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.
