Verizon Communications Inc

NYSE:VZ

Earnings Call Analysis

Verizon’s Strong Performance and Growth Outlook for 2024

In the third quarter, Verizon achieved a 2.7% increase in wireless service revenue and a record $12.5 billion in adjusted EBITDA, signaling robust operational momentum. The company generated $6 billion in free cash flow. With almost 4.2 million fixed wireless access subscribers, they surpassed their target 15 months early. Adjusted EPS was $1.19. Looking ahead, Verizon expects both wireless service revenue and adjusted EBITDA growth to exceed 2024 guidance midpoints. They maintain a disciplined approach to capital allocation while investing in the business, supporting the dividend, and reducing debt.

Resilience Amidst Crisis

Verizon's recent performance is set against the backdrop of significant challenges posed by Hurricanes Helene and Milton. The company's robust network infrastructure provided essential support during these disasters, highlighting its commitment to customer service. As a result, Verizon's response has solidified its reputation as a reliable telecom provider.

Strong Q3 Financial Performance

In the third quarter of 2024, Verizon reported impressive financial metrics, showing year-over-year growth in wireless service revenue of 2.7%, amounting to $19.8 billion. Additionally, the company achieved a record adjusted EBITDA of $12.5 billion, marking an increase of 2.1% compared to the previous year. This growth reinforces Verizon's position as the leader in the telecom industry.

Operational Momentum

Verizon has demonstrated operational strength across its divisions. The company reported over 239,000 net adds in postpaid phone subscriptions, more than doubling from the previous year. Both consumer and business segments are contributing positively, showing promise for sustained growth in the coming quarters. Notably, Verizon's prepaid segment showed improvements with 80,000 net adds, signaling a positive trend.

Promising Broadband Growth

The broadband segment is thriving, with nearly 4.2 million fixed wireless access subscribers, surpassing the company’s target 15 months ahead of schedule. The total number of broadband subscribers now exceeds 11.9 million, reflecting a 16% increase year-over-year. This rapid adoption of broadband solutions showcases Verizon's effective strategic execution.

Strategic Acquisitions for Future Growth

Verizon's transformative strategy includes several strategic acquisitions, such as the pending Frontier Communications deal, which will expand its reach in mobility and fixed broadband. Additionally, the company is enhancing its spectrum portfolio through a transaction with UScellular, which will improve network efficiency and capacity, further strengthening Verizon’s market position.

Financial Health and Guidance

The financial health of Verizon is underscored by a strong free cash flow of $6 billion in Q3 and a year-to-date figure totaling $14.5 billion. Looking ahead, Verizon remains committed to its financial guidance for 2024, with expectations for continued growth in wireless service revenue and adjusted EBITDA to be at or above the midpoint of their projected ranges. The company emphasizes a disciplined approach to capital expenditures, maintaining a full-year CapEx guidance of $17 billion to $17.5 billion.

Sustainable Business Practices

Verizon’s focus on sustainable business practices includes implementing a voluntary separation program to enhance operational efficiency. The financial benefits of this initiative are expected to be realized in the upcoming quarters, complementing the company's long-term strategy for cost management and strengthening its workforce.

Conclusion: Optimism for Future Growth

In summary, Verizon's third-quarter results exhibit resilience in the face of challenges, strong financial performance, and ambitious growth plans. The company intends to sustain its momentum while investing in its core areas, including expanding its mobile and broadband capabilities while paying down debt. With a unique market position and proactive strategies, Verizon is well-prepared to capitalize on future opportunities.

Earnings Call Transcript 2024-Q3

[Brady Connor, executive]

Hello, and welcome to our third quarter 2024 results discussion. I'm Brady Connor. And on this recording, you'll hear from our Chairman and Chief Executive Officer, Hans Vestberg; as well as our Chief Financial Officer, Tony Skiadas.

Before we begin, I'd like to draw your attention to our safe harbor statement, which can be found at the start of the earnings presentation posted on our Investor Relations website. Information in this presentation contains statements about expected future events and financial results that are forward-looking and subject to risks and uncertainties. Discussions of factors that may affect future results is contained in Verizon's filings with the SEC, which are available on our Investor Relations 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.

A detailed overview of our third quarter results and other materials related to this discussion was posted this morning to our Investor Relations website. Additionally, we hope you'll join us for a webcast of our sell side analyst meeting for a strategic broadband update that starts at 9:00 a.m. Eastern Time this morning, October 22.

With that, I'll turn it over to Hans.

[Hans Vestberg, executive]

Thank you, Brady. Good morning, and welcome to Verizon's third quarter earnings update.

Before we dive into our performance in the quarter, we must address the devastating impact of the Hurricanes Helene and Milton on communities throughout the southern parts of the United States. At Verizon, we always run to a crisis. Our teams acted quickly to assist all the affected communities, and we are deeply invested in helping everybody come back stronger. Our superior network made a real difference during these events. Our network infrastructure was resilient and delivered for customers and the first responders who really relied on it.

Now let's dive into our third quarter performance. The actions we have taken since early 2023 are driving improvements across all our businesses. In the third quarter, we delivered sequential and year-over-year growth in wireless service revenue and adjusted EBITDA, and we had a strong free cash flow of USD 6 billion.

Wireless service revenue was up 2.7% over last year. Our quarterly adjusted EBITDA of USD 12.5 billion is the highest we have ever reported and the highest in the telecom industry by far. With these results, we are confident that we will not just deliver on our 2024 financial guidance, but the wireless service revenue and adjusted EBITDA growth will come in at or above the midpoint of our guided range.

Our momentum continues to build from strong operational performance across mobility, broadband and private networks. While bringing choice and value to our customers, we signed strategic M&A and implemented cost efficiencies to make Verizon stronger.

I'm proud of our team and excited about how we're using our scale and industry-leading position to bring value services and experience to our customers every day. We're deepening customer relationships and offering critical services that earn us a high return on capital. And we delivered our 18th consecutive annual dividend increase.

In the third quarter, we brought more C-Band and network capacity to states across the country. As always, our network is the foundation for our success in mobility, broadband and private networks.

As Brady mentioned, following the earnings call, we will be providing an update on our broadband strategy. We will share our vision for the future of broadband, including ambitious new targets that reflect the strong demand that we're seeing across both fixed wireless and fiber offerings.

Now let's discuss how our superior network and our strategy are driving results across our business. In mobility, we more than doubled postpaid phone net adds over last year with 239,000. Importantly, we also delivered positive consumer postpaid net adds in the quarter, both with and without our second number offering.

We have focused on delivering choice, value and simplicity to our customers through myPlan, myHome and new business offerings. Our strategy of giving our customers more options than other wireless providers continues to drive positive momentum in both postpaid phone gross adds and churn. We have applied the same operational rigor and commitment to our prepaid brands, and results are very encouraging.

For the first time since the acquisition of TracFone, we had positive prepaid net adds for the quarter, excluding SafeLink. We expect our prepaid business to continue improving quarter by quarter as we further refine our offerings and execution.

In broadband, we ended the quarter with nearly 4.2 million fixed wireless access subscribers alongside a strong Fios growth. The continued success of our fixed wireless offering allowed us to reach our goal of 4 million to 5 million fixed wireless access subscribers 15 months ahead of our original plan. This confirms a strong demand for our offering and its high level of customer satisfaction.

In private networks, we see a strong momentum and exciting opportunities. We're expanding our sports partnership through an agreement with FIFA where we will provide extensive network services for the 2026 Men's World Cup and serve as a Tournament Supporter of the 2027 Women's World Cup. We also expanded our partnership with the Madison Square Garden Family of Companies to become the official wireless provider for all its venues, including Madison Square Garden and the Sphere.

We will be providing a more detailed update on capital allocation at our analyst meeting this morning. But our capital allocation priorities remain to invest in the business, support our dividend and pay down debt. We executed on all 3 during the quarter, including our pending acquisition of Frontier Communications, a tower transaction with Vertical Bridge, a spectrum acquisition from UScellular and a new satellite partnership and organization improvements. All will enhance our capabilities, help us serve our customers even better and support financial growth.

Let me walk you through each of these transactions. First, our pending Frontier acquisition will expand our total addressable market in mobility and broadband. Post-close, Verizon will stand unmatched as the only company with the ability to serve both fixed wireless access and fiber at scale.

Second, we announced a transaction with Vertical Bridge involving more than 6,000 towers, deepening a relationship with a valued strategic partner. In addition to the cash proceeds, we will lease back capacity at very favorable terms, providing long-term cost stability. Third, we're acquiring valuable low- and mid-band spectrum from UScellular, which will enhance our spectrum portfolio and expand our network capacity when the deal closes.

Fourth, we have further expanded our satellite capabilities, adding a partnership with Skylo on top of our ongoing work with AST SpaceMobile. By using satellite technology, we're extending our network reach to previously underserved areas, opening up new market opportunities and reinforcing our commitment to connectivity.

And finally, we continue to make progress on costs. Our voluntary separation program allowed the employees to make informed decisions about their futures, while helping us manage cost as we transform our workforce and adopt new technologies. Overall, I'm very pleased with our continued improvement in operational and financial execution.

Now Tony will talk about our third quarter results in greater detail.

[Anthony Skiadas, executive]

Thanks, Hans, and good morning.

Our third quarter results demonstrate our continued focus on operational excellence and reflect our ability to deliver both customer and financial growth. With our differentiated offerings and value proposition, we're continuing to drive year-over-year improvements in postpaid phone net adds and broadband connections, all while maintaining our discipline around promotions.

Starting with our Consumer results, postpaid phone net adds were 81,000 for the third quarter. This compares to a prior year net loss of 51,000. The year-over-year improvement was driven by continued gross add growth of about 6% in the period. This marks the seventh consecutive quarter of year-over-year postpaid phone gross add growth. Additionally, phone churn improved by 1 basis point compared to last year.

For the full year, we continue to expect positive Consumer postpaid phone net adds, both with and without the impact of our second number offering. America's best network, together with the benefits of myPlan, continues to be a differentiator for us. We offer customers a compelling value proposition with one-of-a-kind perks.

Moving to prepaid, the team is successfully executing on its strategy and improving the trajectory of the business, delivering 80,000 net adds, excluding SafeLink. Our core prepaid brands, Visible, Total Wireless and Straight Talk, continue to perform well, driving a total year-over-year improvement of over 300,000 net adds when excluding SafeLink and the related ACP impacts. With ACP pressures now firmly behind us, we're confident that the rigor being applied to our prepaid operations will position us well going into 2025.

Moving to Business results, postpaid phone net adds were 158,000 in the third quarter, representing another quarter of solid growth. We saw sustained buying activity throughout the quarter and had strong contributions from small and medium businesses, enterprise and public sector customers. Businesses continue to trust Verizon for their mission-critical functions over any other provider.

Shifting to broadband, our total net additions were 389,000 for the quarter. Fixed wireless access once again had a strong quarter, contributing 363,000 net adds. Our FWA subscriber base now stands at nearly 4.2 million customers. As Hans mentioned earlier, we are pleased to have reached our FWA customer target 15 months ahead of schedule. This reflects the popularity of fixed wireless access and customer demand for high-quality broadband services.

Fios Internet net adds totaled 43,000 for the quarter, an improvement of 15,000 sequentially. We saw momentum build throughout the quarter as we further distance ourselves from the effects of the ACP shutdown. In total, we now have over 11.9 million broadband subscribers, a nearly 16% increase year-over-year. We continue to make good progress in growing our customer base and look forward to sharing additional broadband updates at our analyst event later this morning.

Moving to the financials, our sustained focus on profitable growth contributed to a strong quarter. We are on track to meet our 2024 guidance with both wireless service revenue and adjusted EBITDA growth trending at or above the midpoint of our guided ranges.

Consolidated revenue for the third quarter totaled $33.3 billion, essentially flat compared to the prior year. Service and other revenue growth of 1.7% was offset by declines in wireless equipment revenue as total upgrade volume was down over 10% year-over-year.

Wireless service revenue was $19.8 billion, representing year-over-year growth of 2.7% or $513 million. Sequentially, wireless service revenue grew by $70 million in spite of a full quarter's impact from the end of ACP as well as headwinds from promo amortization.

Looking ahead to the fourth quarter, we expect sequential growth in wireless service revenues to be driven by volume improvements, increased contributions from FWA and our recently communicated pricing actions. This will partially be offset by the continued promo amortization headwind.

Consumer postpaid ARPA continues to grow at strong rates, with the third quarter above $139 and up 4.2% year-over-year. Targeted pricing actions, FWA expansion and the further adoption of myPlan are all contributing to ARPA growth. We have more than doubled our myPlan subscriber base since the end of last year, which represents over 37% of the Consumer postpaid phone base. Additionally, perk revenue continues to provide a notable benefit.

We continue to grow fixed wireless access into a long-term, sustainable business. Total FWA revenue, which is included in wireless service revenue, was $562 million for the quarter. That was up $215 million versus the prior year period. FWA is on pace to generate more than $2 billion in revenue for us this year.

Prepaid revenue for the quarter declined by over $40 million sequentially, with the third quarter having a full quarter's impact of the ACP shutdown. This overall service revenue impact continues to be within our previously provided range for 2024. Prepaid revenue represented a 100 basis point drag on total wireless service revenue growth for the third quarter. However, the actions we have taken to improve our prepaid customer results are working, positioning us for better revenue performance going forward.

Consolidated adjusted EBITDA for the third quarter totaled $12.5 billion, an increase of 2.1% year-over-year. This is the second quarter in a row in which adjusted EBITDA has grown faster than service and other revenue. As Hans mentioned, this also represents the highest quarterly adjusted EBITDA we've ever reported.

Continued wireless service revenue growth and lower upgrade volumes helped to drive this result. Upgrades in the third quarter were down over 10% year-over-year. We continue to be disciplined with our promotional spend, maintaining our targeted and segmented approach to customer retention. We continue to see healthy and consistent payment trends with bad debt levels in line with expectations, and our high-quality customer base remains resilient.

As we previously disclosed, we are implementing our voluntary separation program. Over 50% of the approximately 4,800 impacted employees have already exited the business. The savings from the program are expected to begin to materialize in our fourth quarter results and beyond.

Adjusted EPS in the quarter was $1.19, down 2.5% compared to the prior year period. Growth in adjusted EBITDA was offset by below-the-line items, including higher interest expense. However, on a sequential basis, interest expense decreased quarter-over-quarter as a result of lower interest rates and lower average debt levels.

Cash flow from operating activities totaled $26.5 billion for the 9 months ended September 30, 2024, compared to $28.8 billion in the prior year period. The results reflect over $750 million of higher adjusted EBITDA. This was offset by higher cash taxes of approximately $2.5 billion as well as higher interest expense primarily driven by the decrease in capitalized interest and higher interest rates.

Year-to-date capital spending was $12 billion. This was approximately $2.1 billion less than the same period last year. Our full year guidance for CapEx remains unchanged at a range of $17 billion to $17.5 billion and back to business-as-usual levels of capital intensity. The net result of cash flow from operations and capital spending is free cash flow of $14.5 billion for the first 3 quarters of 2024, largely in line with the prior year period.

For the fourth quarter, there are several items to keep in mind around cash flow. First, upon the closing of our tower transaction, we expect to receive approximately $2.8 billion in proceeds. This will be partially offset by higher cash taxes and interest expense as well as the anticipated impact from severance payments related to our voluntary separation program.

Net unsecured debt at the end of the quarter was $121.4 billion, an improvement of over $1.4 billion compared to the previous quarter and more than $800 million lower year-over-year. Our net unsecured debt to consolidated adjusted EBITDA ratio was 2.5x, flat compared to the prior quarter. Bottom line, the cash generation of the business is strong, and we are on track to pay down debt as planned.

In closing, our third quarter performance continued the ongoing trend of delivering strong operational performance and financial results. We achieved positive postpaid phone net adds in Consumer, which positions us well to be net add positive for the full year. We reached our goal for fixed wireless access subscribers more than a year ahead of schedule, and we did it all in a financially disciplined manner, consistent with our overall strategy. We are now focused on finishing the year strong, setting us up for success in 2025.

With that, I will turn it back to Hans for his closing comments.

[Hans Vestberg, executive]

Thank you, Tony.

We are well positioned for a great fourth quarter and to carry our momentum into 2025. Our offerings from myPlan to myHome are resonating with our customers and driving deeper engagements. Our brand refresh has been successful and tells a compelling story about the central role our services play in customers' lives.

Looking to the end of the year and into 2025, our priorities are: first, deliver on our 2024 financial guidance with continued focus on wireless service revenue, adjusted EBITDA growth and strong free cash flow. We will sustain momentum in mobility and broadband. As we expand our 5G Ultra Wideband Network and scale our private networks business, we're opening up new opportunities for growth and innovation.

The rapid adoption of our fixed wireless offering and the continued strength of Fios demonstrate the effectiveness of our network-centric strategy. And we will execute on our capital allocation priorities by investing in the business, supporting our dividend and paying down debt. At the same time, we're scaling AI to improve employee and customer experiences as well as unlocking new revenue streams.

I'm more excited than ever about Verizon's prospects. Our superior network, coupled with our customer-centric innovations and strategic investments, position us uniquely in this market. We're connecting people, empowering them to do more, experience more and achieve more. The transformative moves we made this year, from our pending Frontier acquisition to our expanded partnership in private networks, are setting the stage for sustained growth and value creation.

I'm looking forward to all of you joining us at 9:00 a.m. Eastern time for our broadband updates and Q&A.