Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Fran Shammo - EVP & CFO

Analysts

Amir Rozwadowski - Barclays Capital

Verizon Communications Inc. (VZ) Barclays Global Technology, Media, and Telecommunications Conference Call May 22, 2013 8:00 AM ET

Amir Rozwadowski - Barclays Capital

Good morning folks. My name is Amir Rozwadowski and as Jerry mentioned I'm head of our telecom services research practice and I am certainly very excited to welcome you to the first day of our Global TMT Conference. Certainly, over the next two days we've got a number of fantastic presentations lined up for you across the TMT landscape. Of course one of the key themes that we've been hearing about and expect to continue to hear about over the course of the next few days is the theme of rising connectivity and mobile spread through major markets in the TMT arena.

One of the companies that clearly sits at the very heart of this trend is Verizon; therefore it’s with great pleasure that we’ve got today Fran Shammo, the senior folk of Verizon. Fran and I are going to spend a little bit of time talking about some of the key themes that we've been thinking about over the last couple of months and you know impacting the company, impacting the broader industry and then we are going to open it up to the floor for a couple of questions.

First and foremost Fran, thank you very much for being here.

Fran Shammo

Thank you. Good morning everyone.

Amir Rozwadowski - Barclays Capital

Fran, you know there's clearly always a lot of activity taking place in the telecom market and a number of changes taking place over recent years thinking about data services, high speed broadband connectivity to the home, the portability of content, consumption and a lot of these changes have accelerated in recent years. You know clearly Verizon seems to be at a nexus of many of these developments, I was wondering from a high level perspective which broader industry trends do you find the most interesting and how do you think about the company's ability to capitalize on these trends going forward?

Fran Shammo

Okay. So first sometimes I have to put things in perspective, so before I answer the question let me first say thank you to the Verizon employees who have run at the crisis in Oklahoma City and our hearts and prayers are with all those victims as we and they were first responders who have to deal with the devastation that happened out there, so all of our prayers are with the first responders and the victims of that terrible tragedy.

So Amir, as we look at this industry, I know a lot have questioned about the growth of wireless over the last five years and of course we're still in that cycle of how much more can wireless grow. So if you look at the ecosystem of wireless and what we've done around the building out of our LTE network, the launching of our shared price plans, what we've really bet on the last five years is that with this LTE infrastructure and the speed that it can deliver and with the technology that we see coming and the enhancements of those speeds, video is going to be really the prime driver of usage in the future.

Now, in addition to the video usage and we see that trajectory in some of equipment manufacturers have put out some of the trajectory of video usage over the wireless network and we pretty much concur with those trajectories. So when you look at that, the way we've built this is the LTE network will be able to handle that; the price plan that we designed where you have the freedom of attaching more of these devices, so if you think about you have your smartphone, you have your tablet, you have MiFi cards, you will have the car, you will have cameras, all of this builds into how do you increase usage over the network and more importantly is how do you monetize that usage of the network. So the shared plan was design to do that.

Then if you take a step further as we look at the footprint we said Verizon Wireless needs a partner because we do see the full convergence of these services coming together between in the home and outside the home and we believe that that has to be a seamless experience for the customers. So the content that they have in their home today they are going to want to take that content with them wherever they go.

So if you think about driving down a highway, there is no reason why your kids in the back seat should not be able to tap into the DVR and download the program that was recorded the night before right into the car. So they are the types of solutions that we are looking at, so when we looked at this, we said, FiOS is only in 13 states, so we need to go more broadly with that, with Verizon Wireless and that’s where we came into the cable venture.

So we looked at this and said we need to partner with those cable companies because of this interaction between in and outside the home, as we grow and develop more solutions there that partnership is going to be more important. So we launched on that; we are in the beginning stages of that; we are cross-selling now. But the real jewel here is the joint innovation that will come out of that partnership. So when you combine all these, we do think that we are in a very good position to continue to grow this marketplace; I mean we were generating 8% revenue service growth now. So we do see a long-term plan for this growth to continue in the industry overall. So I think the pie gets bigger and so the each carrier will gain more share, but the pie will get much bigger.

Amir Rozwadowski - Barclays Capital

And what you think about Verizon’s sustainable competitive advantages in this type of sort of referenced to before quad play type services, where we are migrating content through multiple devices, to multiple parts of alive and so forth, I mean what is really that sustainable advantage?

Fran Shammo

Well, the sustainable advantage is first of all, we have build our reputation around as the best more reliable network and in order to deliver services you have to have that network; it has to be reliable and it has to give a consistent performance to that consumer. So okay, you can be really fast today, but as tomorrow you are not, it’s that inconsistency that drives churn. So we built the reputation around a consistent performing most reliable network; I think we have proven in events like Oklahoma City and Sandy, our network stands against these events and stays up and running. It hinges around the portfolio of devices that you offer to your consumers, it hinges around the customer service that you provide your customers, so when they call your customer service, they get answered; it’s a friendly communication and you solve their problem at the first time. And then it’s also around what is the choice of price plans; granted Verizon is the premium to the marketplace, but our service is a premium to the marketplace.

So what we see is people are willing to pay for that premium if it’s a value that they perceive that they can get and we believe that the shared price plan gives plenty of flexibility to pick where you want to sit and allows you to manage your usage if that’s what you want to do. So when you combine all this, it really goes to that’s how you sustain the growth of the company regardless of whether it’s a quad play or if its not a quad play, the foundation has to be there and then we can add onto that services that consumers require.

Amir Rozwadowski - Barclays Capital

And thinking about this, where confidence consumed on multiple platforms, it’s certainly not a new topic I mean it’s something that’s been kicked around the industry for many years, but certainly technology is perhaps impeded over the last couple of years. Today where you sit with your LTE network, with FiOS, I mean do you feel comfortable that is something a ubiquitous user experience that you can deliver in the market today?

Fran Shammo

You know I think we still have some work here to do; obviously the biggest barrier to this seamless experience is the content rights; so most of the content rights are in the home, you can't take them outside of the home or if you do take it outside of the home, its on a registration basis back to do you have a home (inaudible) in your home.

Now I think that ecosystem will change, eventually that's going to break up, you are going to be able to take the content out and when we see some of the content providers being more in the forefront of that versus some others where the content can be taken outside the home, but now you are starting to get into discussions where some content providers are saying, well, maybe in essence we will pay you for the content, don't charge the consumer to view my content. And I put this in the box of this is nothing more than 800 service. So I am a customer, I want to call your customer service, I don't want to pay for that call because I'm your customer so they sign up for an 800 number, the company paid for the call, not the consumer. This is the same model; now that we are going to with these content providers, so what they are looking at is the value that they get is, well, if I pay forward and you don't charge the consumer then there will be more ask to view my content over their mobile handset and look I mean Verizon Wireless has a 100 million eyeballs, so that's value to them.

So I think you are going to see this ecosystem change, you are going to see some content provider say I'm willing to pay for the content, don't charge the consumer and when we developed LTE, we developed LTE and our billing system with the capability to segregate that traffic if someone else wants to pay for it. Now don't confuse this with net neutrality; net neutrality is around prioritizing the delivery of content, that's not what we are talking about, content will be delivered equally across the network. This is just a matter of who pays for the delivery of that content, and I think you are going to see that change and that's going to open up what can be done on a more seamless basis.

Amir Rozwadowski - Barclays Capital

And I guess with some of the discussion, if I think about sort of two, three, five years down the line, it seems like you mentioned Verizon has 100 million eyeball within its reach, are you now having different types of conversations with respect to content rights given that mobile and given that FiOS are increasingly stronger presence in the marketplace?

Fran Shammo

Sure I mean from a content perspective we won't walk into content providers. We put everything that we have to offer on the table not only wireless, but we have FiOS Sprint and now we also have Redbox. So through our discussions we are negotiating those content rights to make sure that we can seamlessly take them across our entire platforms not just FiOS or not just Redbox but we are looking at that seamlessly and we are making progress there but these are difficult negotiations to have because you are breaking up the model that works for the content providers for years, and they are struggling a little bit to the point of well we will give it to wireless so to pay us 50% a [sub] and that doesn't work in the wireless world so we he to breakdown the barriers but we are making progress. But the real key for us strategically is to get that content to go seamlessly across all of our platforms, not just one.

Amir Rozwadowski - Barclays Capital

And then you had mentioned Fran discussions around pricing and sort of Verizon pricing in the marketplace. Clearly there are a number of competitors, potentially, largely in the wireless space right now that are taking differentiated approach to the pricing plan. What is your view on that is that something that you view as increased competition or is there sort of this note that you believe you have from a network perspective that allows you to continue to drive premium pricing in the marketplace.

Fran Shammo

Look I think this has been an extremely competitive industry for years. We've had low end providers income, reduced price income, and I think what we do our philosophy behind this is we watch our competitors very closely, we watch what they do but the golden rule we have is don't overreact to anything that happens in the marketplace, just continue to execute on your path. I mean price is always a big factor and we watch it closely. We were the first ones to launch share pricing. We think that we set the market now to go forward on a more shared data. We took voice and text off the table. So really what you are looking at now is, now you have folks bringing installment plan to the table. We’ve been in installment plans back in December on tablets and there are certain customers who want to pay for that device over a period of time and we dabble in that area, but the key for us is and having the lowest period in the industry, the real key for us is you have to execute on everything. You can be the cheapest and you may get a quick win here, but if your network can’t support that it’s not a good product, people are just going to turn back off. So for us it's that consistency what I talked about in the beginning. We will always be very competitive but there are certain niches that I am just not going to plan because it doesn’t make sense for me to bring my brand to those areas and the quality of my network to those areas. So prepaid is an area where we dabble in but there are certain prepaid markets that I am probably just not going to play in. So you have to balance this equation but we watch it, and I think you are going to see some innovative pricing schemes come to the market place but that’s competition.

Amir Rozwadowski - Barclays Capital

And if we think about that you know, sort of a network perspective, I mean clearly in the fourth quarter of last year and the first quarter of this year, we look at your net ad rates. It seems that though things are continuing to work in your favor in terms of bringing more folks on to your network. Do you believe, that largely is because as we penetrate sort of or as LTE penetrates people are realizing the value of that network?

Fran Shammo

I think so. Look, we have a pretty significant lead on our LTE deployments with the most coverage will be done, our coverage here by June of this year for the majority. So the coverage of our LTE network will match our 3G network. Now we will go back and start to really concentrate on the capacity side of that because when you look at net ads of this industry, the net ads mix of this industry is going to change. So it's not going to just be a net ad of a smartphone, we know that. But the real key is you have to have that portfolio, you have to have the phone, the tablets, the WiFi cards and all these other connected devices, because that’s what's going to carry the growth into the future. Yeah we’ll still be net phone positive here, but look I mean the penetration of smartphones is getting higher and higher every year. So that’s growth is going to significantly slow and we understand that. But it's all of the other things that you bring, and what we think about is in the old days FamilyShare, when you think about FamilyShare, FamilyShare was a very sticky product, so if you got the main user and then they added family members. It was difficult for them to leave that network provider. We believe that we bring even more now with the share plan in our LTE network. So as we, as people come and they start to add more devices, we think that’s a much more stickiness going forward. So we do believe that our churn, and we will continue to improve here, over the longer term and this will really start to, really proliferate as to how this growth of net ads continues in the future, but the market has to get away from this net ad of a smartphone, because the dynamics of net ads are going to be change.

Amir Rozwadowski - Barclays Capital

Well, and thinking about some sort of this new environment in which where mobile and connectivity permeates all walks (inaudible) and Fran I also know that you are the guy, who makes sure that Verizon is not spending too much money and ensures that sort of cash flow continues to flow out of the business. How should I think about the investments cycle required to deliver this type of environment? I mean clearly you’ve done a lot of investment in LTE, you have done a lot of investment in FiOS. Is there another set of investment coming down the pipeline in order to leave this strategic goal?

Fran Shammo

Look we have been pretty consistent with our capital spending around that $16 billion mark and I said that we pretty much be probably be flat this year with last year. But as we go we shift between our product lines and I would anticipate wireless spending more capital from an LTE support perspective and if our growth continues on the trajectory it is then that may have to accelerate a little bit. This is not large amount of dollars though. But we build our brand on staying ahead of our usage curve and we are not going to let that go, but what I would say is that, I am pretty comfortable that our ratio of CapEx to revenue will continue to improve year after year.

Amir Rozwadowski - Barclays Capital

And if I think about network technology, I mean we look at whatever require to build your DO network many years ago and whatever requires to build LTE today perhaps thinking about, its more software focused versus equipment focus. Is there a point where we can see incremental improvements in the networks, but requiring less capital dollars out of your pocket?

Fran Shammo

Look this is an engineering feat right, because as you get more and more devices in the market place people are going to want more in building coverage, folks are going to make sure they are connected at all time. There is still a lot of void space in the network out there. So as you do this, you are going to hear more about small cell technology rather than micro cell technology, but small cell technology is cheaper from a per unit basis but you need a lot more to filling that space. So and then it also comes down to the efficiency of the spectrum that you have to overlay to that network, so every carrier has a different portfolio of spectrum and we happen to think, we have a very efficient portfolio with spectrum with our 700 megahertz and our AWS and how we are going to be able to reallocate our CDMA spectrum over to our 4G. But each time you layer in more spectrum it complicates the network more, it complicates the handset more. So all of these things go into factor and I think what you are going to see is what the usage curve that we see, I'm not sure that you are going to see a huge decrease in CapEx spending in the wireless network, at least not in the short term.

Amir Rozwadowski - Barclays Capital

That's very helpful and then the other side of the equation if we think about non or I should say we don't think about smartphone attachment rates being sort of the be all and end all of connectivity; one of the expenses that you guys certainly face is the question of subsidy and certain vendors have certain amount of subsidies and other vendors another amount of subsidies and how do you think about the subsidy equation when it comes to overall capital allocation from your perspective.

Fran Shammo

It’s an interesting ecosystem right, so if you go back to the beginning of time even with the basic phone, basic phone started out in huge dollars I remember the day where you had an installment for three years because the handset was $3200. But if you looked at this ecosystem it naturally comes down with competition. So smartphones now as you see we had two operating systems now, you have Windows and Blackberry coming back into the marketplace. This is all good for the industry because what happens is the more competition you get in the space the more technology is advanced and the more competitive the prices become. So I think what you are going to see is over time the smartphone cost is going to come down, just by the nature of how the curve works and you can pretty much track it based on history. The other thing though is that technology changes and we move more to that LTE technology and we convert more to voice over LTE. At some point you will just have an LTE handset, okay so now you can take cost out because you don't have to have these multiple chips in the handset.

So over time that subsidy is going to decrease, but the way we look at it is within our portfolio a subsidy is just one line item of the profit and loss statement. You have to manage all the other line items. And the reason we believe that Verizon Wireless has been so successful is because we have paid attention to the rest of the P&L. We have challenged them to take out cost over the last three years. They have taken out $3 billion. We challenged them again this year between $2 billion and $2.5 billion. So there's a lot of infrastructure efficiencies that we can still create within the wireless portfolio, subsidy just being one of those items.

Amir Rozwadowski - Barclays Capital

And you bring up an interesting point when it comes to cost management. Clearly you said very strong targets with respect to pulling out costs and you've been successful historically in pulling out those costs, both from the wireless side and on the wireline side. How should we think about your ability to pull out further costs going forward, I mean is there low-hanging fruit that you can continue to target? Is the incremental dollar saved more difficult to obtain than it has been in the past?

Fran Shammo

No, I think that look, I mean as technology changes as our backroom systems get more efficient, we do believe that there's more cost that come out. So just a couple of examples here I'll start at Verizon Wireless. So if you look at Verizon Wireless, we added 5 million customers last year and we closed three call centers.

So as you look at some of the things we are doing even with share pricing, when you take the voice and text out of the mix, your call volume decreases because customers aren't calling to say well I went five minutes over my allowance, I'm now paying overcharges, do I need a credit. So you take a lot of this really dissatisfaction from a customer out of the mix, but you also really significantly reduce your call volumes in your call centers. Call centers are a huge infrastructure cost for wireless. So that's just one example.

If you go to wireline, one of the biggest costs that we have in wireline is maintaining the copper infrastructure, which is an old dying technology. So what we are after is migrating as many of those copper-based customers on to our FiOS network and we have done that over the last year and we continue to accelerate that through this year. That’s going to have significant cost efficiency for us because we know that the repair rate is 50% less on FiOS than it is for copper. So there are still a lot of things that we can do in the cost structure.

On enterprise space, we are dealing with hundreds of back-office systems built just from the days of the MCI acquisition and many other things that we have done. We are still consolidating that. For each system we turn down there is a cost reduction that can be achieved. So there is still a lot of cost within our infrastructure that we can take out.

Amir Rozwadowski - Barclays Capital

And I guess that brings us to the question on margin, I mean clearly if I look at both wireless margins and I think about your targets to improve your wireline margin, what are the major leverage there, if I focus first on the wireless side that you can continue to either sustain or is there room for further improvement when it comes to your margin?

Fran Shammo

Well, look I think that, I am not going to talk about where our future margins will be in wireless, I mean I gave guidance this year that said we are pretty comfortable would be with that 49% to 50% for the year. But if you look at our history on a linear basis, you can pretty much see that we consistently perform incremental improvement in Verizon wireless.

On the Verizon wireline side of the house, what I have said this year is obviously will be flat with last year and then we start to see some incremental growth in ’14. That is part of all these costs infrastructure that we are taking out, but it's also because we have some headwind from some of the start-up things that we are doing this year that we think we will reverse next year and start to pay off. So with the combination of that, we are pretty confident that we can continue to expand our margin.

Amir Rozwadowski - Barclays Capital

If I may on the wireless side, I mean clearly you folks have discussed opportunities to improve margins by move folks to the LTE side of the house. I mean, is that something that you are now consistently seeing that, so the incremental LTE customers they much better margin profile than the legacy 3G has start?

Fran Shammo

Well, you have to be careful a little bit here, because when you think about the 3G network now, we have stopped investing capital in that network in June of last year. So really we are only very minimal capital to keep it up and running. So from a contribution margin perspective, you want to try to keep that as full as you can without going over so you don't have to invest more capital. That has a lot of profitability dropping down now because we are not really investing in it anymore.

On the LTE side of the house so, as you said, it is five times more efficient to put a customer on LTE than it was on 3G. So the more users I can move to that network, I get a cost benefit, but then the big bang though here is not necessarily the cost but the speed and the usage pattern and the revenue increase that that customer will generate. So that’s really the mix that we deal with to say if we can move on those parts consistently, then we feel that we have good margins.

Amir Rozwadowski - Barclays Capital

And then perhaps you folks have, I know that you talked is only specific areas of prepaid that you are looking to target, but in recent months we have seen you improve your service portfolio with respect to prepaid on the 3G side. Is that another lever that you folks can use in order to drive incremental margin improvements on the wireless side?

Fran Shammo

Yes, so going back, as I said that 3G is trying to keep it as full as you can. So where you will see us play as prepaid, so our prepaid product is only available on 3G, we don't do any prepaid on 4G. So in that 3G prepaid market, you have seen us get a little bit more aggressive over the last two years, and you will probably see us continue to be a little bit more competitive in that area because now I can afford to do that because I am not worried about adding prepaid customers and investing capital for prepaid customers. So again it’s that trying to keep that network as full as possible.

The other thing that we are doing and you saw coming out in the first quarter is on the reseller side. So a lot of our resellers play in the prepaid market, so we are attacking the prepaid market probably at the lower end not using our brand but using it on the wholesale basis and coming out of the first quarter, we had a million net adds on the reseller side and that was in that prepaid market and again that is only offered on our 3G network, not our 4G network. So it goes to the strategy of keeping that network full to really contribute the contribution margin that that network can contribute.

Amir Rozwadowski - Barclays Capital

So if I think about those moving pieces, even in an environment where there is potential slowing topline service revenue growth, it seems like you have a number of levers to improve margin, I mean is that a fair assumption?

Fran Shammo

Well, I will speak on a consolidated basis, I think that on a -- so from what we see is, I mean obviously Verizon wireless is generating 8% service revenue growth right now, our consumer side of the house on FiOS is at 4%. First time in the couple of quarters now, in the last 10 years, we have seen some consumer revenue growth. Enterprise is a drag at this point and I think that will continue to be a drag on the overall portfolio, but we are very confident that we can continue to have sustainable revenue growth here than we’ve had in the past and that is going to increase, that is going to drop to the bottom line with our cost structure improvements that we have. So we are looking at that we can improve margins here.

Amir Rozwadowski - Barclays Capital

And you spoke about the enterprise side of the house for a bit there. How should we think about what can drive a turnaround in that business? I mean clearly the broader economic environment hasn’t necessarily been too favorable from impacting the business. You folks have taken a diligent effort to drive cost out of the business. Where can -- you know what are we looking for in order to drive sustainable sort of improvement in that business?

Fran Shammo

Well, this one is more of the macroeconomic issue. And as I have said before, I still think that companies themselves are still on the sidelines if you will just because of the deficit issue, the tax reform issue and some of these other things. I think consumer confidence is much better than corporate confidence at this point. I think the consumer market and we've seen this with wireless and FiOS, the consumer is confident, they are moving forward. But when you get to the corporations they are not so sure as to what bet should they make because they are not sure if do I get bonus depreciating -- do I get bonus depreciation, what's my tax rate going to be, are we going to get a territorial tax. I mean it’s pretty evident right now that you can't be number one in the world for the highest corporate tax rate and you can't be the only one in the world that doesn’t have territorial tax system.

So some of these things I think people are just waiting to say, okay, thus things change and then I can start moving forward. So I think until that settles itself and hopefully that settles itself here in 2013, you are still going to get some resistance from that corporate area and therefore employment is not going to have this steady increase that corporations like to see, it’s going to be kind of just lumpiness. So until we get some consistency here, I think you are going to still see corporations sit on the sidelines and that really impacts enterprise because it’s all based on investment upgrading of technologies and moving and at this point we are not seeing that.

Amir Rozwadowski - Barclays Capital

Okay. And if I may shift gears here a bit Fran, when we talked a lot about sort of your capital allocation plans with respect to investing in the business and the network, how should we think about bigger picture in terms of sort of your usage for the cash at this point, clearly focused on the dividend, but anything outside of the scope of generally usage that we've seen in the past that you guys are thinking about these days.

Fran Shammo

That's a pretty creepy question. So no, look I think that just from a core perspective, obviously our dividend policy is extremely important, so from a rating agency perspective, we have committed to them, we will continue to take down debt, so that's the strategy of Verizon, and we've shown that consistently and I think that we've shown that we are not afraid to continue to reinvest in our network because that is really what we are around. So I think that what you have seen in the last two years is consistently what you are going to see from us going forward. So that's kind of I don’t -- there's nothing if you are asking me Lowell and I are very satisfied with the assets we have. As I said back in when I first took this job 2.5 years ago now, really the basis of what we have is we have to execute on what we have, there's really nothing else out there that I need to be able to grow this portfolio. So that's where we are at.

Amir Rozwadowski - Barclays Capital

And so with that I am going to open up the floor to some questions.

Question-and-Answer Session

Unidentified Analyst

Thanks, good morning. If we can go back to the topic of the content please; you mentioned earlier in your remarks and you said it quickly, but actually I thought that you said, you thought that technology out of the home was in fact enabling the traditional model for the media and entertainment companies to be broken up.

And for me it seems like it’s actually the opposite, actually technology is enabling the content companies to deliver more value and improve the price value relationship as part of the multi-channel video bundle. And so I wonder if strategically if you could just talk a little bit more about that, I mean if content is giving you an advantage of driving video usage across your network, isn’t it strategic imperative for you to actually perpetuate the existing multi-channel bundle to the customer?

And along those lines and one thing that’s interesting is if you look at technology companies, and you look at cable satellite, telco distribution companies such as Verizon, really haven't since them acquire or license content or acquire a content company, the way Comcast has. And I just wondered if you look at content and strategic value going up, in order to try and incorporate content more so as part of the Verizon portfolio?

Fran Shammo

Yeah, thanks. Just full disclosure, [Anthony] as our content and (inaudible) I knew where it was coming. Now, look I think this is important. It's not going back to your comment it's not what Verizon Wireless wants. It's what our consumers want and I think it's pretty evident that consumers want the ability to just buy the content that they want to view and that’s where the world is moving to; I mean if you look at demographics, look, linear TV over the next 10 years, based on what I’ve seen, will continue to grow very slightly.

So linear TV model is not going to change, but if you look at demographics, 30 and below, they only want what they want and they have the ability to go get what they want and not pay anybody for that content. But if somebody just wants sports, then they want to just be able to pay for sports and get sports. They don’t want 300 channels that they never watch. So I just think that if you look at it from a consumer perspective and everybody has talked about this, at some point, you are going to have this intermediation content. I don't know when that will be, at some point you will get it; but the ecosystem as I said, I think the content providers are opening up saying, okay, well, maybe I should pay for the delivery and not the consumer. I think that drastically helps the ecosystem. I think that helps change the consumers mind as to where do I want to get that content or where I don’t want to get that content.

So I think look, I think it's still out there to be solved. I am not saying we've the answers. We're developing the technologies to be able to adapt the environment that that’s there. I think the environment is going to significantly change. So we're looking out for the future as if this happens, we have to be ready to take advantage of that situation. So, I think everybody has a different viewpoint on this but my viewpoint is over the next couple of years, or maybe 18 months or five years, you are going to see content right significantly change.

Amir Rozwadowski - Barclays Capital

Before we go to the next question, there is, obviously, one question that I want to make sure to ask before we ran out of time, Fran, is of course one of your partners reported results yesterday and has been discussing sort of their dramatic views on continuing to partner with you in the US with respect to Verizon Wireless. I know that this is a question that you’ve dealt with consistently over the conference circuit, over the last month but I’d remiss in not asking you any updates there.

Fran Shammo

Yes, no updates. I am still tired and weary of that question.

Unidentified Analyst

I just wanted to follow up on your comment with regard to content providers potentially paying wireless as almost like a toll-free analogy that you use. On the other hand, on the wireline side, you are paying the content provider. So it's kind of a dichotomy that from a consumer perspective, whether I watch it on wireless or wireline, it's same to me but from your perspective and [one] perspective if you are getting paid and the other you are paying.

Fran Shammo

Yeah, I think there is one very significant difference here. So when you watch content in your home, there is no usage charge on that content so you can consume as much as you want in the home, be it your files, network. You pay a subscription fee and you can consume as much as you want. When you go outside the home and you get into wireless though, with LTE and share pricing you now start to pay for the consumption that you have, and that’s where the ecosystem is moving for data usage on the wireless networks. I mean everybody is moving to a usage. I mean we have some carriers still unlimited but most are going to have to pay for consumption because there is not unlimited spectrum there is not unlimited network, you have to get to a model that says you have to pay for what you consume. So when you get to when you move which is where we are, what the content providers are looking at is, how can I stimulate more usage on that mobile handset without really having the consumer pay for all that and being able to monetize what’s important to them which is iBall and advertising and those sort of things. So when you get to that model, you kind of step back and say, If I pay for that do I get more iBall to watch my content therefore its more valuable to an advertise to advertise [more]. So its just a difference of the ecosystem, and we’ll see where we go.

Unidentified Analyst

So just as a follow up does that mean there’s potential for data caps on broadband side, I mean it could be kind of the same structure?

Fran Shammo

Well, I think you have already seen some cable providers put in the data cap, I mean FiOS we have not, but data cap is set as an extremely high level. Really what will change that model, if all of the linear TV providers went to, you paid for the amount of gigabytes you put through your home. So it’s a very different out right now.

Unidentified Analyst

Excuse me, this is something is in your normal disclosure and I just manage to missed it. But what is absolute bit traffic doing on your wireless network. In absolute terms, absolute bit year-over-year?

Fran Shammo

You haven't missed anything, we don't disclose it.

Unidentified Analyst

Why not?

Fran Shammo

We just choose not to disclose it; it’s a competitive issue quite honestly.

Unidentified Analyst

I see is it growing.

Fran Shammo

Absolutely you can see that I mean what we have disclosed is on our LTE network with 30% of our base now converted to that network over 54% of our data tariff is on the LTE network, that's what we disclose and that's growing.

Unidentified Analyst

Quick question on enterprise growth, there's a lot of activity in cloud and obviously Verizon has great capabilities there. Do you think that a lot of enterprises given the proliferation of choices to go to your AWS et cetera rack space, does that have an impact and do you see that facet of your business growing.

Fran Shammo

Yeah, well I think in the cloud space right now there's a ton of choice and there's a ton of price ranges within that choice, and I think that quite honestly we have more work to do to be able to really compete across that footprint if you will. And look I mean its pretty obvious that Amazon is the gold star of how to provide a cloud service at a very affordable rate for small business and then if you go up the stack, you have medium business and then you have enterprise grades, and actually where we play today is we play more in that high tier medium business and enterprise grade.

The trick is, can we create something that really gets us across the map as to you choose what service you want, do you want security, don't you want security, do you want flexibility to add servers at any time or don't you, and I think what you will have to see the ecosystem here at least for us is we have to get to more of a flexible model if you will to be able to deal with the wire range of customers that we have. And we are just not there yet. I mean we play really well in the enterprise grade and the government grade cloud space, but we haven't tapped into that small to medium business yet, and I think that's our opportunity for growth.

Amir Rozwadowski - Barclays Capital

Could you talk about the opportunity that you guys see, maybe the margin profile, perhaps the pitfalls of sort of sharing your customer data with other marketing firms, etcetera, I mean there was an article in the paper this morning about that, could you talk about the opportunity?

Fran Shammo

Yeah, so we have approached this extremely carefully because the key for us is our customers’ privacy. Now when you deal with the customers’ privacy you don't release individual data to anyone, to market too. So what we are looking at is and we've actually and we call precision marketing, looking at the data and camouflaging all the data and giving some general specifics around some usage patterns of consumers, but no one specifically and we think most advertising agencies and so forth want this data and they are willing to pay for that type of data. They understand they are not going to get individual customer usage patterns because that's not something where we will go. So I think there is a model that works to protect the privacy of the consumer but also gives data to marketers and other companies data that can be utilized to service what they need without giving that privacy issue because the privacy issue is something our customers come to Verizon wireless for because they know their data is secure.

Amir Rozwadowski - Barclays Capital

If I may one other question from my end, you had talked about sort of the finite resource which is spectrum. Clearly if I think about our broader growth when it comes to connectivity and I think about multiple devices and sort of where penetration rates could go, what are your plans in terms of spectrum and allocating capital to improve that position?

Fran Shammo

Well, we have -- from where we sit today, I mean we have a very good spectrum portfolio which is why we went after the AWS spectrum which is really going to be used for our capacity of LTE, the 700 megahertz that we have contiguous across the United States is used for the coverage piece. So we're in pretty good shape for the next four to five years even with reallocating our 3G spectrum over the 4G network. But obviously as I said, this year we just announced $7 billion dividend out of Verizon Wireless.

Now for the rest of the year, we will accumulate cash to pay debt down and prepare for the 2014 auction that hopefully will come and will be prepared to exercise in that auction because I always said as spectrum comes available, you have to be opportunistic because it only comes down the road every once in a while. So you have to acquire that spectrum for the future.

And we think, look, we think that there will be enough spectrum there. We think that technology change. I mean people are already talking about LTE Advanced. Well, LTE Advanced is nothing more than creating a little bit more speed on the network but really LTE Advanced is around being able to utilize the spectrum much more efficiently within the network and that’s really where the carriers are pushing the equipment manufacturers as to bring technologies that can utilize the spectrum we have more efficiently, because the spectrum is, as I said, is not an unlimited resource, it's a limited resource that you have to use very efficiently. So I think from our perspective, we are in very good shape and we will be opportunistic to take spectrum when it becomes available.

Amir Rozwadowski - Barclays Capital

And you feel very comfortable in terms of your cash position, when and if [those special auctions] come to fruition?

Fran Shammo

Absolutely.

Unidentified Analyst

Can you tell us a little bit about how you expect the structure of U.S. wireless market to evolve given some of the potential changes in ownership and may be a little bit about consolidation that could occur may be not this year but just looking into the future obviously dependent on politics too? But you have had quite a golden period certainly, Verizon wireless and AT&T wireless. Will that change? Thanks.

Fran Shammo

Well, look, I think that as I have said before, from a consolidation perspective, I think that’s good for the industry, whether it's Softbank or DISH, I think what that says is people like us think that there is a lot of growth left in wireless or as they would not be willing to invest the amount of money that they are looking to invest in a wireless network in the United States.

So from a growth standpoint, I think they are confirming the fact that there is still lot of growth left in the U.S. wireless market. Just from a consolidation standpoint, regardless of who invest in Sprint, I think it's all good. I think that stronger carriers make stronger competition and grow the marketplace overall. So I think structurally, I think it's all going in the right place. We compete very vigorously, and we will continue to compete vigorously.

Amir Rozwadowski - Barclays Capital

I think with that we actually have hit our time. I want to thank Fran for taking this morning to speak with us and we appreciate all of you attending. Thank you very much.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Verizon Communications' Management Presents at Barclays Global Technology, Media, and Telecommunications Conference (Transcript)
This Transcript
All Transcripts