Morning, and welcome to day two of our Global TMT Conference. Before we begin, disclosures are available at the registration desk. For those of you that I haven't met, I'm Mike Rollins, and I cover communication services and infrastructure for Citi. We're pleased to welcome Tony Skiadas, CFO of Verizon. Tony, great to see you. Thank you so much for being with us today.
Thanks, Mike, and great to be here. Before we get started, I need to point you to Verizon's safe harbor statement and our SEC filings, which can be found on our investor relations website. My comments may include forward-looking statements that are subject to risks and uncertainties. With that, Mike, we can get started.
Wonderful. Well, as typical, it's been an extremely busy year for Verizon. Maybe busier than some. What are you focused on right now, and how should investors think about your priorities for the balance of the year?
Sure. It has been a busy year and an exciting year and let me frame it for you. At a macro level, the team's very focused on four things. First, growing our mobility and broadband business and doing it in a fiscally responsible way. You've heard us talk about that. Our second priority is investing in the business and in the customer. We've seen our evolution with our value proposition. Third is delivering on our guidance for the full year, and we'll talk about that as well. Then fourth is generating strong cash flows, paying down debt, and returning capital to shareholders. Evidence of that is our first half results were very strong. Let me just share a few highlights from the first half of the year.
From an operational perspective, our mobility and broadband net add growth, we added over 1 million net adds for mobility and broadband net adds. Underneath that, our phone net adds improved by over 500,000 this year. We are making great progress on volumes. From a financial perspective, in the second quarter, we had our highest ever adjusted EBITDA margin of 40.1%, which is the first time in a long time. Similarly, our adjusted EPS grew by 6.6%. Our cash flows were up 24% in the second quarter and up 16% for the first half of the year. We are generating strong cash flows. We returned $9.4 billion in capital to shareholders through dividends and share repurchases, and that is up 60% year-over-year.
As we said on the earnings call, this is a structural change and an inflection in our results and a step function change in what we have seen from prior years. The way I would frame it is what is happening inside the company, it is a growth transformation, not just a cost transformation. It all starts with the customer. As you know, you have seen our value proposition and the ongoing work we are doing there with simplicity and our loyalty programs. Those are performing well. We have a relentless focus on the customer. What we say is we put the customer at the center of everything we are doing. We are driving our growth through targeted retention. You see our churn down 5 basis points year-over-year. We will continue to make progress on retention and through segmentation. That is great to see.
We are also taking cost out of the business. We talked about at the beginning of the year a $9 billion cost program, $5 billion of operating expense savings, and $4 billion in CapEx savings, and that is proceeding on track. Also, we are leveraging AI, both from a cost efficiency perspective, but also from a revenue generation perspective with our AI Connect business. We announced a deal with Google recently, so we will talk more about that. Lastly, we have the Frontier integration, and that is proceeding on track. We are starting to see some of the benefits from that. We talked about our synergies, at least $1 billion of synergies by 2028, so that is pacing along as well. If you think about what is coming in the back half of the year, the focus is largely the same.
Growing our volumes, both mobility and broadband, in a responsible way. Doing that through retention, and we have said if we can get 5 basis points of churn improvements, that gets us more than halfway to our growth targets. That is what we are seeing. That is just an example, but we will continue to focus on that. Growing the top line and the bottom line as we outlined in our guidance. In the second quarter, we raised our EPS guidance, adjusted EPS guidance to 6%-7%. We also raised our free cash flow guidance to 9%-10%. The team is very focused. We are proud of the first half accomplishments. We still have more to do, and the team is executing with a lot of urgency right now. We are excited.
Great. This gives us a lot to unpack and dig deeper. You talked about pivoting to grow as part of the strategy and transformation. As you've connected with your investors over the last number of months and recently, what are some of the underappreciated revenue opportunities for Verizon?
Sure. When I step back on revenue, what I would say is we're executing on our plan and driving volume growth as a catalyst for sustainable long-term revenue growth. As you saw in the second quarter, Mike, our mobility and broadband service revenue grew 2.8%. That's up 120 basis points sequentially. We talked about our outlook for the balance of the year with the third quarter growth rate approaching 3% and the fourth quarter approximately 4%. That's an acceleration in the growth rate. Underneath that, we also said that we expect a transitional year in revenue as we drive towards more volume-based growth. We talked about our wireless service revenue being around flat this year. That's still our expectation.
We see an improving trajectory in the second half of the year, and we expect our wireless service revenue to grow in the second half of the year, which is great to see. What gives us confidence around that are three facets. First is, as I mentioned, improving volume profile. We had a lot more net add, phone net adds, over 500,000 year-over-year, so we're starting to see the green shoots from that. The other thing is the promo amortization headwinds that we've been talking about for a couple of years. They've peaked, and now they're easing in the second half of the year.
That's a function of the work we're doing on simplicity. We continue to see great opportunities for revenue growth. Obviously, when you talk about conversions, that's the other area that we can continue to drive growth, particularly where we under-index in some of the Frontier markets in wireless. There's a lot of optionality. We have things like perks that are growing roughly 40%. That'll drive revenue growth and service revenue growth. Perks give us great revenue and also great margins.
Customers can also step up to premium plans as well. There's a lot of ways to get our growth rate up. Then to your question on some of the underappreciated areas. First, I would say is churn, and churn improvements and what that does to our business model. It allows us to be more efficient in growing our business and not relying on expensive subsidies and promos. We're starting to see that. Simplicity is the great. We did a lot of work and a lot of research around Simplicity, and it allows us to decouple the handset and the service pricing. We think that the financial benefits of that, we expect to accrue over time, and more and more customers are coming on to Simplicity.
Then, with convergence, we have a long runway to go there with the Frontier acquisition and continue to deploy fiber and customers attaching wireless to that. The other thing that's coming is AI Connect.
That's an exciting new revenue stream for us. You saw the deal we signed with Google recently that is in excess of $1 billion, and it's a great start, and we have a lot more deals in the pipeline. I'm sure we'll talk about it. That's a growth vector above our core business. That's great to see. When you put that all together, the actions we're taking are driving durable improvements in revenue and set us up well to finish the year strong and get us ready for 2027.
Two follow-ups on Simplicity.
Sure.
When I look at the Simplicity Plan and what you've put into the market, and you were talking about how better phone net adds in the back half of the year is more about churn reduction. But when I look at Simplicity, that feels to me like it's actually helpful to drive store traffic and potentially gross adds.
Absolutely.
How does that set you up specifically? Because it seems like that's in addition to everything you're doing on the churn side.
Sure. As I mentioned, we did a lot of work before we launched Simplicity and our loyalty program, so that's an ongoing evolution of our value proposition. Simplicity is hunting well. More and more customers are taking Simplicity. As I said, it decouples the service pricing from the handsets. So it gives customers a lot of optionality and a lot of choice.
Whether they what level of service they'd like, and also if they need a device, there's options there. If they don't, they can bring their own as well. It can certainly drive store traffic, particularly in single line, two-line accounts where we've historically under index. So we like what we're seeing thus far. We launched it back in mid-June, along with leveraging our World Cup investment. So it was a great launch. Team did a great job launching those solutions for customers and we're happy with the progress thus far. It's driving us towards our net add targets as well. So, we said we'd be at the upper half of our net add guidance range of 750,000 - 1 million, and we're pacing towards that.
And then in terms of ARPU. The other side of Simplicity is to decouple the subsidy and charge for the device, you are offering a lower price point, and it is particularly notable for one in two lines where the industry has had a behavior of charging more for that first line, marginally less for the second, right? For that onesie, twosie line especially, is there a risk on the ARPU side that you have to take a hit to that to get the growth, to get the unbundling of the subsidies?
Yeah. The way we look at it, Mike, is on a cohort basis. So, if you look at an ARPA overall, obviously a single line ARPA is much different than a four-line ARPA.
But we look at the ARPAs on a cohort basis, so single line, two line, and we see great opportunities for growth. Customers being able to attach things like perks and other adjacent services, and even take broadband. So there is a lot of optionality there. When it comes to account growth, we are really focused on growing both accounts and lines. It is both.
Maybe just for a moment, flipping over to the cost side, then maybe we will come back to wireless again for a few more minutes. On the cost side, you have got this $5 billion in year savings goal, but that is in year. So help us think through the exit rate opportunity.
Sure.
And where you could take this over time.
Sure. Our $5 billion cost program is on track. Maybe I'll just unpack where some of that's coming from first, and then we'll get to the future. The largest part of that is around our network operations and network operating costs. If you think about taking legacy elements out of the network, taking copper out, modernizing with fiber, recycling that copper, lower access costs with a larger footprint, also integrating Frontier. So that's one of the largest areas. Some of the other areas we're focused on is advertising and marketing efficiencies.
We've done a great job there. The one thing we have seen is structural improvements in both our COA, our cost of acquisition, and our cost of retention. Cost of acquisition was down 15% in the second quarter, year-over-year. Cost of retention down 17% year-over-year. Those are structural things, particularly on cost of retention, on the segmentation and micro-segmentation work that we're doing. We're operating with a leaner workforce as well. As we look ahead, there's certainly more opportunities to take cost out beyond 2026. We see opportunities in 2027 and 2028. That continues to be centered around the network, so we still have a lot more work to do on the network side as we modernize. As I mentioned, Frontier is in the fold now, so driving synergies there.
More work to do on our AI and tech stacks, and further deployment of AI, both in the network and in areas like customer care. We certainly see opportunities there, real estate, et cetera. There's a lot of areas that we're still getting after. Customer experience is probably the largest and one of the biggest areas that we have in front of us in terms of improving the customer experience and making sure we're investing back in the customer. That's really important for us because when you think about it, the cost cuts and the efficiencies allow us to do four things. Number one, run more efficiently, and you see us doing that. The second part is investing in the customer experience, and we invested in our Simplicity and our loyalty programs. That requires investment, and those investments come from the cost cuts.
Third is addressing and working through the transitional year in service revenue, and fourth is returning significant capital to shareholders. It allows us to do those four things, and the first half results gave us the confidence to raise our adjusted EPS guide to 67% for the full year. A lot of great work, but we still have a lot more to do.
The size of dollars that we are talking about and the percentage change in a single year are quite large. This is quite a transformation.
Yes.
What are the risks that there is this unintended consequence or consequences in the next one to three years where, because of the cuts that you are making today, at some point in the future, that could negatively affect either your service or your customer experience or your go to market?
Yeah. It is a significant number, as we said at the outset, that we are taking bold steps. These are bold steps. And one of the things we did, and this is both on CapEx and OpEx, is we put a lot of rigor around this, making sure that the areas that we are focused on are aligned to growing our mobility and broadband business, and areas that were not were reduced. But this is also about reducing friction in the business and with our customers.
Making sure the customer experience is improved, simplifying our business as well, and simplifying our processes. That takes investment, and those cost cuts are funding those investments along with our loyalty programs and things like that. We are very focused on making sure that the cost cuts make us more efficient, but they are also allowing us, as I said, to invest in the customer and in the customer experience, and that is what we are focused on.
Maybe just taking a step back on the wireless market again. Maybe a question for you first on some of your indications. Account growth, this has been a focus of getting that back to positive. Are you on track to deliver positive accounts in 3Q and potentially in 4Q?
Sure. What we have said is it is important for us to grow our relationships with customers, whether that is at a line level or an account level. Obviously an account level, and both are important, by the way. At an account level, obviously, we can add more lines, we can add perks.
Customer can take broadband, and that is a great ARPA customer. It is a sticky customer as well. We talked about on the earnings call in July about account growth, and we do expect our accounts to grow in the third quarter, and our focus is to continue to grow accounts, and I am confident that we will.
Very helpful. What are you seeing more broadly, just competitively in the wireless category? If I could just add to this question just a little bit, we're in an environment where it seems like device replacement might be lengthening. You've talked about convergence. You talked about the focus on lower churn. Is there an opportunity that we get back to just the switcher pool shrinking and just the pace of activity in the industry slowing? I'd love to get your thoughts on all that.
Yeah, sure. I'll start with your first question.
Yeah.
On the competitive market. It's a competitive market, Mike. Nothing's changed in that regard, so we don't expect it to change. Our focus is competing on the strengths of our offerings and our network. We have a great value proposition with Simplicity and our loyalty programs, and with myPlan. We have a lot of optionality for customers.
With Simplicity specifically, that's hunting extremely well, and we like what we're seeing thus far. More and more customers are taking Simplicity. So I feel good about that. You mentioned also device refresh cycles, and I know today is Apple's.
Was that today?
Yeah. That was, yeah. Sounds like it. Seems like it. You talked about device refresh and upgrades, so we can talk about some of that as well and how we think about that. Our focus is to grow in a responsible way and grow both with gross add growth, but also with retention and the work we've done to segment the customer. As I said, our cost of retention is down, and our churn is down 5 basis points.
That's a focus of continuing to bring down churn as well back half of this year.
Absolutely. That's a heavy focus of our team, and we've made great progress. We're It's a daily grind and the team is really focused on continuing to reduce churn year- over- year.
With a smartphone cycle, I think we're 4.5 hours away.
We're actually tracking it.
Yes. 4 .5 hours and counting down. What are your expectations for this cycle? Can you share with us what you think is going to happen with subsidies during this cycle? This is always a big focus.
Yeah. Obviously, like you, we'll wait and see what happens later today with the launch, so really can't comment on any of that. But in terms of upgrades and upgrade volumes, maybe we can start there. I think you saw in the second quarter, our upgrade volumes were down over 20%. Really, that's a function of two main drivers. First, customer choice. Customers are choosing to hang on to their devices for longer periods of time. The average upgrade cycle is now around 43 months, so it's elongated by two months since last year. Again, customers are happy with the devices they have. The second, as I mentioned, is the work we're doing on targeted and segmented retention.
Not every problem needs four free handsets to solve. The team has done a great job continuing to segment the base and being very disciplined in our approach to retention. With upgrades down over 20%, our churn came down as well by 5 basis points. We are very focused on that. We have a lot of options too for customers, as we mentioned about Simplicity gives customers optionality for their device needs. If they want the latest and greatest device, we have options for them. That is called Simplicity Plus or Simplicity Pro. We have those options available to them. If a customer wants to bring their own device, they are more than welcome to do that, and they can bring their own in Simplicity as well. So it is very flexible, and it gives customers a lot of choice and flexibility in their connectivity needs.
The discipline has supported the strong cash flows that you see. We have modeled, and we have strength in our business to model a variety of outcomes. I do not have a crystal ball to tell you exactly what is going to happen obviously in the fourth quarter, but we have been through this before, and we will see how it plays out.
You mentioned the different tiers that you have with Simplicity. What are you seeing in terms of the mix of up-tiering from customers relative to what you typically see in a rate plan menu?
I mean, customers, it is early days on Simplicity, so we are almost 90 days in now. So we are still learning. But we like more and more customers are coming on Simplicity. Many are bringing their own device, which is great to see, and obviously that keeps a lot of the subsidies in check, which is extremely important. As I said earlier, where we see good strength is in one and two-line accounts, and that is performing well. We expect customers will take perks and other things that will continue to drive sustainable ARPA growth.
Convergence, you mentioned a few times. What should investors know about how Verizon's approaching convergence differently? How far away are we from a tipping point where just the momentum that you get from convergence, you could see more of a benefit to churn or more of a benefit to cost items or profitability?
Yeah. So convergence is real. I would say it's working. It's demand led, which means it's being driven by the customer. We are seeing now with the Frontier deal closed, we are seeing those cross-sell economics that we expected. Mobility customers attaching fiber customers attaching mobility, and both cohorts churning materially less than a customer with a single product from us. In terms of opportunity, 20% of our mobility base has a broadband service with us, so we have a lot of room to run. As we said, we under-index in wireless in the Frontier geographies, so obviously the team's been working at that with urgency. From a churn perspective, we see 30% lower mobility churn when customers have both mobility and broadband services with us. So it's a very sticky customer.
Obviously, they can attach things like, as I mentioned, perks, adjacent services to continue to grow. Or they could get increases in speed tiers as well. So there's a lot of optionality there. We just launched our Verizon One product, which is a converged offer. It's very simple. $70, mobility and broadband included, taxes and fees included. So very easy for customers. Very transparent. So that was launched also at the end of June. So we are very happy with that. Obviously it's early days as well, but we like keeping it simple, and that's really the focus. From a cost perspective, we have owners' economics there on both our wireless network and our fiber network. We have added Frontier into the mix.
We also have the partnership with Tillman as well to build fiber at a very efficient rate at our specifications so we can earn the margin on both products as a result of having the owner's economics. So we are really pleased with our progress thus far, and we have a lot of room to run.
What about fixed wireless? As you are pushing into these MDUs, can that accelerate the quarterly rate of fixed wireless net adds?
Yeah, absolutely. Our fixed wireless business continues to grow. We continue to take share. So we are very pleased with that. The multi-dwelling unit, or MDU solution that you are referencing is another opportunity to expand our market, and we are able to do that using millimeter wave technology. So using our wireless millimeter wave spectrum, delivering high-quality broadband in MDUs. So that is a great opportunity to continue to increase our TAM in the FWA space. Customers want high-quality broadband, and this is another way to deliver more open for sale for us. So we are excited about it.
On the satellite front, are you seeing any increased competition from the LEOs, whether it is in wireless, I realize early days with direct to device or particularly on broadband? How do you see the risks and opportunities across these categories, mobility and broadband, from these LEO constellations?
Yeah, sure. I would start more broadly by saying, we see satellite as complementary to our business. As you know, Mike, 99% of our network covers where people work and live. We use partnerships such as AST, Skylo, Globalstar, for example, to complement our network in more rural and remote geographies.
This is about density. It is about uplink. It is about urban and suburban, where we generate over 95% of our revenues. Satellite works well in sparse terrain, and where a cell site either doesn't make sense for us. It is a market, it is just not our market. We compete where the density economics reward us for our fiber and our wireless networks. Those take many years. It has taken us many years to build. The best example I can give around density is, I know you and some of your peers joined our network engineering team on a visit to MetLife Stadium to see some of the experience we provided for fans at the World Cup. You got to see our fiber network, our wireless network, our distributed antenna system inside the stadium, along with using our spectrum assets to deliver a very rich experience for customers.
That takes decades to build. We are going to compete on the strength of our offerings and the strength of our network. I also know the satellite MVNO question is always lingering, so I will just reiterate what we said at earnings is that we do not see a satellite MVNO as an option for us. It does not add to our distribution, nor does it give us the ability to sell something we cannot already do today.
Yesterday you announced a deal to buy a lot of fiber.
Yes.
80 million fiber miles?
Yeah, it's a lot of miles.
A lot of miles. So what are you seeing in terms of the TAM for this hyperscale AI fiber opportunity? Is there any updates then on the pacing to get to the target of 40 million - 50 million fiber passings in your footprint?
Yeah, sure. So maybe I'll start with the last part of your question on fiber. So we're deploying fiber at an aggressive pace, and we said we'd see over 32 million passings this year, and that's progressing as planned, and we're well on our way to the 40 million - 50 million passings that we said over the medium term. So that's humming along. On your first part of your question around AI Connect and what we call AI Connect, we're excited about that. That's a new revenue stream above our core business. As you saw back in the second quarter, we announced a deal with Google, a long-term deal with a value in excess of over $1 billion. It's long duration. It's a great revenue stream and a great start for us.
We have a lot of other demand and deals in the pipeline, and we see this as a multibillion-dollar opportunity for us. So the team's obviously working that pipeline with urgency. The AI Connect business comes in three different flavors. First is power space and cooling with our central offices.
So this is reusing assets we already have. It's building dark fiber and fiber routes, and some customers may want wave or lit services as well. There's a few different ways that we see growth opportunities there. As I said, the Google deal's a good start. We see a lot of demand. Hyperscalers want the Verizon network. We've been building fiber for a long time. We have over two decades of building fiber. Carrier grade, low latency, high throughput networks. This is very much in our wheelhouse to do. We're very confident that we can help support and deliver on the AI economy and the infrastructure providers. We're very excited about the opportunity. You mentioned the deal that we signed with Corning, and that's both for consumer fiber, but also to support the AI deals as well.
That shows the confidence that we have in the opportunity and the commitment we have towards deploying fiber. We're very excited about it. From a deal perspective, each deal is customer specific. We've got a lot of questions around that. I would be careful not to extrapolate one deal to the rest of the pipeline because every customer's needs are different. But in terms of returns and margins on these deals, we like what we see. The margins on these deals are very good. For example, if we have a tenant on a fiber route, we like that margin. It's a really good margin. If we get two or three tenants on that route, it's very attractive for us. The other optionality that we have is we can run fiber for our own needs as well to reduce our transport costs.
This is a revenue stream, as I mentioned, that's above our core business, and we expect it to be meaningful in our results in 2027. The team's getting after it with urgency, and you'll hear more about it soon.
Great. We'll try to do three more topics in three minutes. First, CapEx. You talk about building fiber, investing. How should we be thinking about CapEx, whether it's this year and into the future, given that there may be more opportunities to pursue revenue and TAM?
Sure. Our first priority is to invest in the business and sustain our network excellence, and that's what we're doing with our capital program, $16 billion - $16.5 billion this year, that's all in, and focused on mobility and broadband. If you look underneath, we continue on the mobility side, deploying C-band, and we said we'd be substantially complete this year, and that's on track. We're deploying fiber, as I mentioned, to at least 32 million premise passed. That's moving along, and we put a lot of rigor around that to ensure that the programs that we have are really aligned to mobility and broadband growth. In terms of the $4 billion of savings in CapEx, we talked about de-emphasizing areas that are not aligned to growth, and a lot of rigor and work was put around that.
In terms of deals and AI infrastructure deals and capital to support those deals, for 2026, that's included in the $16 billion - $16.5 billion.
That we see. In terms of next year, we're not going to guide on 2027 yet, so we'll come back in January on how we think about our capital program for 2027. We expect that the AI Connect deals will be success-based capital.
Okay. Capital allocation. So how are you thinking about investing in the business, as you were just describing, relative to what you're returning to shareholders? Since we are ahead of what could be a significant spectrum auction next year, do you have to start putting some money aside to prepare for what you may or may not invest in spectrum in the future?
Yeah, sure, Mike. Our capital allocation policy and priorities are very disciplined. Our first order of business and first priority is investing in the business, as I just talked about with our capital programs, but also investing in spectrum. We just acquired AWS-3 spectrum in Auction 113.
$3.2 billion. Investing in the business also includes M&A, including the deal we just closed at the beginning of the year with Frontier. Our second priority, capital allocation priority, is the dividend, and we said our commitment to the dividend is ironclad, and we've raised the dividend for 20 straight years. That's a track record we're extremely proud of. Our goal is to put the board in a position to continue to increase the dividend in the future. Third, and to your question around balance sheet and leverage, having a strong balance sheet and delevering is extremely important to us, and we've, as you heard on the earnings call, we paid down the Frontier debt six months early, and we've made progress on our long-term leverage target as well, down to 2.5x , and we expect to be at our leverage target in the 2027 timeframe.
Our fourth capital allocation priority is share repurchases, and we said we would repurchase up to $4.5 billion in shares this year. Through June, we already had repurchased $3.5 billion in shares. We're making good progress on capital returns, and we're able to execute on all four pillars of capital allocation simultaneously while we're executing on our transformation. The second part of your question, look, we always look at things, spectrum and other assets, and we're always going to do that, whether it's a build versus buy lens. We have ample capacity if it makes sense for our business. We're still focused on deleveraging, and that comes from EBITDA growth, and it comes from strong cash flows and paying down debt. That's our focus.
To close this out, as investors begin to think about 2027, what do you want them to know about Verizon's prospects for next year?
Yeah, sure. We are executing on our plans, making significant progress on our transformation, growing responsibly, and making sure that we return capital to shareholders, and also investing in our business. Those are really the key pillars that I started out with in the beginning, and you see us doing that. We have made a lot of progress in growing our mobility and broadband business, doing it through churn improvements, being more efficient, investing in our value proposition and in the customer and in the customer experience, and returning cash to the bottom line and generating strong cash flows. In the first half of the year, we feel very good about the results. We have more to do, and we are excited about what is ahead. Thanks, Mike.
Thank you very much. Thanks.