain near term maturities at low levels, giving us confidence to operate and invest throughout the business cycle. So in summary, 2nd quarter saw a continuation of our strong performance while we made the transition to Verizon 2.0. We grew customer relationships and increased service revenues. The growth in our earnings was driven by operational performance from the business, which also led to strong cash flow results for the quarter. We continue to be disciplined in our approach to capital allocation, and we remain committed to strengthening our balance sheet.
With that, I'll turn the call over to Brady so we can get to your questions.
Thanks, Matt. Brad, we're now ready
to take questions. Thank you. We will now begin the question and answer The first question comes from Philip Cusick of JPMorgan. Your line is open.
Thanks guys. One short term and one long term, if I may. First, your 2.5% to 3% service revenue growth guide seems very conservative at this point versus 3.7% in the first half. Are there headwinds in the back half that we should think will get the average down below 3%? And second, Hans, can you dig more into the 60 Market Fiber build and help us understand any early progress on in sourcing backhaul as well as when you will start marketing that to consumer or business out of region?
Thank you.
Thank you. Let me start with the wireless service growth and Matt will come back on that. But I think that the team has shown really good work here in the last couple of quarters since, I would say, we have this new structure. So we're I'm confident. We have a good momentum in our business.
Ronan and his team probably have some more cards up their sleeves thinking how they will continue to compete in these markets. So we think it's our athletes, I have a lot of confidence in the team of Rona and continue to progress on the service revenue growth that we have done so far. On the fiber build, yes, that's a very important build for us. And we have been on for that for quite a while right now. And the speed in this quarter was 1400 route miles per month in average in the quarter.
And remember, in the Q1, we talked about 1,000. So definitely, we're coming up. Right now, the majority of the fiber is going to our own sites, to be honest, if we if I may say. But over time, of course, when we roll in later in part of this year and next year, we're also going to be able to offer that to our enterprise customers and wholesale, etcetera. So that's how we're working right now, and we're building it in 60 markets.
And it is just so essential for the whole Intelligent Edge network. It's so essential for the whole 5 gs play that we have to have these fibers. So we have a good speed now. The team has been there on for quite a while. And so it will take a little bit longer before we can offer it to all our customers.
But mainly, I would say, well, right now, we're taking to our own sites, which is a efficiency. Matt? Yes. So good morning, Phil. So on
the service revenue, certainly pleased with the results we've seen in the first half of the year, 3.1% in Q2 driven by over 6% in the business segment. So great momentum in the wireless products and services across both segments as we head into the second half of the year. We like the momentum we have as we jump off into second half. And we'll wait and see how the back half of the year plays out in terms of the total service revenue growth. But we certainly see a continued path to continue on the service revenue growth that we've had for over a year or so now.
Thanks. And Hans, if I can follow-up, the in sourcing of your backhaul as you take fiber to your sites, has that really begun to start lowering costs? Or are you not starting to light that up yet?
We have been starting. But of course, today, on the total cost we have, it's not significant there yet. But this is all part of the Intelligent Edge network, the multipurpose network we're building, and that's what you have seen in our CapEx the last 2 years, the efficiency. Efficiencies. So and as you remember, Kyle talked about that the Intelligent Edge network build is going a couple of year more.
So we, of course, believe that we are more efficient to come out with them. And one of them is definitely the fiber, which we are now building that definitely should get us a better owner economics long term. And also remember that also that this is a growth opportunity for us as well in certain areas. Okay.
Guys. Thanks, Phil. Hey, Brad, we're ready for the next question.
Thank you. The next question will come from Brett Feldman of Goldman Sachs. Your line is open.
Thanks for taking the question. This one is for Matt. As you show on Slide 14, you're getting very close to achieving the net unsecured leverage target you outlined at your analyst meeting a couple of months ago. And so the question is, as you sort of get down to 2 turns of leverage and below, how you think about prioritizing the incremental capital you'll be generating at that point? Should we think about that as dry powder for spectrum, which you maybe look to flex up on CapEx a bit?
Or are we actually getting closer to a point where share repurchases become a higher and more immediate priority? Thank you.
So let me start here because this is, of course, something that me and Matt is working with constantly. Remember how what we outlined in February, we're very clear disciplined way of our capital allocation. Number 1, into the business, the CapEx. You have seen what we have done with the CapEx the last couple of years. We do everything we need, and we are on historical levels, and we will continue to be very disciplined there.
Secondly, we want to put our Board in a position to make a dividend that we have been working. And lastly, we work with our debt. That's how we have worked all the time. So it's business, dividend and debt. And we just want to continue this commitment that we made to get into this range.
And remember, that was a commitment long before me. But as you know, we are a company to always deliver on the commitments. So that's why it's important. And ultimately, when we get there, we will get optionality to our Board to have a great conversation on what we're going to do with it. That's how I see it.
And then, of course, Matt is working with us daily to see that we have the right balance sheet structure and the capital allocation on
the company. Matt? Yes. Hans, so thanks for those points. And just building on maybe on the back end of that.
So as you said, Brett, we are we're as close as we've been to that range in the past 5 plus years. And so we're making good progress to get there and that comes from having strong results that drive good cash flow and you see the progress we've been able to make. But just a couple of add on points to what Hans said, it's a range that we say we want to be in for the long term. That means we don't want to go past the 1.75% end of that range either. And so get into the range and then be in the range.
And then we also don't expect to build up cash on the balance sheet beyond our normal operating levels. So as we get into the range, we look at the opportunities around priority number 1, which is to invest in the business and then the rest of the items that you heard Hans talk about. We'll then decide the most appropriate use of cash that we may have to drive long term value for our shareholders.
The next question comes from Simon Flannery of Morgan Stanley.
Thanks a lot. Good morning. Hans, I wonder if you could update us a little bit more on your 5 gs. You talked a bit about opening up the new mobile broadband Perhaps you can talk about your learnings so far and where we stand on expanding 5 gs home. I think you've talked before about new markets later this year and dynamic spectrum sharing.
How is that panning out? And when do we expect to see that hitting the Verizon network?
Thanks, Rick. Great question. So on the 5 gs, you have seen our progress in the quarter. We have basically now launched 9 markets on the way to get to the 30 that we have talked about for the full year. You can also see on the 5 gs mobility how the improvements has gone extremely fast.
I mean, take a couple of the cities where basically have doubled the footprint in this since we launched the market, and that's the space we're on to. At the same time, we have gone from roughly having 600 megabits in speed on the handset. Now we're doing easily 1.3, 1.5 and averaging up to 2 gig. What I want to tell you is that the development we're doing on technology is actually extremely fast compared to what I saw in 4 gs. And remember, I was part of 4 gs as well.
I mean, we are just a quarter into all these 9 markets when launched. We have launched with all the 3 infrastructure vendors we have, which means that we're coming out from sort of you're scaling in the beginning, getting all the technology to work and now we can start scaling. At the same time, we have now 3 handsets and we have the NCI Go MiFi that we launched, which is a sort of a business proposition as well for 5 gs. So I think that, that's what you see. We see a great improvement.
But still, it's a lot of the intelligent antenna sort of technology that we're developing. The team is out in the field every day. So I'm confident that we will continue to do well here. And remember now, in the 5 gs ultra wideband that we're doing right now, we're doing that in the most dense populated areas where really 5 gs is coming to its right with a fantastic sort of performance there. So that's it.
When we then talk about the 5 gs Home, you're absolutely right where I said that later this year, we're going to launch 5 gs or 5 gs Home with the NAR chip set. So that we will come back. So there's no changes to those plans. Ultimately, your question about DSS, we did dynamic spectrum sharing, which is an important piece for anyone that wants to do coverage on 5 gs. That is still coming in the first half of next year.
But in our case, what I've said before, the most important is to get our customers the best experience. We have the best experience on 4 gs right now. We are just giving them an extraordinary experience on the ultra wideband. We're going to be in the position to give optionality when we turn that off on, when we're going to turn it on with coverage and capacity when we see it's a benefit for our customers. But I would say the activity level in the engineering team, the team working on the ground in every city, doing the fiber is extremely high in Verizon right now.
So I think our focus is absolutely in the right place to see that our network is the number one. And remember also what I said previously, the 4 gs network now continues to win all the 3rd party awards. I mean, RootMetrics, JV Power in this quarter. So we're not neglecting that part of it neither. So you need to think about that when you have a customer in front of you.
Yes. Thanks, Simon. Brad, we're ready for the
next question. Thank you. The next question comes from David Barden of Bank of America. Your line is open.
Hey, guys. Thanks for taking the questions. I guess 2 if
I could. One for Matt. If we're guiding for the low end of the tax rate for 2019, should we be then thinking that we're kind of steering our earnings per share growth up? Or are there other things in the mix that we shouldn't be kind of taking that improvement right to the bottom line? And then the second question would be just with respect to the legacy 1.0 reporting for the business segment.
I think one of the surprises that came out of the AT and T result was the strength that they showed relative to history in their enterprise business and they talked about price stability and other things. I think Randall said that it was as good an outlook as you have for that unit for some time. I think that the performance at Verizon didn't seem to kind of reflect the same strength. But I'm wondering if it had something to do with the reorganization in the quarter and we should start to see some improvement there. I wonder if you
could kind of elaborate a little bit on that.
I can start with the last question there about the business side of it. And I think that when it comes to what you call the wireline business, I mean, it was a little bit blended, a little bit tougher on the enterprise side. But on the other hand, the governmental and the governmental business and the small and medium had a good growth for us. So I think we see a very good possibility to continue to see that with the accelerate sort of the decline in enterprise. We have a great funnel in the enterprise business as well.
And remember, I mean, there's no impact of the reorganization we have done. I mean, I would go the opposite. Yes, I would say that, hey, the changes we have done the last 12 months compared to what we've done the last 5 to 10 years, and we delivered these results in all the units, I think it's a really strength of the company that we are doing a transformation from a position of strength and which will just set us up to be even stronger going forward. And of course, Tam and her team are working daily with our customers. And as I said, also in my previously, I mean, the excitement from our enterprise customers when we come with a full portfolio, so be it fiber or UCaaS or if it's coming with 4 gs or 5 gs solution, mobile edge compute, I think we have a good and compelling story to continue to work harder.
So that's how I see the business. Then, of course, we still have some legacy business declining in the enterprise side, which we've had for a couple of quarters right now. Our work is to see that with decelerated over time. Matt?
Yes. So David, on the ETR, so as I look at that, remind you that on a year over year basis, the adjusted ETR is actually is up, as I mentioned in the prepared remarks. And largely that's because of the one time impacts a year ago from the adoption of the tax reform. So we do see that continuing to be higher year over year. But despite that, the EPS in the quarter was up $0.03 even with some headwind from the ETR on a year over year basis and also approximately $0.04 of headwinds on the from the accounting standard.
So kind of similar to the Q1, so good EPS performance year over year in both Q1 and Q2, strong momentum therefore as we jump off into the second half of the year. And so feel good about where we are so far this year, and we'll see how the back end plays out, but certainly a very strong platform to be building from.
The next question comes from John Hodulik of UBS.
Hey, thanks. Two questions. First on the 5 gs Home. Hans, how should we think about the expansion of the 5 gs home footprint once you get the standards based equipment? And anything you could tell us on sort of growth in the target market or how you expect that subscriber base to grow?
And then the second question is on spectrum. Obviously, you guys control less spectrum than your current competitors. And with the T Mobile Sprint deal, we're looking at the creation of a company with over 300 megahertz of spectrum. Is that a competitive disadvantage for you at this point? And would that situation worsen with a competitor out there with that much spectrum, certainly relative to its smaller subscriber base?
Thanks.
Okay. On the 5 gs Home, I think what was remember, we have the limited sort of 5 gs Home in 4 markets right now, and we kept both the development on our software as well on how many CPs we had as we did the proprietary solution. The only thing I can say, our Windshare is really good in those markets. It seems to be a good appetite for 5 gs Home. We have a good performance of it.
And then we're going for the second half of this year or this part of the year, we're going to come back with an NR sort of 5 gs home CP equipment. And I think that what we're going to do, we need a certain size of market that so it makes sense for us. So I think, as we said before, I mean, this is a 2021 when it's going to have a significant impact on our revenue. So 2020 is going to be an important year for us. Of course, coming out now in the latter part of this year and starting adding markets all the time will be very important.
On the spectrum side, I mean, I think that we always had a headwind that people don't think we have enough spectrum and all of that. I mean, what this organization and this engineering team is doing with the spectrum is, I would say, is magnificent. And remember, sometimes when we talk about spectrum, there's so much more. It is As I said previously, we have a very compelling position when it comes to millimeter wafer outer wideband, but we also have spectrum where we can deploy 5 gs in the other bands. Ultimately, 5 gs is going to be on all bands.
And I have a high confidence that my team is going to be doing that well, continue to have the leadership in the market when it comes to network performance. There might also come up opportunities over time where it could be added spectrum. But right now to launch both capacity and coverage, we feel confident on the assets we have.
Great. Thanks.
Thanks, John. Hey, Brad, we're ready for the next question.
Thank you. The next question comes from Jennifer Fritzsche of Wells Fargo. Your line is open.
Great. Thank you for taking the question. If I may, I just wanted to revisit on the fiber activity. I think you said you're now adding 1400 miles of fiber route miles every month versus 1,000. Some power companies have cited some issues with municipalities and power companies and utilities.
Are you finding that easier lately or harder? Because that just seems like a 40% increase monthly is a big jump.
Thank you for the question. I would say this is not an easy work. This is but this is really what Verizon is great at. I mean, we have people all the way from working with the municipalities, working with engineering, planning, working with third parties. And remember, in the couple of years since we decided to invest together with Corning in the fiber factory, we have come to actually running 1400 route miles a month.
So yes, you're right, we are scaling right now and the team is really, really responding to the demands we have on them. We're always going to have even higher internal demands on them. But as you can see, we definitely have a good role right now. But that doesn't mean that it's easy to do it. But I think we have put the machine in place with a team that I have a lot of component in to do it.
And Hans, if I may, should we continue to see that number increase throughout the year as you gain more scale?
Not so much. I think we're starting to get things on the volumes we are, and that's really important to understand because there has been questions on the market. The CapEx will go up and all of that. Remember, we are almost on the highest sort of volume where we believe we need to be in order to serve these markets because there are, of course, technicalities for doing it. So I think we have a machine right now that is actually executing very well on the high volume.
There might be some increases, but maybe not so much more. I think now it's more about the broad deployment in all these markets where we are right now deploying fiber.
The next question comes from Michael Rollins of Citi.
A couple of questions. First, have there been any recent changes to the cable MVNO deal? And how do you see your role continuing to evolve as a wholesaler of capacity in the industry?
And then secondly,
is there an update on any of the potential strategic moves you could make on the wireline side, whether it's asset optimization or trying to figure out maybe how to proceed in the video business with the
current size that you have?
Okay. On the M and O side, now there are no major differences, but the important is that we believe it's a good model. Remember, we outlined our net of the service strategy where we sometimes we're doing the connectivity and then we have others being on top of this and MNO. Sometimes we do the connectivity new platforms And in some cases, we do the whole strategy. So I think that continues to be important for us, and we're happy with our partnership with the cable MVNOs, which is part of our how we are actually doing a multi usage of our assets, getting maximum utilization on the investments we're doing.
So for us, this is playing straight into the long term goals as we have as a company. On the wireline optimization, we I would say that the biggest assets we have here is, of course, all the infrastructure we have, but also the customer relations we have and we are working. Of course, we are looking into all the areas we need to fortify or the areas we should drop, which was the market is not demanding it. And I think that's a very normal way of reviewing the strategy all the time. And Tammy and her team that now have been in place for this quarter, they're constantly talking to the customer what we need to do and where we need to fortify in some areas where the products may be non diluting.
But it's not major. It's just a daily grinding that you do in order to optimize how you work with your customers and how you optimize your capital and efficiency. And I can also add, of course, that in this quarter, we announced then that we're going to work with YouTube TV when it comes to the sort of the linear TV, both for the Fios optionality as well as for the wireless customers. So again, working with the model that we outlined in February and just continue with that.
Thank you. The next question comes from Craig Moffett of MoffettNathanson. Your line is open.
Yes. Hi. Hans, I wonder if we could go back to the spectrum question for a second. I understand that the longer term spectrum position for 5 gs, you have a lot of spectrum bands outside of millimeter wave. But there's been a lot of concern in the market of late that for the near term, your coverage map may be more limited than your competitors until you can start peeling away some of your LTE and 3 gs committed spectrum bands and dedicate them.
Can you just talk about that issue and how you think about the coverage layer of 5 gs over the next few years as you make the transition?
No, that's a great question. I think, first of all, DSS with the dynamic spectrum sharing is the same for all. And that's a standard solution coming out in the market is software. So I think that we're not disadvantaged by anyone if you want to deploy your coverage. And I think that's how one.
At the same time, you also want to see that there's enough handsets and things out in the market when you start turning on 5 gs, you get because we want to do a transformative feeling of what 5 gs is. We don't want to just rebrand it and say it's 5 gs and you don't feel it different. We already have the best 4 gs network and for us the customer is the most important. So you're right. I mean, I see that we will have a coverage map whenever it's going to be needed for our customers, and it's going to be enough handset in the market and no disadvantage for anything.
So I think that historically, we have had those feedbacks that we are not in the right position with spectrum, etcetera. I come from the outside and worked and seen what Verizon has done with Spectrum and with new softwares and with optimizing how you build the networks. And I'm confident that we have a good path here, and I'm not feeling that we're disadvantaged. I feel that we are executing right now. We're launching markets where others are doing other things.
Is there any concern that even
from a marketing messaging perspective though that your competitors will have more ink on the map, so to speak, early on in 5 gs, even if the experience in 5 gs may not be all that much better than your 4 gs networks?
Let's see how that turns out because again, it's a lot of promises. I think that Verizon has had and I actually inherited a fantastic sort of DNA in this company that we first do the things and then we start marketing it, and I think that's what we'll continue to do. They might have other strategies. So I'm not going into that context about who is talking most right now. I'm working with the technology myself weekly to see that we are doing this right for our customers.
And that's a consumer, it's an enterprise customer, it's a governmental customer, it's an IoT customers. We think it through, and that's why we built the Intelligent Edge Network already started 2 years ago. And I think that the significance of understanding how important that is for the success of Horizon, I think, has not really been understood yet. And we will just continue to execute on that. But there's going to be a lot of message in the market, and you know it as well.
Just be confident that our company, Verizon, will continue to right sort of performance to all our customers in the right moment.
The next question comes from Colby Synesael of Cowen and Company. Your line is open.
Great. Two questions, if I may. First for Matt, I was hoping you could quantify the cost of the VSP plan that was implemented in the Q2 since that didn't seem to have an impact on free cash flow. And then secondly, if you're able to just kind of quantify the savings we could expect from that as we go into the Q3? And then my second question has to do with the fiber route miles that you're referencing on the call.
I just wanted to separate the conversation between the route miles and small cells. So I appreciate you're adding about 1400 miles route miles per month in the second quarter. But are you seeing the same momentum in terms of actually getting the small cells put up as well? I feel like you could still be adding the fiber route miles, but not necessarily getting the actual small cells up and it seems like those two things would have to go hand in hand and that might explain why some of the other companies that are out there doing the same thing might be seeing delays on the small cell side?
I can start with the fiber and Matt will respond on
the other one. So the fiber, remember,
it's a multi use fiber, and I have several different customers. I have the network guys that meet these with 4 gs and 5 gs. I have the enterprise, the small and medium and I have wholesale. And that's, of course, very important when we build that we can have owner economics on fiber and we can build it as we had all those customers. But of course, initially, quite a lot of the fiber is coming and going to the small cells.
And that's why we are able to turn up the 9 cities we have done so far. But again, the question earlier was about how much are we now actually gaining of it. I think this is an early indicator about how we're building a network because we're you need to start with the fiber and getting the permits in the cities before you can deploy the 5 gs. So this is early indication that we have a high speed in organization to be prepared for the 5 gs and whatever other use cases we have for fiber.
Matt? Yes. So, Colby, on the voluntary separation, Obviously, the income statement charges we took in the Q4 of last year from a cash flow standpoint, we took probably the largest piece was in the Q1 and then some in 2Q and 3Q. Certainly, I think that there's good savings in the first half of the year. Frank mentioned like $480,000,000 of positive impact in the first half of the year.
And we'll have another step up in 3Q as the final tranche of employees came off payroll at the end of June. So for the full year, I expect that to be north of $1,000,000,000 of impact and that benefit on a year over year basis will carry over into the first half of next year until we get to a full run rate by June of next year. So certainly being a positive thing. It's part of our overall on improving the cost efficiency of the business, and we will continue to focus on that. We're well on track to more than meet the $10,000,000,000 commitment we made and the VSP was a big component of that.
Thank you. Yes. Thanks, Colby. Hey, Brad, we're ready for
the next question. Thank you. The next question comes from Mike McCormack of Guggenheim Partners. Your line is
open. Hey, thanks guys.
Hans, maybe just a quick comment on what you're seeing at robust subscriber adds in
the business segment for wireless.
What you're seeing from a competitive standpoint in the B2B marketplace? I know one of your competitors is pretty loud about getting bigger there. And just thinking about the ARPA drivers going forward, what do you see there? Obviously, you have more room to move to unlimited. Any other puts and takes on ARPA we should be thinking about for the back half?
Yes. On the business side, when it comes to wireless, I've we're taking share. We feel really good about it. I think that Tam and the team are doing a great job with the relationship we have and of course, with the network quality we have. It's very important for businesses.
I mean, there's no doubt about that coverage and capacity becomes even more important. And there's no enterprise company that has not been a digital transformation. So I'm pleased with that. We're going to do even more. So yes.
The second question was about the ARPA, and I will hand it over to Matt. But I can also say that the team with Ronan, especially on the consumer side, has been, since the unlimited with loans, continue to lean forward with new offerings, with new ways of dealing with the market segmenting it up and actually continue to have a good service revenue growth. And I think that's what I'm pleased with and I look at the team. I know that they have more card up their sleeves, let's say. And what Matt and I are doing together, we're transforming the company to have a disciplined approach to that to be prepared for that marketplace to continue to do well.
So I feel good about Ronan and what his team is doing. Matt? Yes. Thanks Hans. So Mike, as you think about wireless as a whole and
the ARPA trajectory, it's coming from the overall growth of the business. Just a few things to point out that's really driving both ARPA and obviously the total service revenue whether that be in the B2B space, which had very strong results in the quarter or the consumer space, which also performed well. Net account growth positive in Q2 of this year. That's up year over year. So good growth there.
We continue to lead the industry in phone gross adds yet again, a number of quarters in a row that we've done that. And in addition to leading the industry in gross adds, growing year over year and not that's something that not all industry participants can say that they did. So leading the industry in gross adds also leading the industry in phone churn yet again. The net result there is phone net adds of 245,000, a nice increase over the 199,000 last year. So as I think about the business in the first half of the year had nice strong performance that went from the operational side onto the financials as well puts us in a great place as we jump off into the second half of the year to continue that momentum and feel good about where we are at this point in time.
Great. Thanks, guys. Yes. Thanks, Mike. Yes.
Hey, Brad, we have time for one last question.
Thank you. Your last question will come from Doug Mitchelson of Credit Suisse. Your line is open.
Thanks so much. Just a couple on wireless competition. So Hans, obviously a strong wireless quarter. I'm curious if you're seeing any competitive impact from the FirstNet initiative at AT and T. I know I think you recently signed a deal with the Massachusetts first responders.
I'm not sure if that's sort of a sign of competition going back and forth. And then I was just hoping to revisit bundling the importance of video to wireless with AT and T planning to bundle HBO Max when they launch it next spring with wireless services. Is bundling video with wireless, does it lower churn? Or is it just necessary to compete on a promotional basis with others that are offering video? I'm just sort of curious how that informs your video strategy.
Yes. So you need to speak a little bit when we talk about consumer and business. But let me just say, I mean, if I look in the second quarter, it was a little bit more competitive than the Q1 when it comes to competition in the market. And that tells a lot about our performance then that we gained all those net additions. At the same time, we had a low churn.
So I think that on the business side, as I said before, we are doing well on the business side. And again, I think that the wireless part of the business side is important. And the network performance there is of critical essence, the coverage and the performance. But of course, there's competition for those deals as well. I think we're doing well in that area.
We will continue to do well. We have new offerings coming out, and we'll continue to build the network even more robust and getting more quality on it. So again, I think the team is there. Matt and I are working with the transformation of the company to enable us to continue to compete and do well in the market. And giving both Tammy, I would say, and Ronan the sort of the tools to work in the market.
And that's what we're doing. And I think we have done it well in this quarter and preparing for the rest of the year.
Just one follow-up on the video question there. Look, we're very confident with the most important thing to customers in wireless is the quality of the network experience. And so for the past couple of years now, we've seen competitors bundled video offerings in with wireless and we continue to lead the industry in phone gross adds and we continue to lead the industry in churn. So I think that demonstrates the most important thing to customers, the quality of that connection, the reliability of that connection and that when you have the best network, you don't need to bundle other things in there in the same way and we'll continue to be focused on providing the best quality network out there. Out there.
Brad,
that's all the time we have right now. Before we end the call, I'd like to hand it over to Hans for some closing comments.
Thank you, Reade. I think we've covered quite a lot of ground in this quarter because basically, the question has ranged for all our business. But just a couple of things. First of all, I'm really proud of the team, what they have achieved. And remember, we have changed the structure.
We have changed how we build the network. We have done a large voluntary program. We're reporting in new structure. We're put into new structure, and the team is executing well. I think that's the way we want to work here, continue to lead the market and continue to transform to be a strong company with the strategy we set out in February.
So then it comes back to execution of fundamentals. That's what we're doing, and we'll continue to do so to be disciplined on our capital, also continue to lead the market. And then, of course, I think a lot of questions are circulating around the 5 gs. What we laid out in the February Capital Markets Day is still valid, and that's what we are aiming for and we are executing on. And I think that the team is doing a great job there.
So I think that to sum it up, I'm proud of the quarter and the change we're doing at the same time delivering this quarter, so and financial earnings. So thank you very much for attending this call, and I guess I'll see you out there soon.
Ladies and gentlemen, this does conclude the conference call for today. Thank you for your participation and for using Verizon Conference Services. You may now disconnect.