Verizon Communications Inc. (VZ) Q3 2017 Earnings Report, Transcript and Summary

Good morning, and welcome to the Verizon Third Quarter 2017 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode, and the floor will be open for questions following the presentation. [Operator Instructions]. Today’s conference is being recorded. If you have any objections, you may disconnect at this time. It is now my pleasure to turn the call over to your host, Mr. Michael Stefanski, Senior Vice President, Investor Relations.

Thanks, Eunice. Good morning, and welcome to our third quarter earnings conference call. This is Mike Stefanski, and I’m here with Matt Ellis, our Executive Vice President and Chief Financial Officer and Brady Connor, who will be assuming my role as the Head of Investor Relations later in the fourth quarter. As a reminder, our earnings release, financial and operating information, and the presentation slides are available on our Investor Relations website. A replay and transcript of this call will also be made available on our website. Before I get started, I would like to draw your attention to our Safe Harbor statement on Slide 2. Information in this presentation contains statements about expected future events and financial results that are forward-looking and subject to risks and uncertainties. Discussion of factors that may affect future results is contained in Verizon’s filings with the SEC, which are available on our 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 we have posted on our website. The quarterly growth rates disclosed in our presentation slides enduring our formal remarks are on a year-over-year basis unless otherwise noted as sequential. Before Matt goes through the results, I would like to highlight a few items. For the third quarter of 2017, we reported earnings of $0.89 per share on a GAAP basis. These reported results include a few special items that I would like to highlight. Our reported earnings include a net pre-tax loss of about $620 million, primarily associated with early debt redemption costs of $454 million and acquisition and integration related charges of $166 million retaining to Yahoo and other acquisitions. The net impact of these items after tax was approximately $374 million, or $0.09 per share. Excluding the effect of these special items, adjusted earnings per share was $0.98 in the third quarter, compared to $1.01 a year ago. Included in our EPS is a $0.01 impact due to the natural disasters in Texas and Florida during the quarter. With that, I will now turn the call over to Matt.

Thanks, Mike. Good morning to everyone on the call, and thank you for joining us today. Let me by start by reviewing the progress on our strategic initiatives before getting into detailed results. The cornerstone of our strategy is to provide our customers with the best network experience available. We are steadily investing to advance our 4G LTE leadership and actively building the network of the future. Our network performance leadership was evidenced by a sweep of third-party surveys for the first half of 2017 and a network's resiliency during the recent hurricanes and wildfires. We delivered solid operational and financial performance in a competitive environment. We grew our retail postpaid and prepaid wireless bases with new unlimited data options and maintain strong customer retention. Service revenue trajectory also improved as expected. Our wireline results were consistent with the past quarters despite ongoing consumer video headwinds throughout the industry. Demand for a high quality fiber based products remains strong. Our Oath team's integration of AOL and Yahoo is ahead of our internal expectation. We are confident in the execution of our strategy to drive profitable growth, generate strong cash flows and produce long-term value for our shareholders. The board of directors demonstrated our commitment to return value to our shareholders when they declared the 11th consecutive annual dividend increase last month. We will start by reviewing the third quarter segment operation performance, followed by a progress update on our new businesses, a walkthrough of consolidated results and finally network and technology updates. Now onto the wireless segment on Slide 5. Our wireless business delivered another strong quarter of operational performance in a highly competitive environment. We grew and retained high value postpaid customer relationships profitably. In August, we expanded our postpaid unlimited data plan to include a lower price access entry points, which provides consumers with more choices to experience the leading 4G LTE network with confidence in our networks we are now addressing a larger market with Unlimited. Given our clear and comparable service value proposition, momentum continued in the quarter. Smartphone net adds were 486,000 versus 242,000 last year. Total postpaid net additions were 603,000 included [four] (Ph) net adds of 274,000, 91,000 tablets and 238,000 other connected devices led by wearables. We added 30,000 postpaid accounts versus a loss of 107,000 last year. Total retail postpaid churn was 0.97% for the third quarter which improved by seven basis points year-over-year. postpaid's phone churn was 0.75% and was the main driver of the improvement in total postpaid churn. Postpaid device activations were nearly 9.8 million of which 82% were phones. Our retail postpaid upgrade rates was 5.5%. During the quarter, 6.1 million phones were activated on device payment plans. Prepaid net adds were 139,000 for the quarter with an increased focus on the smartphone value proposition. Additionally, we have recently expanded our offering to allow families the flexibility to combine different prepaid plans at a great value. Let's turn to Slide 6 and take a closer look at wireless revenue and profitability. Total wireless operating revenue declined 2.4% in third quarter as compared to a 3.9% decline a year ago. On a year-over-year basis, service revenue declined 5.1% versus a 6.7% decrease in the previous quarter. sequentially service revenue increased for the first time in 12 quarters. The key drivers of overall improvement in service revenue include increased access revenue through customer migration to higher access points. New account formation and the tail end of the transition of customers to unsubsidized pricing. We now have approximately 78% of the postpaid phone base on unsubsidized plans as compared to 60% a year ago. We expect the service revenue trends to continue to improve in the fourth quarter and to exit the year with a decline of less than 4% year-over-year. In the third quarter, equipment revenue increased 5.5% due to a higher device payment plan take rate. The percentage of phone activations on device payment plans was about 77% in the quarter, which is consistent with the prior period. We expect the take rate for device payment plans for the fourth third quarter to increase seasonally due to heightened consumer equipment activity. Approximately 49% of our postpaid phone customers had an outstanding device payment plan balance at the end of the quarter. Wireless EBITDA margin as a percent of total revenue was 46.2%, up slightly sequentially and up from 44.9% a year ago. In the fourth quarter, we expect the improvement in service revenue to flow through wireless EBITDA margin partially offsetting pressures in highest seasonal volume, advertising expenses and promotional activity. Let’s move next to our wireline segment on Slide 7. Total reported wireline revenue grew 1.1% including XO operations and data center divestitures. On an organic basis, wireline segment revenue decreased 2.7%, which was consistent with the prior quarter. Our fiber offerings continue to gain share and grow revenue partially offset in a decline in legacy copper products. Consumer markets revenue increased 0.9% driven by Fios Internet activity. Consumer Fios revenue grew 4.6% including the impacted two markey Pay Per View events during the quarter. Verizon was recognized by a leading third-party study as the top rated residential internet provider for customer satisfaction in the Fios footprint. Fios Gigabit Connection, which launched earlier this year continues to gain traction offers symmetrical speed of up to one gigabit per second. We added 66,000 Fios Internet Customers in the quarter. Fios Video results were pressured due to the ongoing shift from traditional linear video to over-the-top offerings, as well as competitive promotional activity. Fios Video losses were 18,000 in the quarter. Enterprise Solutions revenue excluding XO, decreased 5.0%, while growth in fiber based products continues. On a constant-currency basis, revenue was down 5.3%. Partner Solutions revenue declined 3.9% on an organic basis, which is an improvement over prior period. Within business markets, fiber revenue is increasing, driven by demand for Fios broadband products. On an organic basis, total revenue declined 5.8% year-over-year. On a comparable basis, the third quarter wireline EBITDA margin was 21.1%, compared to 20.3% a year ago and up 40 basis points sequentially driven by ongoing costs control measures. Let’s move next to Slide 8 to discuss our progress in new businesses, starting with media. During the quarter, our Oath team has been executing on more than 20 integration work streams. We are positioning the business for the future, locking in early synergies and setting out a roadmap for the next several years with the expectations to realize $1 billion in operating expense synergies through 2020. With the addition of Oath, Verizon's addressable market has expanded from millions of wireless and wireline customers to about one billion global content consumers. We are combining the best aspects of AOL and Yahoo to create a uniform and integrated platform to drive engagement and consumer value. Oath revenue is $2 billion for the quarter, we will provide additional information on Oath in future quarters as we progress through the integration phase. Telematics revenue was over $220 million in the quarter including Fleetmatics and Telogis. Total IoT revenue on an organic basis increased approximately 13% in the quarter. Let's move next to Slide 9 to wrap up with our consolidated results for the quarter. The solid segment results in the quarter and addition of new businesses drove improvements in the consolidated top-line reported results. In the third quarter, total operating revenues were higher by 2.5% on a reported basis. On a comparable basis, excluding divestures and acquisitions, consolidated revenue declined to 2.3%. Similar to recent quarters, the primary driver was the year-over-year decrease in wireless service revenue. On a consolidated basis, excluding special items, adjusted EBITDA margins was 36.7% up slightly from prior year's margin of 36.5%. We are focused on driving profitability through cost and capital efficiencies across our business. As Lowell announced in September, we have targeted $10 billion in cumulative cash savings over the next four years. Let's turn now to cash flows in the balance sheet on the Slide 10. We had a strong quarter of cash generation supporting our consistent capital allocation program and returning value to shareholders. Year-to-date, cash flow from operations was $17.2 billion including working capital pressure primarily due to the $3.7 billion of device payment plan receivables. Year-to-date capital expenditures were $11.3 billion with the sequential with a sequential increases in the quarter driven by increased spending in wireless, supporting growing network demand, while prepositioning for 5G. We expect full-year 2017 capital expenditures to be at the lower end of the guided range of $16.8 billion to $17.5 billion. Free cash flow from the first nine months of the year totaled $5.9 billion, which included a net after tax discretionary pension contribution of $2.1 billion. In addition, our free cash flow does not include proceeds from asset backed securitization which we initiated in the third quarter of last year. we did not executing an asset back securitization during the third quarter, but have generated $2.9 billion year-to-date from our ABS borrowings. Over the last few days, we completed our third public ABS transaction this year to $1.4 billion. The impact of device payment plans and on balance sheet securitization is expected to approach a steady state by year-end, reducing working capital headwinds during 2018. We anticipate working capital fluctuations throughout the year due to seasonality in wireless equipment volumes. We ended the quarter with the $117.5 billion of total debt, comprised of $109.6 billion of unsecured debt and $7.9 billion of on balance sheet securitizations. Our near term unsecured maturities are modest at $2.3 billion through 2019. Our balance sheet is strong and provides us with financial flexibility to grow the business. Let’s move next to Slide 11 to discuss our network and technology. Our industry leading wireless and wireline networks are the cornerstone of our strategy and we consistently invest to ensure that we have capacity to serve growing demand technology to reduce the cost of serve and a network position to lead the industry into the future. We continue to win awards in third-party studies, a test to combination of coverage, speed and reliability. Based on the confidence in our network, we broaden to unlimited options to offer more customers and unmatched unlimited experience on the best wireless network. As expected, the introduction of unlimited pricing plans has increased the LTE network usage across various busy timeframes and geographies as our customers enjoy the experience of consuming more data throughout the day. We are more affectively utilizing existing network capabilities and service plan features to handle the increased traffic without interrupt in the quality of the customer experience. Just over 50% of our available low and mid-band spectrum portfolio is being used 4G LTE. Network reliability and resiliency are critical elements to our wireless network, we are thankful and proud of the work performed by our employees during the tragic natural disasters in Texas, Florida and Northern California, who ensured they are first responder and all of those effect who were able to relay on our network in the time of need. We maintained a high level of performance through our planning, network redundancy and rapid response despite wide spread power outages. Although, we are not a wireless network operate in Puerto Rico, we have offered assistance to the local carriers and government officials as they work to recover from unprecedented hurricane damage. We are steadily investing in the network of the future, which we called a Verizon Intelligent Edge Network. This network has many components the lead to a multi-use software driven network upscale. It goes from the wireless or wireline access networks to intelligent distributed computing platform to a highly automated software enabled core network. This architecture enable by a dense flexible radio network with deep multi-used fiber that we have been building for years. As we seen new use cases, this Intelligent Edge Network architecture will meet the new types of application demand. We will leverage these in [HART] (Ph) network capability such as latency, throughput and security to create network slices that will be tuned to the specific needs of each application. Our pre-commercial 5G fixed wireless broadband trials are continuing, live customer experiences on the network provide key data and learnings that will give us valuable insights for commercial deployments. We are on-track to share trial results later in the fourth quarter. Over the past several years, we have been leading the development of 5G industry standards and the ecosystems are fixed in mobile. Global development is accelerating based on our work alongside industry partners for multiple used cases. Let’s move next to Slide 12 to review our strategy for future growth. We are confident in our strategy to drive future growth while delivering near-term results. We are laying the foundation for the network of the future, while maintaining a strong lead in 4G LTE coverage, capacity and reliability. Our focus is on preserving and growing our customer relationships, while expanding our presence in digital media and Telematics. The execution model is to deliver strong fundamental results, allocate capital to our networks, maintain a strong balance sheet and return value to our shareholders. Our wireless value proposition is evolved to allow more customers to experience unlimited wireless plans on the best U.S. networks. We produce solid operational and financial performance across the business in a competitive environment while investing in our best-in-class networks and driving near-term cost efficiencies. Our long-term strategy is to change people's lives by delivering the promise of the digital world while leading the industry and innovate for future technological application. 5G provides a path for growth with fixed and mobility use cases with 4G interoperability. The 5G ecosystem is progressing with [standards] (Ph) and technology development and we are prepositioning our network with fiber investments, spectrum resources and cloud architecture. With that, I will turn the call back to Mike so that we can get to your questions.

Thank you Matt. Eunice, we are now ready to take questions.

Thank you. We will now begin the Question-and-Answer Session. [Operator Instructions]. Your first question comes from Simon Flannery of Morgan Stanley. Please go ahead with your question.

Great, thank you very much. Good morning. Matt, you mentioned the $10 billion cost reduction program. Could you just give us a little bit more color around some of the buckets on that and how should that layer through the next four years. and then on Unlimited, any updated stats on what percent of your base or what percent of your new customers are taking that plan and obviously since you changed it to the two or the three plans who's taking the lower rate plan versus the higher is that splitting more towards the higher ARPU plans. Thanks.

Thanks Simon and good morning. So on your first question around the $10 billion books, Lowell announced that last month, since then we have put a dedicated team against that and we are starting to get around that work. It's a little early to get into some of the specifics of the timing of when you should see that, but in terms of bucket that's going to come across. Really think about all of the all parts of the business are in focus here, whether that’s the network, whether that be distribution and care and even to obviously the shared service parts of our business and across the complete supply chain. We are going to take a deep look across the whole business and identify areas where we have the opportunities to significantly improve the efficiency on how we operate the business. As we get further into that program, we will share more specifics overtime both on where the savings are going to be realized from and also the expected timing, but I think we are off to a good start with it. In terms of your second question around Unlimited and the new price plans. I would tell you that between Unlimited and the Verizon 2.0 that we introduced last summer, we now have approximately two-thirds of the base on planned where they could control their over expense. And so that's up as you would expected from where we were a quarter ago and that's obviously a significant part of the base now has the ability to do that. The mix is as expected between the two plans, we are not going to go into the specifics of each of those. I would tell you though that in the third quarter what was - we saw as we expected the migration of existing customers from data bucket plans to Unlimited plans shifted to where on average they were stepping up in revenue from their bill prior. And as we expected, we knew that initially we would see optimizes who had the opportunity to move to Unlimited and save money, we saw that in this first quarter as we introduced those plans. In the second quarter, we continue to move through that by the end of the quarter essentially that was flat that customer’s migrated over. And then in the third quarter, we got to the point where the customers migrating over actually increasing and you saw the increase in [indiscernible] sequentially from 2Q to 3Q for the first time in three years. So we are seeing good progress there.

Great. Just one quick follow-up. Any impact then on 2018 or is it really going to be ramping through 2018, so the impact is more 2019, 2020 from the 10 billion.

You will see some impact in 2018, but it’s a cumulative number over those four years, but absolutely, we will see benefit in 2018.

Simon, thank you. Next question Eunice.

Your next question comes from John Hodulik of UBS. Please go ahead with your question.

Great. Matt, couple of questions on the wireless sort of the growth and profitability. First on the upgrade, saw a low number in the third quarter. As you guys look after the fourth quarter do you think that changes and maybe bounces back a little bit, like maybe won’t see as much seasonality you typically do, we are basically trying to get a sense whether it’s sort of a lack change in the technology or just customer at this point waiting for their turn to come out? And then related to Simon’s questions, you saw sequential growth in service revenue for the first time in a while this quarter and it sounds like these trends are sort of inflecting. So could you guys return to sort of year-over-year growth sooner than the third quarter next year given those underlying trend you are seeing in ARPU? And related to your comments about margins, does that mean that we might not see the typical downdraft in margins, we typically do in the fourth quarter given the flow through effects that you mentioned?

Yes, thanks John. So as you mentioned the upgrade rate in the third quarter was a little lower than we have seen in past years. I think what you are seeing there is difference in timing of some of the new devices coming out versus what we have historically seen. Obviously Apple is part of that with splitting the new devices between the eight, which came out in 3Q and the ten which comes out in 4Q. But also on the Android OS side of the house with having the new Google device coming out this month as well. I think you are going to see more of – we would expect to see a shift is some of the volumes versus typically from 3Q to 4Q. So look as we get into the holiday season some of those new devices come out, we think, we will see strong demand and look if you are paying a $1000 for a new handset you are going to walk not to be on a good network. So we are very confident that we will get more than our fair share of that activity when it comes through in the fourth quarter, but obviously, we will wait to see exactly how that plays out. In terms of the sequential revenue trends and as you highlighted, we were up in service revenue from 2Q to 3Q. That was in-line with our expectations as we discussed on the last call. As you start to see combination a number of factors. We have largely migrated the consumer base to unsubsidized pricing, it was 78% in 3Q, 75% in 2Q. So that transition is largely done and so you are no longer seeing as much of a headwind from the reduction in the line access fee. And as I mentioned, we are starting to see step up and migrate is over. In addition to that, we increased the number of accounts for the second quarter in a row, so you got the total volume in the business up as the rate we are getting from customers going up too. So as I said in the script, we expect to be inside of 4% on a year-over-year basis in the fourth quarter, and as I have said previously, I expect that we will get to service revenue growth during 2018. In terms of your questions around margins, it's a little too soon to say where they will play out in the fourth quarter. Obviously as we are now on unsubsidized, we don't have the same subsidy headwind, but we will see what the environment is like in the fourth quarter competitively and we will respond as necessary. So we will see where that shakes out between now and the end of the year.

Great, thanks Matt.

Thanks John. Eunice, next question please?

Thank you. Your next question comes from Brett Feldman of Goldman Sachs. Please go ahead with your question.

Thanks for taking the question. I was hoping you can maybe unpack the improvement you continue to see in postpaid churn, particularly phone churn. You obviously have a much better visibility into your customer base and than we do. So for example, to what extend do you think that this is a structural improvement in churn as a result of customers moving into Unlimited plans and other plans where they can control their overage. To what extent do you think it might just be that the seasonal pattern of device launches has been moved a bit and so it could see it moved back to prior levels as we go through that cycle. And then just as an extension of this question of this question. Some of your competitors have been looking to lower churn by including free or just deeply discounted streaming video products as part of their bundles. I'm curious whether that's something that you think would make sense for Verizon as well. Thanks.

Thanks Brett. Look I would say as I look at the churn number, we have always had a good churn number, it's obviously 0.75 continues to trend that we saw in the second quarter and really continues the trend since we saw mid February when we launched Unlimited. And as we said at the time, the key driver of launching Unlimited was to protect our pace of customer which we think is the best and most valuable set of customers in the industry. So look there is a number of things that go into that, but I would tell one of the biggest thesis is the network experience that Verizon customers have, they get to see that they understand the reality of our network experience versus some of the others and so we saw that with some of the recent natural disasters that customers on our network understands that when things really matter Verizon is a network they want to be on. So that continues to be key part of it and I believe we can continue to have very good churn without necessarily the bundle in other aspect into the core offering.

Is it fair to say that you would expect on a seasonal basis going forward. So for example, this fourth quarter you still think you might do better than you did a year ago even if there is an uptick in devices and maybe industry wide churn.

You mean to better year-over-year [indiscernible] number?

Yes.

Yes, I think look we have seen that since we launched Unlimited and we had a clear and comparable offer in the marketplace. We have demonstrated that our customers prefer being on Verizon rather than moving somewhere else and I have no reason to believe that will change in the fourth quarter as we go forward. So very confident that we will see that trend continue.

Thanks for taking the questions.

Thanks Brett. Next question please?

Your next question comes from David Barden of Bank of America Merrill Lynch. Please go ahead with your question.

Hey, guys. Good morning, thanks for taking the questions. I guess just a couple. First, Matt, you kind of highlighted the impact of divestitures and acquisitions on the revenue line which was about a 5% swing versus the reported numbers. Could you maybe walk that down through EBITDA and then to earnings with respect to all the different moving parts year-over-year? And then second, Lowell was pretty widely reported as talking about working on a content type of program or partnership or acquisition as you worked into the back part of the year. Could you elaborate a little bit more on kind of what the goal is for that project and maybe how it ties to your plans for launching your own over-the-top video products? Thanks.

Yes, so I will start with the second one there. So with respect to Lowell’s comment around content and potential deal for usage rights. I would say, we are continuing to work that particular transaction Lowell, when he made that common expected it would be done by now. Unfortunately it just taken a little longer to [indiscernible] fully expect to see something there as we move forward. In terms of the over the top, really nothing new to add versus what Lowell said last month. Look this is a space what we think there is an opportunity for us to play, we think that makes sense for us to play in that space, but we don’t want to launch just a me too type product. So we are continuing to look at what makes sense for us to launch something that’s differentiated in that space, probably around live programming, but how and when we launch something will be TBD. In terms of the, your questions around the M&A side. Obviously the revenue line, we brought Yahoo and you brought XO and those brought revenue on day one, when you close a transactions or same thing with the Telematics businesses as we closed in the back half of last year, but initially especially the Telematics businesses and Yahoo not significant. The EBITDA or EPS line maybe a little bit of pressure, the EPS line if anything about $0.04 on a year-to-date basis. And then they also bring depreciation and amortization, which is why there may not a huge amount of pressure at the EBITDA line, but as you move down the income statements of operating income and EPS, we see a little pressure this year. As we expand those businesses going forward we expect them to contribute in the future.

Great. Okay, thanks.

Eunice, next question please?

Thank you. Your next question comes from Mike Rollins of Citigroup. Please go ahead with your question.

Well thanks for taking the question. Two if I could. First, I was wondering if you could talk a little bit more about the three to five year view for wireless. Can you just help us understand the Verizon’s expectations with the investments you are making, the technology that you are deploying? How investor should think about top-line growth over a more extended period of time? And then secondly, if you could delve into a little bit more detail on some of the businesses you have acquired in over the last couple of years. In terms of Oath and Telamatics and how should investors think about the growth of those businesses over the next couple of years as well on the top-line especially? Thanks.

Yes, thanks Mike. So look, as you think about the while this business going forward and obviously I’m going to talk specifically about our views on 2018 and so on. We will have those discussions when we get to January. But you think of the business overall, we are very confident with where seeing the growth start to migrate to we talked about the trends in service revenue, the fact that we should expect those to get back to positive during 2018 once we have worked through the transition fully from subsidized to unsubsidized pricing. We think it will continue from there, we will continue to add net adds to the business based of the quality of the network. And then the network will continue to expand the capabilities as we transition to 5G and we think that will give us other opportunities to expand the wireless business going forward. So we are very confident in the future trajectory of the business there and obviously as we think about three to five year view, the overall GDP is going to play into that. But as I think about 5G and what it’s going to do for the business going forward, and then as I think about the new businesses coming in, and contributing as we expand those and then continuing to work on the cost side of the business as Lowell described last month. I don't think that you're going to recognize the business five years from now versus where it is today.

If I could just follow-up on that point, the wireline business is something where you upgraded significant amount to fiber, but you also have some copper, you're competing for a full - bundle in a lot of your market, but you're smaller relative to some of your video competitors. Have you thought about doing something different in the wireline business in terms of the way the footprint will look, whether it's through 5G or other investments in the wireline business or other strategic options for that assets.

Yes, so there is a lot in that question Mike. So look fundamentally as you think about the wireline business you're thinking about really two assets there, you have got the legacy copper business which continues to have a secular declines across our set of customers, whether that the consumer, enterprise, small business whatever. And then you have the fiber side of that business where we see continued growth and demand. And that's just not within the [indiscernible] footprint, its more international sales. So if you think around we have had the Ultra-Long-Haul backbone for a number of years now, earlier this year we expanded that with the XO acquisition which added fiber metro rings in the 45 of the top 50 markets. We obviously have significant fiber in the Northeast corridors, we have been building Fios over the last 10 years. So you should expect to see the fiber side of the wireline business continue to grow and become more relevant and then as part of that you have got the convergence of the network between the fiber network and the wireless network as we [indiscernible] 4G and preposition for 5G. So as we go forward here we think that the combination of those networks is incredibly important.

Thank you.

Mike thank you. Next question please?

Thank you. Your next question comes from Craig Moffett of MoffettNathanson. Please go ahead with your question.

Hi, thanks. First Mike, I just wanted to say congratulations on a terrific career in IR and thank you on perhaps all the help you have given us and Brady congratulations on your new position as well. I wanted to ask about consolidation, because it's obviously the top - and from what Sprint and T Mobile has said, we could see an announcement as early as next week. Can you talk about how you think a Sprint, T Mobile merger will change the competitive landscape and would you argue to the SEC and [indiscernible] in favor of approving a transaction like that?

Yes Craig, look I would tell you, there is a lot of various rumors and so on around the industry overtime around various M&A activity and I’m not going to comment on other people’s businesses. I would tell you, we have the right set of assets to compete irrespective of the industry structure and that’s what we are focused on and I’m very confident in our ability to be successful however things play out with other people?

Thanks. Could I ask, since there’s not much to say on that topic, one separate question then? Could you update us on the 5G fixed wireless broadband trials, what you are seeing and how that informs your expectations for what you are going to do in 2018?

Absolutely. So we will have more specifics on that later in the quarter and we will get the right folks talking about that. But I can say the trials are going very well and we are getting a lot of good experience using the millimeter wave spectrum and some other things we are seeing whether it’s a fact that we can deliver service without needing line of sight, whether it’s think about MDUs and the number of floors we can deliver service to being more than we expected. We have experienced delivering service in MDUs above 20 floors, which is more than we thought it would be going into the trial. So a number of good things coming out of the trials, we will get back to all of you later in the quarter with more specific details on the results of the trials and what that means for 2018, but nothing has change about our intent to launch the fixed wireless broadband offering during the course of 2018.

Okay, bye guys.

Thank you. Next question please Eunice?

Your next question comes from Mike McCormack of Jefferies. Please proceed with your question.

Hey guys thanks. Matt, in the prepared remarks, you talked about over-the-top and some of the video pressure that we have all been hearing about a lot more recently. How do you guys look at that? When you look at the customers leaving you, is it leaving just the video piece of it and maintaining the broadband connection or are you just seeing a shift to different providers generally? And then secondly, the spread between those making device payments in wireless versus those that are on unsubsidized plans, how many of those in your best estimate are people that actually were making a payment plan to you guys, pay off the phone and are opting into sort of a lower price point instead of upgrading the phone?

Yes, thanks Mike. So look on your first question. There is really nothing new here to us in terms of the trends we have been seeing over the past few years around whether it’s cord-cutting or [cord-nevers] (Ph) or whatever else. In fact, we have spoken in the past two or three years ago, we really started to speaking about this and the fact we said the traditional linear TV bundle is not long-term sustainable and you saw our reaction to that when we launched some of the different plans that we launched at that point in time. But so, we are not surprised by what we are seeing around the TV, but I would tell you what is important, when you move to over-the-top for your video entertainment, the quality of that broadband connection becomes more important than ever and if you want a quality broadband connection Fios and fiber to the home connection is the best option out there. And we continue to see strong numbers on the broadband side of the business as a result of that and we are very confident that the Fios Internet offering will continue to be very strong in the marketplace. As I think about the spread between the unsubsidized and the subsidized payments. Look, what you have here is you do have customers who were on subsidized pricing, get to the end of two-year contract and they then move to unsubsidized pricing and not necessarily getting there through upgrading to a new device and do a net on device payment plan. But that migration as we say is largely completely now have 78% of the base which meets virtually all of the consumer bases now on unsubsidized pricing. So as we go forward here the gap between the this year and the last year number will get narrower and narrower. And that's what is going to help drive the service revenue trajectory improvement as we go forward here.

And Matt I'm sorry just quickly on the hurricane issue, you guys called out the one penny impact. But anything with respect to volumes in wireless that may have been even better as the hurricanes might have?

Certainly we had in both Huston and Florida, we have period of times when our stores were closed and certainly that’s an impact. But we also saw good volumes as soon as those stores reopened, customer realizing in times like that you want to be on the best network and so we saw an uptick as soon as those stores reopened. And I have to get credit to our teams, whether it be on the network side and all the things they did and also our teams in the distribution side of the business, getting those stores open incredibly quickly after those storms, they did a fantastic job.

Great. and congratulations Mike and Brady.

Thank you Mike. Eunice Next question please?

Your next question comes from Jennifer Fritzsch of Wells Fargo. Please go ahead with your question.

Great, thank you for taking the question. Matt if I may, I just wanted to ask on fiber we have all been brought up to be believe fiber is really expensive to deploy. And yet we see you coming into the lower end of your CapEx range. I'm not asking you for guidance on 2018, but are you seeing some savings with these XO properties. Are you deploying those laterals yet, or is that going to be more kind of a 2018 event? And then if I also just could ask on the other element of 5G spectrum. I think [indiscernible] you feel comfortable with spectrum might that not even sit in the spectrum auction. Can you talk a little bit of how you as you look at your inventory are you feeling comfortable still with what you have? thanks.

Yes, so I'll answer the spectrum question first. We believe that we have a great portfolio of spectrum. As you look at the 4G network only approximately 50% just over 50% of our spectrum portfolio server in that network today. We have got additional spectrum assets that will serve that network in 2018 whether that the [Refarm] (Ph) and 850 and PCS or whether it would be put in the AWS-3 to work. And additionally as you move into the 5G world, we look forward to closing the straight path transactions and the XO spectrum transaction as head into 2018. So we are comfortable with our spectrum positions. As we think about future auctions we will wait to see what is in there or make assessments at that time. but very comfortable with the portfolio we have today. And as obviously as we think about added capacity to the network we have more than spectrum as the tools available to us as we go forward, and we have talked about the different technology and architecture tools with LTE Advance and all the different pieces in there. We continue to be able to add capacity as we move to more software defined networking and those type of tools and in obviously densification. And that densification based of having more fiber available in the network. So to get to your first question, we continue to deploy fiber and we will continue to do that as we head into 2018 as you say I'm not going to talk to 2018 CapEx at this time, but you should expect to see us continue to be deploying fiber around the country as we go forward to service both wireless but also customers across the rest of our businesses and getting into IoT applications as well.

Jennifer thank you and Eunice next question please?

Thank you. Your next question comes from Amir Rozwadowski of Barclays. Please go ahead with your question.

Thanks very much. I was wondering if I could build upon the prior questions around your spending trajectory. If we think about this lower-end CapEx target for the year, how should we consider the outlook against that backdrop of investment? Clearly, focusing on network quality is a clear focus for you folks. I’m just trying to unpack the commentary a touch, whether it’s a shift in some of the spending priorities that’s taking place that’s enabling you to get to the lower end? Are we seeing inflection with the benefits from software-defined networks flowing through the business at this point? Or anything to that effect, Matt?

Yes, good question, thank you Amir. So as I think about the CapEx for the year and where it’s coming in towards the lower end of the range. That’s still going to be around 17 billion of spend, so certainly not in significant number. Some of this is just a timing of the activity with the network teams between 2017 and 2018l. But look, I would tell you that the key thing here and you talk about has there been any shift in priorities and I would say absolutely not. The priority to continue to invest in the network whether that’s adding capacity for the networks today or pre-positioning the network and being at the leading edge of building the future network technologies, that priority is unchanged and as we had into 2018, you will see that we will continue to spend to continue to do exactly those things. So no major change there, as we head into 2018, more spending on fiber as we pre-position for 5G and continue to make sure we have the leading network.

Thanks a lot, and one follow-up, if I may. In touching upon that 5G commentary, in recent weeks, we have seen some notable developments around the broader ecosystem, in particular the announcement with Qualcomm to accelerate the global 5G standard in millimeter wave spectrum. It seems like mobile 5G, in terms of its availability, is now being pulled forward. Is that going to affect the type of services that you plan to offer? Could we see mobile 5G a bit earlier than anticipated here? Any color to that effect would be great.

Yes. So I think we were very proud to be part of that announcement with Qualcomm earlier this week and really what you are seeing there is as we have talked about now for the past two to three years. We said if we put our shoulder behind 5G development. We think, we can accelerate versus some of the timing of safety place. And in fact, there were some people who were saying they didn’t even think 5G was going to be real and if you be able to use millimeter wave spectrum. So we have demonstrated that by our effort so far, we have brought the ecosystem together, we have push forward the timing of standards coming forward and not surprised by any of that at all. It’s exact as we expected. In terms of the timing of mobile 5G, it’s certainly not a 2018 activity. But you talk about does it change our view on the types of services we will be able to offer, absolutely not. We have seen a wide range of services that we will be able to offer on 5G has - why we have been so excited about it, quite frankly and while we put our shoulder behind get in the ecosystem to move faster on this than they otherwise would have been and we look forward to being in position to offer those services in the years ahead.

Thanks very much for the input.

Thank you and Eunice we have time for one last question.

Thank you. Your last question comes from Tim Horan of Oppenheimer. Please go ahead with your question.

Thanks guys. And just upon the CapEx again. Matt are you seeing any benefits from kind of the [SDN] (Ph) in terms of pricing of equipment. And can you just talk about as you move to 5G. should we think about CapEx stepping up a couple of billion dollars a year? there is a lot of articles in the press over the last couple years that it might talk close to $20 billion $50 billion to build out a nationwide 5G network. Any color around that would be great.

Yes so thanks Tim. So in terms of benefits from SDN and so on, let me show as you not just SDN but also network function, virtualization it does allow the value of some of the hardware you put in the network to change overtime, and how you operate network moves more to the underlying software there. So I think we will see those trends as we continue to expand the network. In terms of deployment of 5G, I think some of the people who are estimating those numbers are getting ahead of themselves and it’s just too early to tell. So as we have more visibility into the timing of spend around 5G we will share that with you, but it's way too early at this point and I'm not going to comment on those estimates.

And then just lastly on the $10 billion of expense reduction. How much of that do you think you'll reinvest and maybe growth in the business. I guess how should we would be think about the longer term margin trend over the three to five year period?

Yes, so as you think about the money, really wants to be generate those savings it becomes part of the overall pull. But I'm excited about the opportunities that the teams are developing to grow the business going forward and it's important that we make sure that we have the resources in the business to invest in those things. and we can't be investing in those things if we have inefficiencies in the core business to that point in time. So we just think it's a responsible thing to do to make sure that we constantly look at the efficiency of the business and look forward to generating those savings and discussing that more with you in the future.

Tim, thank you and before we end the call I would like turn it back to Matt for a few closing comments.

Thanks Mike. I would like to close the call with the few key points. We remain focused on our strategy to invest in our networks while expanding our high quality customer base and developing new platforms and solutions. We are well positioned to compete in the current environment while leading the industry into the next generation of technology with our strong network of assets. We are confident in our ability to execute our strategy and to generate long-term shareholder value. Finally before I close the call today, I want to personally thank Mike for this commitment and the support he has given to me and many others throughout his career of Verizon. And we wish him all the best in the future. We will also like to welcome Brady Connor to the IR team. I have known Brady for several years and he will be a great successor to Mike in addition to the IR team. Thank you for your time today.

Ladies and gentlemen this does conclude the conference call for today. Thank you for participation and for using Verizon conference services. You may now disconnect.