Verizon Communications Inc. (VZ) Q4 2010 Earnings Report, Transcript and Summary

Ladies and gentlemen, Mr. John Doherty.

Good morning. Welcome to Verizon's Investor Conference. Thanks for joining us here at Cipriani Wall Street, where we are live webcast, where I understand we have an additional 500 plus people that have signed in. We hope you're all as excited as we are to be meeting with you in person, as we end 2010 and kick off 2011. Before we get started, I would like to point out that our fourth quarter earnings release, financial statements, investor quarterly publication and the earnings presentation slides are all currently available on our Investor Relations website. At the conclusion of this morning's meeting, the strategic and financial overview piece will also be posted to the website for your reference and use. All historical information has been adjusted for the effects of the change in the benefit plan accounting that we announced on Friday. It is my pleasure to be joined this morning by our Chairman and Chief Executive Officer, Ivan Seidenberg; our President and Chief Operating Officer, Lowell McAdam; and our Executive Vice President and Chief Financial Officer, Fran Shammo. If you can switch to the agenda slide. We will start our session this morning with the review of our fourth quarter earnings by Fran, and then we're going to have a brief Q&A session just after that, where I'd really like you to stay focused on the earnings that we released in that piece of the agenda. We're going to be followed by our strategic and financial piece, and then we'll open it up to a broader Q&A, where we'll have Ivan join us, as well as Fran and Lowell, of course. So with that, I'd like to hand it over to our Chief Executive Officer, Ivan Seidenberg. Ivan?

Thank you, John, and good morning, everyone. Once again, I would like to thank all of you who are here and those of you on the webcast for joining us this morning and participating in this earnings call. Just a very short introduction here before I ask Fran to join us. I thought, with all of the moving parts and all of the strong momentum that we have been developing here in the end of 2010 and a very exciting set of prospects for 2011 and beyond, that our investors needed a little grounding in making sure they understood our strategic, operational and financial metrics. And hopefully, this morning, while we're not intending to make a lot of new, big news, I think you will be pleased to see Fran and Lowell share with you what they think the vision is and the model looks like as we go out into 2011 and 2012. I also thought it was very important that you have a chance to see and touch and talk to both Lowell and Fran as we enter this important year, 2011. And for those of you here in person, of course, the opportunity to go in the back and play with our toys and all the new products and services is always a nice thing, and you’ll get a chance to see how all of this new technology comes alive for the customer. So with that brief introduction, as John just mentioned, what we'd like to do is the structure. Our first order of business this morning is to cover 2010 earnings. And for that, let's ask Fran to come up and do that for us right now. Thank you.

Thank you, Ivan. Well, good morning, everyone. For those of you here in person, as well as those on our live webcast, I want to thank you for joining us today. During the transition period with John Killian, I had the pleasure of meeting a few of you. For many of you who I have not yet met, I would like to look forward to that later today or in the near future. Okay, so let's move into our first topic for today and review our fourth quarter and full year 2010 financial results. After my remarks, we'll take some questions, and then move onto the rest of the program. Before we get started, I would like to draw your attention to our Safe Harbor statement. The factors which may affect future results are contained in our SEC filings and are also available on our website. So going to the next slide, for fourth quarter '10 overview. We ended 2010 on a high note, with very strong overall financial performance in the fourth quarter, driven by continued solid execution and growth across all of our businesses. The Wireless business is performing extremely well. Service revenue growth in the fourth quarter remains strong at 7.7% year-over-year, driven once again by Smart phone sales to both new and existing customers. We had a solid quarter of postpaid customer growth with 872,000 net adds, and we continue to see accelerating growth in postpaid ARPU, which was up 2.5% on a year-over-year basis. We improved our industry-leading customer retention metrics this quarter. In local number portability, we were net positive against all major carriers. In terms of profitability, we reported a record high service EBITDA margin of 47.5%, which we are obviously quite pleased with. In Wireline, the financial picture continues to improve. We…

John Hodulik.

Quick question on the Wireless margins, the margins in the fourth quarter up sequentially. Could you give us a little bit of detail on the billion dollars in cost savings that you identified. Maybe, where they're coming from? If there are potentially more to go? And even more importantly, when those came out during the year? I mean, was it something that affected the latter half or even the fourth quarter more than the other quarters? And then maybe just a couple lines on some of the below the line items, which seem to be a little bit different than we'd expected this quarter.

So first, on the overall cost initiatives within Wireless. They set up the year on a $1 billion cost initiative, which crossed all types of things, like customer service, store operations, logistics, real estate. But the biggest one this year that had the most impact was logistics. In logistics alone, there was a $750 million cost reduction within the whole ecosystem of our logistics system. That came throughout the year, but obviously, the bigger part of that came in the second latter part of the year. So that really was the big portion. As I said, and I'm going to talk about later, they have yet another $1 billion challenge for 2011, and we could talk more about that in the later program. On the second issue, John, I think that as we look at what the consensus was, we were higher on EBITDA margin, we were higher on operating income margin. But then on the below the line item, I think the big disparity between consensus as us, is how minority interest is calculated. And of course a lot of that EBITDA margin was driven by the Wireless unit, so there was more minority interest, I think, than what was expected on the consensus side. So that's how we got down to the bottom.

Jason Armstrong from Goldman Sachs. First, just a follow up on John's -- the balance between strong adds and margins this quarter in Wireless, I think, really exceeded expectations. You guys put up a record Smart phone add quarter this year, but still had record margins, which really kind of frames, I think, the investor debate into next year because there's a sense out there that you can't maintain margins, EPS is going to drift because of the type of volumes you're going to see. So maybe just help us think through what actually happened in the fourth quarter. I'm sure there was obviously some cost-cutting initiatives that played into that, but just how that sort of sets the stage into next year. And then maybe on the volume metrics, the 870 in postpaid adds. It seems like there were actually probably some limitations at the customer level in 4Q, big network changes ahead, big handset refresh ahead, seems like that number actually could've been a lot higher. So what do you think maybe the run rate of the business is?

I think we're going to cover a lot more in the next session, but let me just set the stage. From a fourth quarter standpoint, even with the adds that we had in Wireless, with the cost reductions we had, we only had a 0.2% increase in our cash expense. So for all of the adds that we had, a significant majority of that dropped right to the bottom line. And I think that, as we've said before, and I'm going to have some fun in the later session because the question I always get is how long can you maintain these margins. And I'm going to have some fun with that in the next session. So hold that question. But I think as we go forward, I think you'd expect us to run the business like we always have. It's all about execution, and it's about execution on profitability and growth. And it's an and equation for us, it's not an or. So I think Lowell will speak a lot to the strategy. I'm going to talk a lot about the iPhone expectations, where we think it's going to be. So I think I'll come back to your questions in the second half.

Staying on the postpaid adds, you had a strong performance in the Internet devices. I think you said 323,000. Can you contrast that with where that was, say, your Q3 a year ago, what the delta is there and what the characteristics of those devices are in terms of ARPU? And then if you could just touch on what was going on in reseller and wholesale.

So on the Internet, we had our best quarter in the fourth quarter this year. And I think really, two things contributed to that increase. One is, as we said, within three weeks of launching 4G LTE, we sold 65,000 Boggles, 41% of them were new to Verizon. So that was a contributor to it. The second is, as we launched our tablets starting in October with the iPad, and then shortly thereafter with the Samsung, we sold about 86,000 tablets in all. 37,000 were just stand-alone iPads; the rest were all with iPad with a MiFi device and with the Galaxy. So 96% of them were new to the category. So these were folks who did not have any type of data usage on this type of a device before. So 96% of those customers were new to this category. So that helped boost the quarter from an add perspective. And then, I'm sorry, Simon, go to your second question again.

Resell or wholesale.

So on the reseller side, we grew by 152,000 net adds. And then on the prepaid side, we lost 70,000. And then I think the important thing here is obviously, as we've always said, we are a postpaid retail company. But we believe that those other segments are important. However, we're not going to chase those segments when we think that we can have more postpaid growth. And if you think about the Reseller segment and with the unlimited offerings that they used, they flip between carriers, depending upon who has the best price at that point in time. So I think you saw a little bit of that, but we still added 152,000 reseller net adds. On the prepaid side, as you saw, we launched new prepaid pricing at the end of the quarter, in December, adjusting our rate down to $1.99 from $3.99, but instituting a $0.02 text messaging fee. So we think that, that stimulated some more retail prepaid growth in the last month of the quarter, but it was not enough to offset the disconnects from October and November. So I think we see some little momentum going there, bringing our price down more to where the rest of the market was. On the wholesale side, I think it is important that we really distinguish this international coin, because if you think about it, on the 12.2% wholesale decrease, 28% of that was driven by the international wholesale piece. So when you state that out, the wholesale decline was only 5.5%. And we did that because, as we said before, there were a lot of routes that were not profitable or very slim margin routes, where we decided to raise our price. That traffic went away, the revenue declined, but I think as we work through that in the third quarter next year, I think you'll see a different picture for us going forward on wholesale.

Could you talk a little bit more about the improvement in the Wireline margin? How much of that is labor-related versus non-labor types of cost improvement?

Well, I mean, obviously, we had a 16,000 reduction in labor this year. So there was a more of a significant impact there, and of course, a big majority of that was driven by the associate population who decided to accept the incentive that we put on the table and work with our bargaining folks. And we put that on the table, and 16,000 associates took that. So obviously, that was some of the decline. But I think there's more behind the story than just that. I think you have to look at the whole picture, which is the increasing of FiOS. So FiOS is becoming a bigger portion of consumer. And when you think about Access Line loss, we went from 9.3% Access Line loss down to 8% in the final quarter. So you're seeing a declining trend for us in access loss. So the other thing is, as you look at the ARPU on FiOS, it's becoming a much bigger segment, it's 53% of the consumer revenue. When you look at Access Lines, it's now only 7% of our overall corporate revenue from a consumer standpoint. So it is becoming less and less significant. FiOS continues to make progress and profitability. So I think you have to look at the whole thing. But obviously, there is a lot of cost reduction initiatives that are there. I mean, you can take the labor piece, but I think you also have to look at everything that Virginia Ruesterholz’s group does out of Verizon Services organization, which is real estate, energy, fleet management. It is just disciplined execution on all those costs that help contribute it to the margin increase.

Just following up a little bit on that, two questions, if I could, on the Wireline top line. First, just specifically with respect to FiOS, as it now creeps over 50% of the consumer revenue. As it grows, is it a lower margin product that, as it grows, you need to cut costs faster? Or as it grows, is it margin accretive to the business? Is this a good thing it’s growing, or is it not a good thing it's growing from a margin standpoint? And then second, just quickly on the enterprise recovery, we saw 1.3% growth. Was there any help or lift from the consumer premises equipment hardware side of that equation?

So from a FiOS prospective. The interesting part here with FiOS is as FiOS grows, it's becoming more profitable. And it's because we are becoming more efficient in how we connect the home, how we passed the home, how many labor hours it takes to connect that home. So if you look at the whole picture, the more we do, the better we are, and the better and the more efficient we get at it. Now, as I said, our goal is always to add between 180,000 and 200,000 TV net adds in a quarter. I think we've increased the penetration, as I said before also, in the third quarter, is we've concentrated much more on the MDU space. So if you look at the MDU's, we actually opened up 500,000 MDU open for sale this year versus only 300,000 last year. That became a bigger portion of our adds in the second half of the year and MDU's holistically, are more cost effective to connect because once you build the building, it's now just connecting all the apartments or condos within that building. So I think you're seeing some more of the efficiency there, which then drives more ARPU up. I think also, there's a couple things with Flex View. So we just launched Flex View. In the short period of time we've had Flex View out there, we've only had 2,000 titles on that platform. That will grow to over 9,000 by the end of next year. Within those eight weeks that we had Flex View out, we sold 41,000 titles at approximately $15 per title. So now those titles are in the cloud, which now these consumers can watch on any device, anywhere, anytime and around the world. So I think that is also going to help…

Good morning, everybody. Thanks for braving the elements and coming in today. I saw lots of you are interested in all the goodies we have in the back of the room there. I will report nobody stumped the jukebox, however. I know a few of you tried to come up with a song that we couldn't pull out of memory, but, sorry. So far, no winners. Okay. So what I'd like to do is spend a few minutes this morning telling you where we stand as we enter 2011 and why I believe we're positioned so well to provide greater shareholder returns in the next several years ahead. I'm new in this position, and I've spent the last few months of this role traveling around Verizon, immersing myself in the details of the business and getting to know the business in its overall entirety. The more I do that, the more it's clear to me that Verizon's assets, both globally and domestically, are really the best in the business. As you know, I've spent the last, we've spent the last several years investing in strategic technologies, like FiOS and LTE, as you saw in the back of the room. We've been acquiring critical assets, like MCI and Alltel, so that we can extend our reach in the global markets and add scale to really deliver more on the bottom line. We've also divested lower growth, what I would call nonstrategic assets, in the Frontier and the FairPoint transactions, so that we can improve our ability to compete and grow in the markets that we choose to serve. So this superior asset base gives us really a solid foothold in the growth markets of the future for broadband, for wireless data, for video and for cloud services. I think businesses that…

Thanks, Lowell. Okay, so now we'll move to the, just the guidance that I think everybody showed up to hear today. So first, let me just talk about, you heard Lowell talk all about the strategic nature of where we're headed. Let me just tell you where my focus is going to be. Obviously, driving profitable top line growth. As Lowell said, we're going to continue to invest and allocate capital to those growth areas that we have in our platforms, enhance the return on invested capital. I've seen a lot of articles written about the telcos and the invested capital. This is a real concentration for me to make sure that we start to return on what we invest in from a growth platform prospective. Obviously, generating free cash flow, maintaining our dividend policy and returning to our shareholders. Let's go to the next slide. So if we look at revenue, so from an overall perspective, there's a few things that are flowing into the revenue projection. One, service revenue, 7.7% growth this year. Obviously, we believe that there's more growth there for next year. Data revenue, 26% penetration. If you paid attention to Lowell's charts, we believe there will be 50% plus by the end of 2012, with all of the devices that we're bringing to the market, both 3G and 4G. Smart phone penetration, as I said, and then, of course LTE, just in a matter of three weeks again, 65,000 adds, which were 44% new to Verizon. On a consumer side, we have FiOS growing 10.7% in ARPU year-over-year on a consumer basis, $146 per sub, grew 4% this year. With the launch of Flex View, as I said, 2,000 titles, we sold 45,000 of them in just a matter of six weeks. So there's more…

Nancy?

The 2x you just mentioned in 2012, what did that refer to? You said 2x wouldn't be unreasonable in 2012?

Based on a 4% to 8% projection, 2x that rate.

And then second of all, if you could talk about the sort of ARPU subscribers’ growth rate and the top line in Wireless in 2011 and then versus Wireline in 2011, how you break up the business on the top line versus that guidance?

Well, I'm not going to give guidance on specific top line growth for there. So we'll stay at the 4% to 8% on total revenue guidance for the corporation.

Just one clarification, the 2x is really related to, when you were talking to the earnings slide, correct?

Yes, 2x on the earnings slide.

So the EPS 2011 number, we are talking two times of what we had on that slide. Not the revenue numbers, for specifics.

Earnings growth in 2012 looked more like 8% to 16% off of the 2011 base, something like that. Just on the Wireline side, you talked about all the drivers and the wholesale being a bare one. Is it possible that you think you could get to Wireline growth, obviously not for the year, but maybe by the end of the year or potentially in 2012?

Yes, so John, I think, as I said, the biggest driveway now is the wholesale side. So on the consumer side, you have growth from FiOS. On the enterprise side, you have growth. So it's really the wholesale side. And I think that as we get through the third quarter on the international traffic situation, I think you'll see some improvement there. Mike Milligan, who's the President of our wholesale, believes that there are, through the Fiber to the Cell program that we have, through Ethernet that we have, they actually grew 6.6% year-over-year within that segment. So as we continue to see some of the decline in the voice side, I do feel that there could be a potential. If the economy stays steady and we get some growth in the economy and wholesale comes back, we could be back to a growth in the overall segment.

And John, I think I had to add to that -- I think there's some good, let's say, let's call it earnings potential on the core side as well. I see lots of opportunities to take more cost out just by being more efficient, not just on the labor side, but more efficient on how we provision, how we maintain, so we have fewer dispatches on that side. And as you and I were talking earlier, we've seen a slight decrease in the disconnect side on the core. And if we can keep the quality and the expense in a good position there, I think we can improve overall profitability of the core.

[Operator Instructions] I'm going to go over to Jonathan Chaplin with Nancy.

So a quick question for Fran. I think you mentioned you expected 50% Smart phone penetration by the end of 2011. That's a doubling from where it is at the moment. And I expect it goes higher than that in 2012. It should drive a very significant increase in postpaid ARPU. With that in mind and how accretive to margins that increase in ARPU is, why aren't you expecting more in terms of earnings growth between now and 2012?

Well, I mean, again, I think you have to look at the holistic picture. But obviously, it's because of the iPhone and the subsidy on the iPhone.

So, I would expect that to be a big pressure in 2011. And so maybe you don't see that EPS growth in 2011. But as you go through to 2012, it's with all the iPhone subscribers that you add in 2011 and the impact that has on ARPU, I would've expected a bigger jump than 10% to 16% in earnings.

Well, at this point, what I said was under the assumption of the 11 million units, you could factor in at 2x. But at the end of the day, I'm not giving guidance on '12 because I don't know yet what the total volume will be in '11.

We've got a couple of, I think, significant moving pieces here. Obviously, the iPhone is one of them. But if you take a look at the 4G devices that we've got outside, I mean, they are terrific devices. And the tablets that go along with those, we're working very hard with lots of different developers to bring new applications. I mean, there's a lot of upside. And I can tell you, later this afternoon, Ivan and I will meet with the employees, and we'll be talking a lot more than 50%. But I think we've got to be very careful that we guide you in a prudent and conservative way, and that's kind of where we are at this point.

Why don't we go over to Simon?

I think you mentioned, Lowell, about depending on iPhone supply. Can you just give us some clarity around that? Is this a situation where you're going to have some significant backorders in the February, March period? And then the obligatory Verizon Wireless Vodafone dividend question, what's the latest on that? What's the timing we should think about there?

Those two questions are interesting bedfellows, I have to say. So on the supply side, you all see the different forecast. And we've spent a lot of time with Steve and Tim, talking about what we might expect, not only existing iPhone subscribers, but there's a lot of people on other networks that are interested in that device on the Verizon network. So from that part, you could be wildly optimistic or you could be conservative. Now you also have to factor in, you remember last year, we ended up with a shortage of screens and some of the basic components because as we started to come out of a little bit of a downturn. So our hesitancy to give you a strong number on supply is just we don't know whether we'll be able -- the demand is very variable and some of the components are variable. But we feel very good on hitting the kind of numbers that Fran talked to you about. Now on Vodafone, I think I need to reemphasize that trying to change this from a pure financial partnership to an operating partnership. If you look back over the last 11 years, our technologies were so far apart, it made it difficult to sort of reach across the aisle and do a lot of things together. Well, they've launched LTE in Germany. Obviously, we've launched LTE. We see now, especially when you look at all the things I talked about on the asset side, that them working with us from not only just Wireless, but from the business side, really is a competitive advantage for both of us. Now we've said over the years that eventually, we'll be into a place where we'll be giving a dividend. To me, they contributed the assets. We knew this day was coming. It'll be a fair dividend. We'll get their support for making additional investments in the business. That's the key for us, is to keep Verizon Wireless very healthy. And if there's excess cash on that, then we'll dividend it out and Fran will use some for our investments across the business and Victoria will use some. But I think that as we get to the end of this year, we'll sit down and we'll talk about it in the board, and we'll figure out what a fair and reasonable dividend is.

Why don't we go over to Jason?

Just one follow-up. I guess one of the key inputs is around iPhones, of where they're coming from. And if the consensus is 11 million units, can you help us think through in percentage terms, is it more weighted towards external? Is it internal Smart phone upgrades, which I guess you're doubling Smart phone percentage, which suggests it's not. Or is it existing feature phone upgrades? Maybe help us think through that.

I think a couple of important facts here, Jason. One is if you look at our current base today, 52% of that base is on feature phones with no data plan. There's another 15% on multi-video type devices, which only had a $10 data plan at that time, which you know now, we have discontinued that line. So within our own base, there are 67% of the people who can upgrade and bring more ARPU with them. So if you think about a feature phone customer going to a Smart phone, the ARPU on that is 2x what they deliver on a feature phone. So I think it's important because I don't know exactly what the mix will be at this point in time. But I think it is important to know there is tremendous growth within our own base by moving that base to Smart phones, whether it be an iPhone or a DROID or some other device. So I think as you think through that, I think you have to look at the overall base, plus what would be coming in from new.

I'm going to go to Jim Peshek. Question from the back.

Jim Ratcliffe, Barclays Capital. Two questions. Quickly, Fran, did I hear you say that you won't be offering the $15 data plan for iPhone customers?

The $15 promotional price that was offered will be discontinued at the end of this month.

You've chosen to take legal action to push back against the FCC's net neutrality proposals. How do you see those affecting the business, whether those proposals actually take effect or not, and particularly regarding applications like Flex View?

I don't think it'll affect it at all. I think the FCC decision, kind of a far-reaching one. I think that most of the impact of that order won't be felt this year. But over the longer term, it would be felt if the FCC actually exercised all the authority. Just for a point, if you actually read the rules they put into effect, the rules don't sound anywhere near as troublesome as the order, which is encourages the FCC to seek broader authority over time. So I don't think it'll have any effect on the current business, but I do believe that longer term, we need to challenge the expansion of the FCC's authority there. Since I have the floor, let me just add a point to the last couple of questions on this guidance question. Fran and Lowell tried to give you as much guidance as we can. There's a couple of unknowns here. But I think it's worth just slowing it down a little bit. So we can get into this contest of, so we think we know how many people will switch from T to us. We don't really know the answer to that. We know you're being subjected to lots of discussion around that. We do believe that our brand and our network will drive a lot of people. But so Jonathan, to your point about what will earnings look like in the future, why don't you do this. Over the next couple of quarters, as we get some experience on volumes, we'll share with you what those results look like, and I think you'll get a better view. It's much better than overestimating something that we don't know. The other point is that we also believe that all our strategies will frankly lift the whole industry. So, yes, this is about us today. But I think that as all these 4G and 3G devices get out there, you will find all of the carriers doing better. Our view is we'll do better because of the position we've established, but the entire base is going to move from feature phones up to Smart phones over the course of the next 12 months. So I think you're sitting in a really good spot when we look at the entire industry growth. And obviously, we believe we'll have an edge on that. So I think when you look at these numbers, my advice is be careful about '11, and '12 and '13 will absolutely be clear to you once you get to the middle of the year.

Chris?

Chris Larsen from Piper Jaffray. Fran, can you talk a little bit about the optimal capital structure and within that, not just at the corporate level, but also the Wireless level. Going back to the dividend question, arguably the Wireless business will be under-levered if it was a stand-alone business. Do you think about it as a stand-alone business when you think about that capital structure? And then do you think maybe it makes sense to lever that up and then cash that out to the parents? And then what is the proper leverage ratio for Verizon? And then a second question, as you look at the last 30% of your access lines that aren't going to have FiOS, what's the long-term strategy for those access lines?

So I'll take the capital and maybe I'll have Lowell take the long-term strategy on the access lines for the LTE. But on the capital structure, I think the way we look at it, is as we've said, we're going to continue to de-lever. So that de-lever will happen in the Wireless unit. I am not going to lever up just to distribute cash to the parents. That's not going to happen. But I'm also not going to build cash in Wireless either. As Lowell spoke about, when the time comes, we'll start to deliver cash to the share owners. So I think that's how you have to look at this. But overall, we will continue to manage our capital structure. We will continue to manage our debt levels and refinancing and position, taking advantage of some of that better interest rates in the marketplace. And we will continue to do all that. But I think, as we said, our target for EBITDA to debt ratio, we are at 1.3 today, and we will continue to de-lever that.

So on the core in the 30% that's less. Let me tell you, my priorities, first, are to get better penetration on FiOS. Every customer I talk to, investors, you name it, if they've had FiOS, they've used FiOS, they go holy cats. I didn't think there was a difference. There is a difference, and they love it. So I've got to go back to what we did with Verizon Wireless in the beginning, when all the carriers were viewed the same and we came up with the can you hear me now campaign, and people really appreciated reliability. We're going to find that message so that we can get penetration up. When you get penetration up, the profitability changes, so that equation may change as well. Now we're also going to, as I said earlier, work on the basic profitability of that 30% to try to make that better. If we can sustain it, and I think we have a tendency and I think all of you have the tendency to sort of write things off very early on. If we get to the point where we do those two things and it doesn't make sense for us, then we'll look at additional dispositions. It depends on where the properties are and that sort of thing. So I'm not ruling out anything. But my number one priority is to make FiOS more profitable and stabilize the other core assets.

Let's go over to Kevin Smithen?

Fran, do you think this revenue growth is sustainable for a few years? And you gave a lot of different metrics on the Wireless data front. Could you maybe talk about what the penetration right now is of your subscriber base that have a data plan and maybe what the average ARPU of that data plan is? And related to that, somewhat, I know it's complex, but do you think Wireless broadband can start to cannibalize Wireline broadband, given the speeds and maybe the capacity upgrades you see in the next couple of years?

So from a guidance perspective, I'm not going to get into that detail of the guidance between what the ARPU growth will be. And I mean, what we say is we're at 26% penetration on data today, we'll be at 50% plus. Data revenue is 2x that of a feature customer. So that's where we're at. As far as cannibalization from LTE, I think what you have to look at is I don't think that the broadband connection to the home with the speeds that are being enabled at 150 megabits per second through FiOS, that's going to go away. I think that given the amount of content that will be put into that home, I don't think that will be a displacement for broadband connection. However, I do believe that when you get out into the rural areas, there's going to be some opportunities. And I'll pass it to Lowell, he can talk about the DIRECTV relationship and what we've done there.

Well, we've got a couple of things. We've licensed our 700MHz in some of the very rural markets that we weren't going to get to for a while to the rural carriers, so that they could get that infrastructure up and operating. And as Fran mentioned, we've got a number of trials with DIRECTV where we have bundled, we've got a special antenna that we've developed together, but we've bundled the video service together with a high-speed Internet access service. And that, again, works very well in the rural markets. So there's ways to get in there. My view is over time, if I look over my years, the Wireless will sort of nibble away at the low end of the Wireline offering. But it's very difficult to beat a dedicated facility into somebody's house. And certainly, it's not on any roadmap I've seen where we're going to hit a 150 megabytes in a broad Wireless deployment.

[Operator Instructions] Let's go with Michael, and then we'll go over to David.

A couple of questions. First in the Wireline side, management earlier last year, pointed out, I think, a $1.5 billion plus goal for cost cutting through the end of 2011. Can you give us an update in terms of where you are along that road map? And then secondly, Ivan, earlier this past month, talked about changes in management compensation that Fran made. And I was wondering if you could detail a little bit more, maybe about how some of the high-level goals or strategies for incentive compensation were changed?

So addressing the cost savings program. We, with the $1.5 billion, I don't remember that figure, quite honestly. But from running the operating unit during the year, we obviously achieved a significant reduction of employees. We closed over 7 million square feet of real estate, we either sold it or closed it or subleased it. We have significantly reduced the cost, as I said before, from a FiOS perspective. We have gotten more efficient as we have gone on. So I think at the end of the day, we achieved what we said we would achieve, which was we were going to expand the Wireline margin, which we did. And I think going into next year, as Lowell has said, that is going to be the consistent strategy going forward. From just an overall compensation standpoint, as Ivan had mentioned, we moved more risk to cash flow away from revenue. And obviously, you can see from the charts, the revenue growth is not going to be really quite an issue, but we have to make sure that we generate the cash flow at the bottom, both in the Wireline unit and the Wireless unit.

David?

Lowell or Fran, could you talk about this, again, this 26% to 50-plus percent Smart phone evolution. In the base today, if 25% are Smart phones, those guys are generating $80, which means that the other 75% are generating $40. And so your game plan is to take a big portion of those people who pay $40 today and turn them into $80s over the course of the year, that's a lot of money for the next 25% to 50% of the base in terms of their income and getting them up the curve. So could you kind of talk a little bit about how you really make that happen because it seems like a very aspirational goal. And I guess my second question, if I could, Ivan, you announced that Lowell would be your successor last year. Could you talk a little bit about how you see your succession plan evolving this year in 2011?

So you consider, you think the 50% is conservative? I just want to make sure -- I mean, I get what you said about the future phone, I'll get to that. But your belief is the 50% is conservative?

Well, no, the question is to get from 26% penetration of people paying you $80 to 50% penetration of people paying you something much more than the $40 they're paying you now, you've really got to create either a much lower cost of entry or bridge them somehow from an economic standpoint because it seems like the first 30% of America is paying $100 or $80 for a Smart phone, no problem. The next 25% of Americans are going to have a bigger problem coming up with that wallet and how do you get them there.

We can talk about this for a while here. That is, I would say, is right if you looked at the entire base of Wireless customers in the U.S. But remember, over the last 10 years, we have gone for that high-end customer and their families. And what we see, when we bring out a great phone like the DROID, and I expect it's going to happen exactly that way with the iPhone, is we pull a lot of family share lines with them. Now in the past, those were $9 lines. In the future, they're going to have the $39 or whatever our data package is associated with those. And what we see is once people get those phones in their hand, they say, "I can live with a flip phone." We tease Ivan, he still carries a flip phone once in a while. But when they get those Smart phones in their hands, the usage goes up, they get on the unlimited plans or they move up in tiers. So I actually feel good about, and when Fran shared some of his charts, having those feature phone customers moving up with the set of devices we have and the clientele we have, I don't see that as a big problem.

So let me just add to that. So part of your question is you assume the available discretionary income for Wireless is fixed. That's what your question was. We assume that even if you're half right, there are other things that will drive people to use Wireless products, medical services, going green. The business revenues will significantly increase as you go to data because people will have more work at home. We have customers, we have large companies coming to us. We have one large one who've said to us, "We want every employee to work out of home." And so I think there's an opportunity to take this data platform and extend it to parallel industries and so the revenue pie we're looking into is much bigger than the one that you think exist today. So not only will those $40 customers become higher data users, but the $80 customers will go to $105 and $110. The other thing we've missed in this discussion is, I've been saying this, that my guess is that at least half this audience today is carrying two devices on them. Two years ago, you guys would say that can never happen, and half of you now have two devices. Our view is when you get to machine-to-machine and all these other things, they're going to find people carrying three and four devices. So I don't subscribe to the theory that the pie remains static. So I think that answers part of your question. Now the succession plan is based on what I just said being true, which is, that if we are really looking at this expansion of the pie and we take these two great guys, when you think about succession, you call up Madison Avenue, you got to get one guy with white hair and one guy that's angry all the time. So that's what we have. We have one guy that's white hair and one guy that’s angry all the time. And so our board is in a place where they've asked me to work with Fran and Lowell through this year. Sometime, I've said this before, sometime in the second half of the year, Lowell will become CEO, and I'll spend a few more months after that as probably chair or whatever the board wants. And by the end of the year, we'll have the transition completed. Most of you know, transitions have a lot of components to them. Running your company, meeting your outside stakeholders, partners, politics, boards, investors. So we're working through all of that. Today is part of that drill. Hopefully, you saw a plan today from two people that have a very expansive view of the future and a really sound, solid record of execution. So I think for me, this is an easy transition. But there's still a few things that need to be done between now and the end of the year, and we'll get them done.

Why don't we go to Kevin with Kevin?

Kevin Smithen with Macquarie. Equally impressive to your 872,000 net adds this quarter was the 9% retail postpaid upgrades to Smart phones and the 63% new to category, I think, bodes well for your 50% Smart phone targets. The question is with all of the hoopla surrounding the iPhone launch, you obviously had very, very strong momentum on Android and BlackBerry in Q4. How do you keep that momentum with the iPhone launch and continue to drive success in all of your Smart phones in 2011?

Well, I think you saw that in the back of the room, the 4G device lineups we have from major manufacturers are terrific devices. So the iPhone sort of establishes its own gravitational pull. But if you look at the CES show and how much attention we got around LTE, and you look at the breadth of those devices, I really feel good. And we frankly worked very hard to get here as that we would have a balanced approach. One thing we said we would never allow ourselves to do is to become a one phone company. And we're a portfolio company, and I think we've positioned ourselves that way. And what the message I was trying to send earlier today is that portfolio is also broad when you look at the Enterprise side, the FiOS side and the Wireless side. So we won't be one business focused and we certainly won't be one device focused.

Let's go one more. Last one.

No one has talked about this, so maybe it is a good one. Enterprise. To what extent is Enterprise outlook for 2011, 2012 really just about the economy recovering? And to what extent, you talk about Cloud, it seems to be on the top of everyone's mind, but I don't quite get the contribution that Cloud's going to make any time soon. Is there a J-curve investment? So could one of you address the issue with respect to the outlook for Enterprise, talk about Cloud, the economy, and as lastly, is Vodafone synergies built into any numbers that you've put out there for 2011, 2012?

Fran can take the synergy side. I mean, we do see lots of opportunity with Vodafone around procurement and hitting these accounts, but Fran can talk about the numbers. So Enterprise. No, I think it's much more than just the economy. Certainly, the economy will help, but as you see the different applications, and Cloud is a very interesting thing. Everybody's talking about it. But what we find, what I find interesting is you sit down with a customer and you start to have a security discussion. The Cybertrust is usually where we start the discussion. They've got things that they want to get out on the mobile network. They're very concerned about the security of it. We bring the Peter Tippett and the team in, and we do the discussion and then it turns into, well, now you can store that application for me on your Cloud and deliver it around the world. So I think that the economy certainly will help, but I think some of those applications will get us up that curve very quickly, I think, quicker than we think.

Then the answer to the question on synergies, no, there is nothing baked into the plan.

And with that, we're going to bring it to a close with Ivan, making a few closing remarks.

So thank you very much. I thought I would make just two or three closing points that will address some of your questions and put a bridge between what we've tried to do this morning and where you guys are. One of the things we wanted to do this morning was to establish a good foundation for our performance in 2010 and let you understand that we feel good about the fact that the beginning of the year, we didn't think the year would turn out as strong as it did at the end of the year, and there were some reasons why you've heard that and you could see clearly the difference that Lowell and Fran are making on the focus on execution in the company to make that happen. What we wanted to do with the iPhone in 2011 is pretty simple. So to put this in perspective for those of you who are into conspiracies and into looking for other meaning to life, so you would think that this is my last year, so I would want to make sure that the year went smoothly. I also wanted to make sure my colleagues didn't overpromise and get in the doghouse for the next two or three years. So I've purposely made sure that whatever they told you this morning represented a fairly conservative but doable plan. So the issue for the iPhone is we don't have all the answers. We personally believe we'll probably do better than most people think, but we didn't want to set any standard because we don't know the number of people who'll move for it, we're not sure what the inventory flows will be, we're not really sure of how all that will time out, but we are sure, by the time…