Verizon Q1'16 Earnings Conference Call: Full Transcript

Operator:

Good morning and welcome to Verizon First Quarter 2016 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. To ask a question press star and then the number one on your touch tone phone. If at any point your question has been answered you may remove yourself by pressing start and then the number two. 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. Mike Stefanski, Senior Vice President, Investor Relations.

Michael Stefanski: Senior Vice President, Investor Relations:

Thanks, -- good morning and welcome to our first quarter earnings conference call. This is Mike Stefanski and I'm here with our Chief Financial Officer, Fran Shammo. Thank you for joining us this morning.

As a reminder, our earnings release, financial and operating information, the investor quarterly and the presentation slides are available on the investor relations website. A replay and a transcript of this call will also be made available on our website.

Before we get started, I’d like to draw your attention to our Safe Harbor statement on Slide 2. Today's presentation includes forward-looking statements about expected future events and financial results that are subject to risks and uncertainties. Factors that may affect future results are discussed in the filings with SEC. This presentation includes non-GAAP financial measures. Reconciliation to these non-GAAP measures to the most directly comparable GAAP measures can be found on our website. The quarterly growth rate disclosed in our presentation slides and during our formal remarks are on a year-over-year basis unless otherwise noted as sequential.

Before Fran goes through our results, I’d like to highlight a few items. For the fourth quarter of 2016, we reported earnings of $1.06 per share on a GAAP basis. These reported results include a few non-operational items that I’d like to highlight.

Our reported earnings include a non-cash pretax loss of $165 million. For a pension mark-to-market adjustment due to settlement accounting. We expect settlement accounting to impact earnings in each of the remaining quarters in 2016. Additionally, we recognized a pretax gain of $142 million on a spectrum license transaction.

On an after-tax basis, the loss in settlement accounting amount to $102 million or $0.02 per share and the gain on the spectrum transaction amount to $88 million or $0.02 per share, affectively offsetting each other. Including the effect of these non-operational items, earnings per share of $1.06 in the first quarter compared to $1.02 per share a year-ago or a growth rate of 3.9%. There were no special items of a non-operational nature in the first quarter of 2015.

As a reminder, our Wireline results for the first quarter included the operations from the three states that we sold to Frontier on April 1, 2016. As we have done over the past year we have recognized a full quarter benefit of approximately $229 million pretax or about $0.03 per share due to these assets being classified as held for sale. This compares to $146 million pre-tax benefit or $0.02 per share that we recognized in the first quarter of 2015. Additionally the operations of AOL are not included in prior period results.

With that I will now turn the call over to Fran.

Francis J. Shammo: Executive Vice President and Chief Financial Officer:

Thanks, Mike. Good morning everyone. We remain confident in our three-tier strategy for long-term growth.

Which is to lead at the network connectivity level in the market we served. Develop new business models through global platforms and video and Internet of Things and create incremental revenue opportunities in applications and contents.

In terms of progress on this multi-tier strategy, we are focused on network leadership and operating efficiency while we developed new ecosystems in video and the Internet of Things leveraging our capabilities in the United States and scaling our platforms globally. We are also developing a portfolio of unique contents targeted at the millennial generation so that we can capitalize on the opportunity transforming mobile.

At the network connectivity layer, we consistently invest in our 4G LTE network to accommodate growth in daily usage and enable customers to experience an unmatched level of connectivity. National studies continue to recognize Verizon as the overall 4G LTE network performance leader having the best network does matter as reflected in our strong customer retention that we will discuss later. We are enhancing capacity and coverage by effectively managing our spectrum. Further densifying areas of significant usage and implementing a number of optimization techniques such as carrier aggregation.

Approximately 92% of our total data traffic is now on the LTE network. The amount of data on the network increased at a rate of approximately 50% over the prior year.

Over the long-term densification of our wireless network particularly in urban and concentrated usages areas is required to add capacity to manage these growing consumption trends as well as to pre-position ourselves for the 5G technology of the future. A key element of this densification strategy is access to fiber. During the quarter we announced our intention to acquire Excel Communications which will provide us the opportunity to deepen and expand our fiber assets nationwide as well as to lease millimeter wave spectrum for 5G testing purposes with the option to buy.

We are also very excited about the announcements made last week do deploy a new fiber platform within the city of Boston that will support wireless and wireline technologies to consumers and enterprises across the city in a network efficient way. This approach gives us tremendous flexibility to innovate, develop, and deliver services with the mix of technologies over the same fiber assets.

In terms of 5G our technical testing is going well and there is a strong interest and commitment from members of 5G forum to prepare for fixed wireless commercial pilots using the technology next year. Improving our operating cost structure is a priority. We will continue work on our operating model and I'll confident that we can improve efficiencies as we have done in the past. We remained focused on cost reductions throughout the entire business and are making progress in driving efficiencies, reducing overhead costs and streamlining support.

We have several initiatives that have already been taken and others that we plan to implement for 2016 and beyond.

In the fourth quarter of 2015, we restructured our wireless organization to improve our ability to address the changing needs of our customers faster and more efficiently. Additionally, we continue to look at opportunities across all lines of business. You are starting to see these benefits in the first quarter. Overall, consolidated headcount since the end of 2015 is down approximately 3%, as we continue to increase the efficiency of our operations.

We expect to receive additional savings from a number of initiatives during the second half of 2016.

We continue to streamline business support functions, utilizing our Lean Six Sigma approach across the business to reduce redundancy, drive consistency, and improve speed of delivery in the market. Across wireless we have identified opportunities to gain further efficiencies within the store operations, call center operations and supply chain processes by simplifying our execution model while improving the overall customer experience. Network related opportunities exists for consolidation and elimination of unnecessary facilities to gain synergies and reduced costs. Always more work to be done here, but we're pleased with the continued progress.

Our networks and operating model also enable us grow and expand our revenue stream through new ecosystems, platforms, content and solution layers. We are enhancing our overall long term global digital media strategy which includes premium content, distribution and advertising platforms across all screens. The video platform continues to expand as we add more unique content that appeals to millennial audiences such as the partnership recently announced with Hearst. Our joint venture with Hearst includes developing two initial channels a video programming targeting the digital millennial audience to be distributed across multiple distribution platforms.

Additionally, we signed an agreement to acquire an equity stake in Awesomeness TV and entered into an agreement to create new premium content service featuring short forum mobile content that will launch initially on Go90.

Just over the past few days we announced the acquisition of their 50% ownership in Complex Media with Hearst. The investments in AwesomenessTV and Complex Media position us as partial owners and the number one digital media brands for young millennials. On the Go90 application, we remained encouraged by the viewership of Go90, but as we have said before, we are still in the very early stages of gain interaction and engagement. Verizon wireless subscribers now have greater flexibility when streaming live sports, concerts and original series content within Go90 on the mobile devices and can enjoy this content free of data charges with our FreeBee data service.

We look forward to expanding our Go90 content to other media through our AOL brands and the web later this year. Within the Internet of Things ecosystem, we continue to develop platform and our network to take advantage of the opportunities to innovate and offer solutions that address some of the more pressing social, economic, and business challenges. We have launched our own utility transportation and health-care solutions with products like NetworkFleet, GridWide, Verizon Share, Hum and one of our newest products Intelligent Track and Trace. Our things based platform is set to accelerate the adoption of Internet of Things products and solutions by making it easier, faster and more accessible to develop applications. New revenue streams from the Internet of Things are growing with revenues of approximately $195 million in the quarter, a year-over-year increase of about 25%. While we build for the future fundamental execution and quality financial results are our top priority.

Now let's get into the first quarter performance in more detail starting with our consolidated results on Slide 5. Our first quarter results demonstrate our ability to compete effectively and execute our strategy in the current market. We delivered strong operating and financial results by growing our quality customer base, expanding earnings and generating solid free cash-flow for the quarter. Earnings per share grew 3.9% and free cash-flow was $4 billion, which enables us to invest and return value to our shareholders.

Total operating revenue in the first quarter was $32.2 billion, an increase of 0.6%. AOL had its best first quarter revenues in the last five years driven by growth in the platform layer. If we exclude AOL which was not part Verizon a year ago, our top-line revenue declined by 1.5% for the quarter. This was due to lower wireless phone activations on the device installment cells, lower upgrades and continued migration of our customer base to unsubsidized pricing.

In Wireline, the higher growth of internet only activations and smaller video bundles also pressured revenue growth. As we managed through the revenue transformation in the wireless and wireline segments and developed new products and services we remained focused on improving our overall cost structure to maintain our strong earnings profile. Consistent with the prior year, consolidated EBITDA totaled about $12 billion and our EBITDA margin was 37.2% in the quarter, which was driven by our ability to manage cost and expand margin aiming with the pressure on the top line.

Let's turn now to cash flows and the balance sheet on Slide 6. Cash flows from operation totaled $7.4 billion in the first quarter, a decrease of $2.8 billion from the prior year, primarily due to the cash received from the tower transaction of $2.4 billion in the first quarter of 2015 that was allocated to cash flow from operations. We continue to sale device installment receivables and received about $2 billion in gross cash proceeds from new transactions in the first quarter. We believe that the underlying quality of our device installment receivables has been instrumental and helping the securitization program to be so successful.

Free cash flow for the quarter totaled $4 billion. We continue to execute a disciplined capital allocation model with the priority to invest for the future. Capital expenditures were $3.4 billion in the first quarter, which included approximately a $150 million -- to the markets that were sold to Frontier. Wireless capital spending totaled $2.2 billion in the quarter, down about 9.5% from a year ago which was the result of the timing of investments.

We fully anticipate capital spending for the year to be within our guided range of $17.2 billion to $17.7 billion.

Our balance sheet is strong and gives us the financial flexibility to grow the business. We ended the quarter with $109.9 billion of total debt, net debt of $104 billion, and a ratio of net debt to adjusted EBITDA of 2.2 times. We completed the sale of properties to Frontier on April 1, 2016. The pre-tax proceeds from the sale were used to repay outstanding debt in the current quarter.

In early April we already executed tender offers and early redemptions to repay over $10 billion in debt to reduce our total debt balance.

Now let's move into our review of the segments starting with wireless on Slide 7. In Wireless, we posted a balanced quarter of quality connections growth and margin expansion. Postpaid net adds totaled 640,000 in a seasonally low volume quarter, excluding all wholesale connections including IoT. Net-phone additions were negative 8000 for the quarter as compared to a negative 138,000 a year-ago.

A significant improvement over the prior year driven by customer retention. Retail postpaid churn was 0.96%, down 7 basis points for the quarter and sequentially consistent. We have taken many actions to improve and simplify our customer experience and provide the best network which have resulted in improved customer loyalty and satisfaction.

We ended the quarter with $112.6 million total retail connections excluding all wholesale connections. Our industry leading postpaid connections base grew 4.4% to $107.2 million and our prepaid connections totaled $5.4 million. Postpaid gross additions were $3.7 million, consistent with the prior year. The majority of gross ads were 4G smartphones and tablets.

The composition of our 640,000 postpaid net adds was very strong. Within the postpaid net adds, we added 452,000 new 4G smartphones in the quarter, which were partially offset by a net decline in 3G smartphones resulting in 284,000 net new smartphones. The remainder of the offset and phone net adds were basic devices. Tablet net adds totaled 507,000.

Other connected devices of a 176,000 were added during the quarter, with Verizon wireless retail Hum device is being a large contributor. We are beginning to see traction and increasing demand for the Hum product which we introduced last year. Net prepaid devices declined by a 177,000.

Let's now take a look at 4G device activations and upgrades on Slide 8. Total postpaid device activations totaled 9.9 million in the quarter, down about 3.9%. Approximately 82% of these activations were phones with tablets accounting for the majority of the other device activations. We ended the quarter with 73.8 million smartphones in total and our smarphone penetration increased to 85% of total phones.

4G device is now comprised more than 81% of our retail postpaid connections base. As expected, seasonality and lower customer demand for new devices is contributed to the softer volumes of upgrades in the first quarter. About 5.8% of our retail postpaid base upgraded to a new device in the first quarter, which represents the decline from the prior year of 70 basis points.

Now, let's review wireless profitability and revenue on Slide 9. In the wireless segment, profitability in cash-flows were driven by our high quality retail postpaid customer base. In terms of profitability, we generated $10.2 billion of EBITDA in the quarter, an increase of 1.7% and had an EBITDA margin of 46.2%, an increase of 140 basis points. Total wireless operating revenues declined 1.5% in the quarter to $22 billion.

Service revenue was $16.8 billion, declined 6.2% for the quarter. As a result of the continued migration to unsubsidized pricing. Equipment revenue increased to approximately $4 billion, up 17.2% for the first quarter. Service revenue plus installment billings increased 1.6% in the first quarter. We expect that service revenue growth will continue to be pressured as more of the customer base moves to unsubsidized service pricing and equipment revenues will grow as the activation rate for the voice payment plans increases.

Overall, about 48% of our postpaid phone customers are on an unsubsidized service pricing plan.

As we discussed previously, we believe service revenue will flat and it's decline mid-year when the base of our customers on the unsubsidized pricing plans exceeds 50%. Over the course of the next year, we expect the decline in service revenue will slow ultimately turning positive by the end of 2017. The percentage of phone activations on installment plans increased to about 68% in the first quarter compared with about 67% in the fourth quarter. The first quarter take rate now below our exception of more than 70% due to customer preference especially on upgrades which contributed lower equipment growth.

We expect the second quarter take rate for device installment plan to be around 70%. During the quarter, 5.5 million phones were activated on a device installment plan. We have about 28.8 million devoice installment phone connections in total, representing 33% of our postpaid phone base.

Let's move next to our Wireline segment starting with the review of our consumer and mass markets revenue performance on Slide 10. In the consumer business, Fios remains the driver of revenue growth and now represents about 81% of consumer revenue. In the first quarter, consumer revenue grew 0.8%, mass markets which include small business was consistent with prior year. During the quarter, Fios total revenue grew 5% with consumer Fios revenue growing at 4.7%.

The increased penetration of quantum and the desire for a higher data speeds are the primary drivers of the Fios growth. At the end of the quarter about 78% of our consumer Fios internet customers subscribe to data speeds of 50 megabits per second or higher.

Additionally, the increasing number of customers opting for higher speeds is evident as about 60% of our consumer Fios internet sales are opting for speeds at 100 megabits and above. Fios internet subscriber growth remains strong in the first quarter. In broadband we added 98,000 net Fios customers for the quarter, which was consistent with the fourth quarter. Overall, net broadband subscribers decreased by 10,000 in the quarter.

In Fios video we added 36,000 net customers in the quarter which improved from 20,000 net customers in the fourth quarter.

The consumer revenue growth trajectory continue to decline as costumers down-size their existing bundles and core voice services are no longer desired. We introduced the next generation of our custom TV offering during the quarter. Expanding the content and value provided by the original custom TV offer to appeal to even wilder range of value conscious customers. Customers now have a choice between selecting an essential plan and a sports and more plan with the option to reflect up to three additional packs.

The demand for custom TV remains strong and during the first quarter, custom TV represented about 38% of our Fios video sales. Due to the lower price of the bundle and the lower content cost associated with the custom TV a custom TV customer generates less revenue but contributes more margin than the traditional Fios video customer.

Let's turn to Slide 11 and cover enterprise and wholesale as well as the Wireline segment in total. The segment EBITDA margin was 23.4% for the quarter, up 70 basis points from the prior year due to strong cost control. Total operating revenues for the entire wireline segment declined 1.9% in the quarter. In the enterprise space, secular and economic challenges remain, but we are seeing stabilization in the rate of decline on a constant currency basis.

In the first quarter, global enterprise revenue declined 3.1% on a constant currency basis was down about 2.6%, and our global wholesale business revenues declined 4% in the first quarter. Trends for both enterprise and global wholesale remain consistent with 2015 results.

Let's move next to Slide 12 for an overview of the wireline segment post the Frontier transaction. Now that we have completed the sale of our Florida, Texas and California properties to Frontier on April 1, 2016, the historical results associated with these three markets will be included in corporate and other beginning with the second quarter results. For illustrative purposes on the primarily basis, we have shown fiscal year 2014 and 2015 and first quarter of 2015 and 2016 recast results. We will also provide nine quarters of recast financials for the wireline segment excluding the three markets later in the second quarter.

Recast total revenue for the first quarter of 2016 excluding these three markets was approximately $8 billion which is comparable to the prior year.

As previously stated, we think we have tremendous opportunity to further penetrate the remaining properties from Massachusetts to Virginia with our fiber infrastructure and Fios products. Recast wireline margin excluding these markets decreased as expected since these properties were more profitable than the properties that remained. Without these properties, the wireline EBITDA margin for the first quarter was approximately 19%. We have been working on our post Frontier transaction cost structure as part of our overall cost initiatives outlined earlier.

As we have stated before, we are committed to offset the financial impact of this transaction including the stranded cost at the consolidated level. Our efforts in this area can be seeing the fact that the recast wireline margin expanded by approximately 200 basis points from the first quarter of 2015 to first quarter of 2016. We've recognized that some of efficiencies and future savings we need in order to offset the impact this year are dependent on the timing and the outcome of our current labor negotiations.

Let's move next to Slide 13 for an overview of our liability management. Subsequent to the Vodafone transaction and at year end 2014, total debt was approximately $113 billion and at the end of the first quarter of 2016 our total debt was approximately $110 billion. We have been actively managing our debt portfolio earning into the second quarter of 2016. In early April, 2016, we utilized Frontier proceed plus cash on hand to complete tender offers and early redemptions of $10.7 billion of face value debt with a cash outlay of $12.5 billion.

Our strategy focused on retiring higher cost debt with the range of maturities through 2043. Thereby improving our maturity profile and achieving lower borrowing cost for the future. The Frontier related tax obligations which are payable in the second half of 2016 and our remaining debt maturity of $2.3 billion in September are both very manageable within our 2016 funding plan. Through our liability management efforts and our future funding plans, we are on track to return to our pre-Vodafone transaction credit rating profile by 2018 to 2019 timeframe.

At the same time, we are continuing to executed disciplined capital allocation model with the priority to the invest for the future. Since the Vodafone transaction closed, we have maintained a strong balance sheet, invested in new businesses, improved our debt profile and return value to our shareholders both through an accelerated share repurchase program and through a dividend increased each year.

Let's move next to Slide 14 for our summary and 2016 priorities. We are off to strong start in 2016 as we executed on the fundamentals of the business, growing high value customers, delivering strong financial and operating results, and generating free cash-flows. Our results demonstrate that we are well-positioned to compete in a competitive environment while effectively implementing our strategies. We remained focused on enhancing our networks and platforms to position us for future growth and on further developing new ecosystems.

At the operational level, we are navigating through the transition to the devoice installment payment model, stabilizing the trend in wireline revenues, improving our overall cost structure, and ramping new revenue streams. At this point in the year we continue to except full year 2016 adjusted earnings to be a level comparable to our strong full year 2015 adjusted earnings. However, given the status of our labor contract negotiations there will be pressure on earnings in the second quarter due to the timing of cost reductions. Depending on the progress of the negotiations, we may need to update the full year guidance at a later time.

With that, I will turn the call back to Mike so we can get to your questions.

Michael Stefanski:

Fran, thank you. We're ready to open it up for questions if we can take the first question please.

Question & Answer

Operator:

Thank you, Sir. We will now begin our question-and-answer session. If you would like to ask a question you may press star and then the number one. Please unmute your phone and record you name clearly when prompted.

Your name is required to introduce the question. To withdraw your request you may press star and then the number two. Our first question comes from Brett Feldman of Goldman Sachs.

Please go ahead with your question.

Brett Feldman: Goldman Sachs:

Thanks and I appreciate the color. I didn't catching the release, are you try still reporting postpaid -- and if so could you break it out for us.

Francis J. Shammo:

Sure. We are going to continue to report the postpaid -- but we will get that out to everybody so that you can see that.

Brett Feldman:

Okay and then on just a separate question, you noted that you are going to making this investment in Boston also be if you can give us some thoughts around the timing of that so we can think about how that might flow through in the CapEx and then are you thinking that there could be an opportunity to continue to expand your fiber presence, particularly as you think about densifying your wireless network. Thanks.

Francis J. Shammo:

Yes, sure Brett, thanks. Well I mean Boston is a unique situations. So we announced the intent to expand Fios in Boston.

Understand that the LFA has to be negotiated with the city council and that is the public process that will take approximately 6 months. We have been in discussions with some broad framework, but we need to go through that process. It's also important to note that the LFA is only for video linear TV services. It is not required for broadband or 5G.

So obviously when we looked at Boston it was the city that we need the densifying for the LTE network. So as we looked at all of our current -- around the footprint and the fiber that we already had there it kind of was a no brain or to us to say we can do the fiber bill out to expand the LTE densification, but we also can use this opportunity with only an increment of about $300 million over the next five to six years to expand our Fios footprint. So the $300 million you are not even going to see it and the wireline capital numbers so it's already there and is as far as the capital that was going to incurred in the wireless side of the house that was already going to be spent regardless of whether we expanded Fios. So, we will get to this but we are starting to we will started this mid-year, this year for especially the 5G and 4G LTE densification.

We will start the internet capability with testing homes, but for the video product we will have to wait to go through the LFA city council process.

Brett Feldman:

Is this the last significant fiber deployment you would expect to make within your remaining footprint or do you think that there is an opportunity to keep doing this in the North East.

Francis J. Shammo:

Well I think what we will have to do Brett is we will take one city at a time obviously we sold out Alexander, build out our Baltimore. So, if we get to our position where we believe we're going to need to invest in densification in those cities than that's an opportunity for us to take a look at it. But at this time we are concentrating on Boston.

Brett Feldman:

Thanks for taking the question.

Michael Stefanski:

Thank you. Next question please.

Operator:

Thank you. Our next question comes from Simon Flannery with Morgan Stanley. Please go ahead with your question.

Simon Flannery: Morgan Stanley:

Thanks. Good morning Fran. Can you just provide a little bit more clarity about your comments on Q2 and the rest of the year. Is it reasonable to take the Q1 margins that's recast margins and wireline that you provided as a goods sort of guide post here until you get more cost savings coming through and maybe you can just reflect on any particular puts and takes from the strike in terms of extra costs from additional labor you might need to hire or if conversely some cost savings and what do you seeing so far in terms of impact on the business in terms of --trouble reports etcetera, and then if you have any update on your data center evaluation sale process.

Thanks.

Francis J. Shammo:

Sure, thanks Simon. So one guidance first and foremost, we are absolutely confident at this point in time based on every everything that we have planned and the timing of the union leader contract that we can deliver on the 399 compared to last year. Just to set the record here I mean again we do not give revenue guidance we gave EBITDA margin percent guidance and we gave EPS guidance that will be relatively comparable to 2015.

So if you step back a second and look at earnings per share at 2015 coming in at a 399. We have to keep in mind a $0.13 of that was from our asset held for sales. So really comparable number is $3.86 and as we said we felt good about growing earnings back to that 399 through our normal operation results of the business.

So if you take that fourth quarter and move it forward for the first quarter a $1.06. So that would mean we are $0.04 ahead of the prior year. That $0.04 which is somewhat attributed to the Frontier properties for the fourth quarter will reversed in the second quarter. So if you start out your base line from last year's reported EPS of a $4.04 is taken right off the top for that.

And then as we talked, there is going to be some timing on offsetting this stranded cost, and again I want to reiterate that we've always said that the stranded cost would be offset on a consolidated basis not within total wireline segment. So we do have some timing here we are looking at business transformation activities.

If you look at the Verizon wireless restructure that was part of the overall plan to contribute and offset some of the stranded cost. So you can see we are already looking at operational efficiencies on a consolidated basis. But other things that we are looking at is around distribution centers and in call centers as you know call centers are very high turnover rate for employees and with our decrease in calls coming in from our wireless customers because of more online, more chat, more chat, more self-service we will not hire as many customer call centers and we will achieve this through our attrition rates just naturally within the call centers. So there is opportunity to reduce force just through the attrition rate.

And then if you look at our equipment volumes, since the equipment logistic system in wireless is mostly a variable cost system as we look to the future and we upgrade volume which we assume will be lower there is going to be some cost efficiencies that we gain there. So as we look at this there will be some timing so Q2 will be lower than just the $0.04 but we were looking at we will regain that in the back half of the year with some of the other things we are doing.

Now finally, obviously on this the timing of the union agreement we have plan for that and if it goes longer then we will comeback in mid-year. But keep in mind that we are looking at this as a long-term agreement for both providing quality jobs for our employees and returning shareholder value to our shareholders. So that's where we stand with guidance hopefully that clears it up a little bit.

On the second question or the second part of your question around the strike. Yes at this point it's too early to tell the impacts I mean we have deployed thousands of management employees to take on the work. We obviously always during this period of time for little behind on the install work. We still see good momentum coming in from a sales perspective so there is a little bit of a backlog there and we will just have to work through this.

But right now really no financial impact for say in the second quarter that I am anticipating unless this drags on for a much longer period of time. On the data center sale look I mean this is still I would consider an exploratory there is a lot of activity going on but nothing at this point that I am prepared to announce in a public forum, but we continue to explore that activity.

Simon Flannery:

Very helpful. Thanks.

Michael Stefanski:

Next question please.

Operator:

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

David Barden: Bank Of America Merrill Lynch:

Thanks guys for taking the questions. I guess two if I could. First one Fran just following up on that guidance question you highlight that if you had the frontier benefit last year though earnings would have been more like 386. But if I do the math on the impacted frontiers having on 2016 if you hadn't sold the frontier asset the earnings would be reasonably materially higher and my math is that the year-over-year earnings power Verizon had the frontier assets it's not been part of the mix here would have been about 10% and street estimates are really when you looking for about 3% earnings growth next year I was wondering if you kind of comment on kind of what you see if you underlying earnings power of the Verizon business as we kind of think about next year's growth ignoring the strike issues for a second.

And then just the second question if I could would be on upgrade rate I didn't see it in the notes yet for this quarter, but obviously reports to that it's been lower than normal and I was wondering if you kind of talk about how you see the cadence for shape of the year with the iPhone 7 might be coming up in the back part of the year and kind of the amount of upgrades you'd see kind of by that point in time. Thanks.

Francis J. Shammo:

Yes. Thanks, David. So on earnings look I mean we've been pretty open about 2016 and of course we've got a lot of things going in the lot of different directions obviously if you look at it even with Verizon wireless and the headwind of the revenue here and the transformation of the pricing model.

We're still increasing the profitability of that business and it's really the recurring revenue that we're focused in on and the quality of customers. On the wireline side of the house, again you see there is pressure on top-line because of custom TV and internet only now versus triple-play, but again we are improving the profitability of that business. So for this year we will stick with what we talked about on guidance. Mike and I have been pretty open and we have been pretty open about '17.

We believe we will get back to a normal growth rate in '17. But I would not attributed to anything that we divested or acquired there is a lot of moving parts here especially within the strategic portfolio that's putting pressure on some of the bottom-line. So I would not over indulge on the frontier divestiture. I mean we have got a really good value for that they we're going to put the cash to work that really benefits to the earnings power of this company and that's the way I look at it.

On the upgrade rate, look I mean if you look at year-over-year we are down over 400,000 units on an upgrade rate and obviously that had a lot of impact on the equipment revenue side. But the other thing that we are seeing is our embedded based customers are selecting the subsidy model on a an upgrade basis which is why the overall device installment plan take rate did not meet our expectation for the quarter of 70% and fell short to 68%. So if you look at that David and look back to earnings power I mean you would think that the stronger up take in device installment plan will drive more margin, but in fact we miss that metric we did lower and we actually improved our margin overall wireless. So there is a lot moving parts here.

But to your question of where do I think upgrade rates are going to go, at this point based on what we know we think that upgrade rates will be relatively the same as '15. I can't talk to the fourth quarter yet, because I just don't know what the devices are going to look like in our line up at this point in time.

David Barden:

Great. Thanks, Fran.

Michael Stefanski:

Tory, next question please.

Operator:

Thank you. Next question comes from Phil Cusick of JP Morgan. Please go ahead with your question.

Phil Cusick: JP Morgan:

Hey, guys thanks. Two quick ones if I can, one can you comment on the FCCs special access reforms. How you thinking about that and then two the potential of borrow against handset receivables what do you think is the cost in that market Fran versus the normal bond market.

Francis J. Shammo:

Hi, thanks, Phil. So on FCC special access, look the FCC will take action this month sometime on special access rule making and its investigation of the certain discount that we and other large legacy providers offers for DS1s and DS3s. I mean, we've reached out, we reached the deal with the lot of -- in order to resolve the long standing and contentious regulatory issue here.

Our top priority though is to ensure that our business services are in a level plane field with all the other competitors including cable companies. We intend to work with the industry and the FCC to develop our framework for that. That applies to all competitors equally and we lies on the public policy to determine where and when regulation is appropriate. So we will wait to see what the FCC does here Phil and then we will respond accordingly.

On the bond market and the recent press reports coming out of Bloomberg look we have been pretty opened and public that we have been looking at an alternative financing arrangement for our installment cell receivables. The public asset that market is an alternative that we have explored. We have had a number of discussions. We are having discussions continuing with alternative providers and various parties, but at this point in time these are just discussions it's something we are looking at.

We are still doing a lot of analysis around it and at this point it is just something that we continue to look at and nothing to announce here today that we are going to change anything at this point in time.

Phil Cusick:

All right. Thanks, Fran.

Francis J. Shammo:

Sure.

Michael Stefanski:

Tory, next question please.

Operator:

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

Mike Rollins: Citigroup:

Thanks. Two if I could, first as look at the range of possible investments that can you make over to next 12 to 24 months. Is there a balance sheet debt level that investors should be keeping in mind in dollars or ratio terms that the upper threshold so what the company is comfortable with and then secondly, as you looks specifically at the performance of AOL since you purchase the asset are there some examples that you can provide on ways in which Verizon's made the performance so that asset better in terms of revenue or cash-flow and how some of the recent content investment might further the performance of that asset. Thanks.

Francis J. Shammo:

Yes. Thanks, Mike. So, on an investment side look I mean, we've been pretty opened at our main priority is to get our debt level back to an a minus rated company and we're on track to do that, and everything we do that continues to be the top priority.

So, even with all of the M&A activity you've seeing, I mean if you look back we started this at pre-Vodafone debt of post- Vodafone debt of $113 billion, we've reduced that to $109 billion. But keep in mind that was with a $10.4 billion spectrum purchase during that period of time. That was with $4 billion of purchase of AOL and some miscellaneous tuck ins capital investment, share repurchase and now we've just sold the frontier properties that helps bring that debt down even to a lower level.

So, we are right on of course, but that is top of mind at everything that we do and they'll continue to be a commitment that low when I made that is as four front that we'll commit too. On the AOL performance, look I think I am not get into a lot of details on AOL but look they've had the best quarter in revenue in the last five years. If you go back to the fourth quarter we said they were up $300 million year-over-year now of course that seasonable go that shows you though that the investments that we've made in the platforms a lot the of the tuck in type investments that we made with acquisitions and these are small acquisitions, but they are real critical I mean if you just look at the most recent acquisition we just did with -- this is a real unique 360 degree video production. It is for really half post for them to increase their viability on producing videos for news.

But again this goes to our strategy and attacking a certain population that quite honestly Verizon is under penetrated in. And if you look at that acquisition it directly goes to GENZ 73% of their audience is Millennials.

So these are real strategic for us to improve the viability of that platform. The other you are going to see is do this year to is around Go90. The Go90 product will start to across all of the ALO platforms this year. That is going to enhance both the ALO platforms and its always also going to enhance the Go90 platform.

So look continuing with our strategy, we will as I said before, we will open the box at some point in time to give you more visibility to this and I continue to say that, that will be mid-year to maybe third quarter of this year where we will start to produce some numbers around some of these more specific platforms that we talk about.

Mike Rollins:

And Fran is there are ratio or stated numbers you could put around how you perceived or getting to that a minus debt level are there indications that you've received for that.

Francis J. Shammo:

Sure I mean if you look at each of the rating agencies, each of the rating agencies have the different approach. Because some of them include the pension plan unfunded liability, others include the OPEB unfunded liability, others don't include any of that. Securitization some include some don't.

So each of them has a different metrics. But if you look our overall GAAP ratio kind of Fios and tests with where we would need to be and based on the GAAP ratio you should look at 2.0 to 2.1 type area in order to achieve that A minus rating.

Mike Rollins:

Thank you very much.

Michael Stefanski:

Tory next question please.

Operator:

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

Craig Moffett: MoffettNathanson:

Hi, good morning. Let me see if I can tie together maybe a question about the FCC and the ongoing discussions with Yahoo. Given in the FCC right now you've got the privacy in PRM and you've got some uncertainty around whether wireless is or isn’t going to be a up held under titled two. How does that is inform the way you think about what you might be able to do with AOL directly I guess and also trying to expand the platform of advertising as you might do with Yahoo as we -- acquire.

Francis J. Shammo:

Yes, thanks Craig. Well look I mean I am not going to speck anything that deal with Yahoo. So let's just talk about what we have on the table today, and under the sponsor data rating type issues I mean the net neutrality already aviates some of this and we've structured our sponsor data program to comply with all the FCC net neutrality rules.

So for example, if any party third party is interested in that we will offer that on bond discriminatory basis and we've priced it accordingly at a commercially favorable rate that we believe is in direct really compliance with the FCC Net Neutrality Rule.

We think that sponsor data and other FreeBee data programs are good for the consumers and the regulatory will recognized that after concluding the review on our products. So based on the zero data we will have to wait and see where they come out on that. As far as titled 2 growth, look I mean we agree with all the principles with net neutrality rule though the thing that we disagreed with an oppose was applying title 2 to broadband services and particularly wireless broadband. So we will have to see where this comes out.

But re-classing broadband under title 2 was not necessary doing sure and open internet. I mean there has been nothing ever that shows that it's not has been an open internet. So this will obviously have some negative current sequences on innovation as whole. But look I mean we're company that has operated under regulation for 100 years and is been very successful.

So we are all wait to see what the SEC concludes and then we'll operate accordingly. But it's too early to say what exactly is going to happened here.

Craig Moffett:

And Fran just the specific limitations that might or might not be imposed on the YouTube customer data under the privacy and PRM that stems from reclassification does that impact your ability to monetize an asset like Yahoo or AOL in general to as you think about how you would use that for advertising purposes.

Francis J. Shammo:

Look I mean we're at Verizon I mean privacy and security has always been top of mine and normally we always used an opt in with our customers or some type of an opt out feature. The issue though that we have right now is under the FCC proposed aggressive rules on privacy and data security that would apply to broadband providers but not company like Google and Facebook so we're going to have rules we need to make sure we don't single out certain industry either benefit or not benefit from those rules and that something that our legal department continues to work with the FCC on and so we'll see where this ultimately comes out but that's really the -- of the issue for us.

Michael Stefanski:

Tory, next question.

Operator:

Thanks you. Next question comes from John Hodulik of UBS. Please go ahead to question.

John Hodulik: UBS:

Okay, thanks. Fran if you could comment on the comparative environment you're seeing a wireless you guys were able to cut your postpaid handset losses on the year-over-year basis pretty meaningfully. Do you expect that to continue through the year and then secondly, prepaid is always been an area where you guys haven't really focused. You continue to loose subs in that space meanwhile I think AT&T and T mobile are see a lot of growth in that area maybe you could compare your views on that market and why you guys don't see that as a social growth? Thanks.

Francis J. Shammo:

Yes. Sure, thanks John. So, on the comparative environment of Verizon, I mean look coming into '15 and again in '16 we said that the top priority would be maintain the high quality of our base and you see us doing that.

I mean we now have 48% of our base over on the new pricing and we continue to push for that so. You saw the 7 basis point increase in churn for the last couple of quarters. What I was say though as if you look ahead last year's second quarter the churn was a like that 0.90 I would not anticipate. Nor -- anticipate that we'll achieve that churn rate again because things have kind of flat and down now.

So, I would look at the first quarter as a guy to where we'll be for the rest of the year from a churn perspective and part of that is because we're seeing some increased churn on that tablets which we have talked about before where we gave a free tablet away and we saw that the customer base just didn't see the value of that tablet when it was free, and they signed up for the year agreement because they've got a tablet for 10 bucks a month to $240 and they disconnected at the end of agreement. So, we stop to doing that promotion for that reason, but you see some of these tablets now coming up on the two year deal. So we anticipate that some of that higher churn that tablet environment will hit us over the next couple of quarter. So, we should be prepared for that.

But as far as the smartphone churn we are continuing to see improvement in that smartphone churn which gets us to holding a flat churn rate overall. So I think that's really what's important to us right now is that smartphone churn rate which is a really where we dedicating all of our concentration in our promos.

On the prepaid side absolutely I mean our retail prepaid is above market. We are not competitive in that environment for a whole post of reasons and it's because we have to make sure that we don't migrate our high quality postpaid base over to our prepaid product.
If you look at the competitive nature they are doing it with sub brands they are not really doing it with their brands. And quite honestly we use the track phone brand as our prepaid product, and track phone has been extremely successful for us. It's not something that we disclosed anymore on reseller. But it continues to increase on the high quality base of track phone.

So that's really where we use, and go after the prepaid market more to come on this during the year but currently that's how we operate under the prepaid model.

John Hodulik:

Okay, thanks Fran.

Michael Stefanski:

Tory next question please.

Operator:

Thank you. Next question comes from Mike McCormack of Jefferies. Please go ahead with your question.

Mike McCormack: Jefferies:

Hey, Fran thanks. Maybe just quick comment on what your view is maybe holistically on the video landscape. What other assets do you think Verizon required and I am specking about Fios video long term where does that go, and then I guess on the service revenue stabilization that 50% bench mark what kind of factors would be built into that to get real expectation.

Francis J. Shammo:

Okay, thanks Mike. So on the video landscape look I mean I think we've set the bar on where we are going on video. Both in the in-home and outside the home.

So in the home where the first to come out with our custom TV package which re-bundled certain content and it's been very successful I mean this quarter even with the re-bundle of custom TV, we had a 38% take rate on the bundle and what I will tell you is yes, it does give us some top-line pressure because it's a lower bundle from a revenue prospective. But the content cost is considerably lower. Therefore, it generate actually more margin for us.

So it's the right thing they do this is where customers want, then don't want the pay for 300 channels anymore and only watch 17 on average. So we are trying to give customers what they want and that's afraid obviously with all the content providers, but we are doing it within the legality of our contracts in of course we want reach any of our contracts, but it's the way that the environment is moving.

So I don't think we are going change any approach to our in-home delivery. The other thing is there is confusion out there on the videos solid which is everybody want to talk about taking in-home video to a mobile handset and this is something new this is been done for the last two years. Everybody who has an in-home subscriber most rights give them the ability to view that content as long as they subscribed and authenticate to that subscription they can watch that on their mobile handset.

We are taking the really the strategy in the whole different mode. We are going to a mobile first strategy outside the home and has nothing to do with in-home consent. Now some of the content you can watch it home could be on this for like sports that has been very popular in the Go90 environment. But we are looking at the lot of different mobile first short clips news, sports and if you think about it original content and if you look at the strategy that we have taken in the last couple of quarter we have added a lot of content that has nothing to do within home.

So if you look at our Hearst joint venture we now have joined with them to create two very exclusive channels for us one is called RatedRed one is called Seriously.TV and the target populations is 12 to 24. We then as I said in my preamble remarks, often this TV we took a 25% ownership stake. Because what we saw was there was certain original content that we had contracted with them that the deployed in Go90 and we saw a viewership really jump when those original contents presented themselves.

So this is another one where number one digital brand within the female population of age at 12 to 24 a 160 million views up 53% year-over-year. And then finally, if you look at what we just did within the last few days entering into another joint ventures with Hearst and buying Complex 50% owner. This is another number one digital brand in the male population of 18 to 24 monthly unique viewers of 54 million and over 300 million views per month. So this is really where we're taking the video product on mobile which is very different than what everyone else talking about and we believe that's where we're going to be a differentiated brand with Go90 and AOL and everything else that we're doing around that video platform.

So that's kind were we add on that.

On the service revenue stability look Mike we've done a lot modeling we consistently say as soon as we get to a more than 50% penetration of that based on the what I called the devoice installment pricing plans we start to see service revenue flat now and we start to see accretion at the back end of '17 and we've run a number of models and we consistently see that model towards that end. So that's really where we are added this point in time.

Mike McCormack:

Thanks, Fran. Thanks for the color.

Francis J. Shammo:

Sure.

Michael Stefanski:

Tory, we have time for one more question please. Can you please just skew that up.

Operator:

Thank you, Sir. Our final question comes from Amir Rozwadowski of Barclays. Your line now open. Please go ahead for your question.

Amir Rozwadowski: Barclays:

Thank you very much and good morning Fran. I was wondering if we could discuss your network plans Fran. In the near term as you mentioned your CapEx was down high single-digit during the quarter but you remained fully committed towards your guidance levels. What initiatives are top of mind or what seems to an implied in proving spending projected to the year and I guess our longer term I was wondering if you could briefly discuss some of your initiatives on 5G.

The folks clearly seem to be pushing the timeline that is well ahead of your domestic players and most of the global players as well. What is the imperatives of this focus and where to meet the time when you expect what type of assets you think you need ensure to be able to meet those expectations. Should be expect additional view of our excel or some organic investments in fiber anything along those lines. Thank you.

Francis J. Shammo:

Hi thanks Amir. So first on just the CapEx. Look there is some timing here and the reason that is because if you look at it in the fourth quarter of last year we really accelerated our spend really in wireless to prepare for the Super Bowl and that was whole densification project on the West Coast around San Francisco and San --.

So really what you seen here is a timing issue. We are right on track with our plans on densification, we are still deploying a lot of small sales. So there is nothing that I am going to say here that concern you about our plans you'll see us Ketchup on that spend in the second through the third the in the fourth quarter. So coming in right on guidance now the only I will say here is keep in mind that the first quarter also had $150 million on frontier that will disappear in the second quarter.

So you could assume that second quarter maybe a little wider than in the past, but again right on track with where we thought we would stay. On the 5G question, look we are committed to being the first US Company to rollout 5G wireless technology. We are currently what I would call doing sandbox, sandbox is and creating innovation centers.

We are working with the 5G technology forum which includes all the major OEMs and handset OMEs we will evolve this 5G ecosystem rapidly just like we did with LTE to ensure an aggressive pace of innovating.

Currently we are testing 5G technology this year and we aim to have an initial fixed wireless pilots starting in 2017 and I want to reiterate that. This is a fixed wireless which is really one of the first case is that we see. It's really not about mobile, its really fixed wireless. We are helping the industry to adopt rules on 5G development including the opening of the spectrum brands above the 24 gigahertz and we are working with the FCC and as you know with Excel we have the ability for an option to buy around the 28 gigahertz which is currently how we are doing our testing right now.

And then keep in mind that 5G is not a replacement technology of 4G. So this is not a capital intend overlay to the 4G network. It really is all about high speed video delivery over a wireless network in a very, very efficient way and you should think about 5G again like we did with LTE where you see those 4 to 5 incremental cost decreases when delivering that video that similar to what we will see in the 5G environment. So right now that's where we are at, but we continue to move forward and we will be ready to go with the 5G technology.

Michael Stefanski:

Thank you. We will now turn the call back to Fran for some closing comments.

Francis J. Shammo:

Thanks, Mike. Look the first quarter provided strong results to the start of this year and again I want to reiterate we are very confident in our ability to execute on the fundamentals and grow this business profitably and as competitive environment and managed through the transition of our business models. We are also positioning our business for future profitable growth through cost and capital efficiency initiatives and all the new revenue streams that we always talk about.

We look forward to positive '16 with confidence in our ability to execute our strategy, create value for our customers, our employees, and our shareholders. Thank you again for joining Verizon this morning. Have a great day.

Operator:

Thank you. Ladies and gentlemen that does conclude your conference for today. Thank you for your participation and for using Verizon conference services. You may now disconnect.