Monday, December 14, 2015

Verizon Communications (VZ) comments [CFO Fran Shammo] from 43rd UBS Conference (12/07/2015)

43rd Annual Global Media and Communications Conference
Verizon Communications (VZ)
Speaker: CFO Fran Shammo
Tuesday: 12/07/2015

Notes:
·         Goals for now? Priorities for 2015 were: (1) invest in networks and platforms. 2014 priority was to gain control over Verizon Wireless from Feb. 2014. Will invest $17.5 billion  - $18 billion in networks in 2015, mostly wireless and fiber networks. Want to be mobile first fiber company. With acquisition of AOL (AOL) launched go90 platform – mobile first platform for video. (2) buy spectrum. Spent $10.4 billion in auction to buy AWS 3 spectrum, gives us capacity for go90 product and 4G usage and the increase demand on this network.
·         Believe people want to be on the best network, are willing to pay a slight premium to be on best network, especially critical in the video world.
·         On properties sold recently: Sold 3 properties in south to Frontier, not fitting in our strategy. Fiber in footprints were well penetrated, >50% penetration, so felt it was time to monetize and return capital. Will close in March 2016.
·         Highest price for towers, $15 billion in gross proceeds, took $5 billion and did accelerated stock repurchase (ASR). YTD returned ~ $11 billion to shareholders.
·         Last priority for 2015 was balance sheet. Went into “installment receivable entity”, started to build a lot of consumer receivables on balance sheet. Been using securitization to generate cash from these receivables. Generated > $6 billion this year, mostly international banks because US banks can’t handle a lot of securitization right now.
·         2016 – same priorities, expect flat capex from 2015. Will participate in 600 spectrum. Want to get back to A-rating on balance sheet. Looking at ABS marketplace, having conversations w/ rating agencies.
·         Have monetized about $9 billion in serviced receivables this year, still only have 22% of customers on installment plan. Once you get to 50%, it kind of levels out, have 28% more to go. Securitization will more than double in 2016.
·         ABS market is extremely efficient for VZ because rate these receivables based on their classification, generally AAA or AA.
·         Biggest concern is competition in wireless market. Everyone will run promotions in Q4. Last year was more dynamic, on top of that you have new iPhone configuration, new format. Seeing less volume this year than a year ago. This is not a surprise to us.
·         Traditionally lower volumes leads to higher margins? Yes, but not necessarily true with installment environment, because already getting benefit when you do installment sale. Margin perspective doesn’t move based on volume anymore like it did under subsidy model.
·         Main strength of VZ is “network quality - will level of spend and stable spectrum keep VZ in lead? Believe the network is key ingredient to very strong brand. 4g requires a lot more densification in your network. Verizon is far ahead in small cell deployment, have to do this to stay ahead or will get congestion in larger markets. Majority of wireless spend is small cell in-building and diversified antenna systems. In 2015 – seeing 50%-75% increases in data usage on our network.
·         Becoming more cost effective to deploy small cells, cost to serve is going down as time goes on. Revenue equation on “service revenue” declining because of installment sale, the cost to serve is declining and that’s why our margin hasn’t changed. If take out effect of installment, still around 50% margin which is critical for VZ.
·         Spectrum: only use 40% of spectrum for LTE and it is carrying 87%+ of data traffic.
·         60% of spectrum being utilized on CDMA EVDO technology. Nomenclature that VZ is spectrum-short is just false.
·         Spent $10.4 billion and got 48 of top 50 markets with AWS-3, walked away from New York and Chicago because of the price. Instead, building it through densification at almost 20% less cost than would have in spectrum.
·         Cable moving into wireless, specifically Comcast? Millennials only care about broadband and video over mobile; care less about linear TV. Even we are trying to disrupt the FiOS product. Cable will enter the wireless world first using Wi-FI as a first, LTE as a backup. Think there will be quality of services issues with that.
·         Go90 launch – launched October 1, 2015. Will give investors numbers in 2016 some time. Have exclusive content with DreamWorks and AwesomenessTV. Working through early start-up issues.
·         How to monetize go90: (1) consume data and pay for it through data consumption. Giving away 2 gbs for free for 3 months if you download the app and watch something. (2) sponsored data if you are a VZ customer, will get data fro free and monetize via advertising. If not a VZ customer and watch on Wi-Fi, will monetize through advertising. (3) Or premium will be an access charge – fall under sponsored data model. (4) PPV type moneization, really made for multi-case technology.
·         Content producers don’t view go90 as disruption to linear TV. It is built on mobile and digital advertising.
·         NBA deal for go90 was huge.
·         Hum car product: 150 million vehicles on road that are not smart cars. Can plug into bottom of computer terminal and trn car into a smart technology like mBenz or GM with OnStar. But it does more than that. Launched – Black Friday 2015.
·         Margins: would not focus on service margin because now is irrelevant with installment sales. Been looking at EBITDA margin, want everyone to focus on that.
·         Change to installment: Will only allow customers to take installment sale. Current customer could keep subsidy model if they want. Think take rate in Q4 will be around 70% on installment sale and looking at increasing that into 2016 as we go to 100% installments. It will never get to 100% because enterprise will not do business on an installment basis. Installment has helped our retention rate, VZ is more competitive with other providers, reduced churn.
·         Wireline sale – ready to close end of March 2016. Been almost a year of cost-cutting in that segment. Union contract is not closed, still in negotiation.
·         Broadband/FiOS: spent a lot of money investing in broadband infrastructure and have one of the “plum” markets in US which is East Coast from D.C. to Boston. This is “the market to be” because of population. VZ is one of few companies still continuing to grow TV product, can do more with current penetration levels. If someone offered 10x EBITDA, would be interested though! But, unfunded liabilities would make it difficult. We have $30 billion of unfunded OPEB and pension, makes for difficult transaction.
·         Roll out more FiOS within remaining territory? VZ has gone beyond LFA requirement, continue to build down streets where there are lots of small businesses. Working mostly on NYC and Philadelphia to compete in those markets.
·         Custom TV: we are seeing people picking more nonsports than sports in custom TV. The people who go to custom TV are generally people who do not watch a lot of sports. But this does not have a long runway for growth because other contractual agreements with content providers. Will be some changes in 2016 around custom TV because have t rebundle it. Content costs are lower but it has lower revenue, but better from FCF perspective.
·         Flat capex of around $17.5 billion: majority around wireless, FiOS newbuild is starting to taper off.
·         Trying to get to A rating by 2018 to 2019. 

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