Michael Stefanski - Senior Vice President, Investor Relations Fran Shammo - Chief Financial Officer

Simon Flannery - Morgan Stanley David Barden - Bank of America Phil Cusick - JPMorgan Mike Rollins - Citigroup Brett Feldman - Goldman Sachs Mike McCormack - Jefferies John Hodulik - UBS Amir Rozwadowski - Barclays Jennifer Fritzsche - Wells Fargo Tim Horan - Oppenheimer

Good morning and welcome to the Verizon First Quarter 2015 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode and the floor will be opened for questions following the presentation. [Operator Instructions] Today’s conference is being recorded. If you have any objections, you may disconnect at this time. It is now my pleasure to turn the call over to your host, Mr. Michael Stefanski, Senior Vice President, Investor Relations.

Thanks, David. Good morning and welcome to our first quarter 2015 earnings conference call. This is Mike Stefanski, and I am 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 our Investor Relations website. Replays and a transcript of this call will also be made available on our website. Before we get started, I would like to draw your attention to our Safe Harbor statement on Slide 2. Information in this presentation contains statements about expected future events and financial results that are forward-looking and subject to risks and uncertainties. Discussion of factors that may affect future results is contained in Verizon’s filings with the SEC, which are available on our website. This presentation contains certain non-GAAP financial measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are included in the financial materials we have posted to our website. The quarterly growth rates disclosed in our presentation slides and during our formal remarks on a year-over-year basis unless otherwise noted as sequential. Before Fran goes through our results, I would like to highlight a few items related to our earnings. GAAP reported earnings were $1.02 per share. And there were no special items of a non-operational nature. This compares with adjusted earnings of $0.84 per share in the first quarter of 2014, an increase of 21.4%. As a reminder, the adjusted EPS of $0.84 last year did not reflect a 100% ownership of wireless for the full quarter since the Vodafone transaction closed on February 21, 2014. As we indicated a year ago on a non-GAAP illustrative basis, adjusted earnings for the first quarter of 2014 would have been $0.91 per share if we assumed 100% wireless ownership for the full quarter. On this more comparable basis, growth in the first quarter earnings per share was 12.1%. I would also like to make a few points about our wireline segment reporting. Our wireline results include the operations we are selling to Frontier until the transaction closes, which is targeted for the first half of 2016. Our consolidated balance sheet reflects the assets and liabilities associated with those operations as being held for sale. This is important because accounting rules require that depreciation expense not be recorded on assets held for sale. Therefore, wireline depreciation expense will be lower in 2015 due to the classification of these assets. The first quarter included a $146 million pre-tax benefit, which equates to roughly $0.02 per share. Going forward, until closing, the full quarter benefit will be approximately $200 million pre-tax or $0.03 per share. With that, I will now turn the call over to Fran.

Thanks Mike. Good morning, everyone. We are off to a strong start in 2015 with an eventful first few months behind us. We continue to execute well on our strategy of investing in networks and platforms and positioning the business for future growth. We delivered very strong financial and operating results in the first quarter with strong cash generation. To review our active start to the year, we were successful in the AWS-3 spectrum auction improving our mid-band spectrum position while maintaining sound financial discipline. As we stated on our conference call in mid-February, we are very pleased with the licenses we won and are confident that they will enable us to execute efficiently on our network strategy of adding capacity through a combination of spectrum deployment and small cell technology. Our early experiences with small cell deployments have been very favorable and we believe that the industry is making good progress on standards for utilizing unlicensed spectrum with LTE, which is already being tested in our vendor labs. We also executed several value creating transactions that underline our commitment to extend our industry leadership in the markets we serve by being strategically focused and returning value to shareholders. We successfully monetized our tower portfolio in a $5 billion transaction with American Tower, which closed at the end of the first quarter. We signed a definitive agreement to sell our wireline properties in Florida, Texas and California to Frontier for $10.5 billion. And we implemented a $5 billion accelerated share repurchase program, which resulted in an immediate reduction of about 86 million shares in mid-February. Final settlement of this transaction, including delivery of the remaining shares that we expect to receive is scheduled to occur in the second quarter. Collectively, these transactions provide immediate value for shareholders. Now, let’s move on to our primary focus which is executing our day to day strategy for the benefit of our customers and shareholders. Our first quarter results reflect strong top and bottom line performance. We posted solid revenue growth, high quality earnings growth of 12% and generated substantial free cash flow. In wireless, we had a solid quarter of quality connections growth and profitability. We had 565,000 retail postpaid net adds in a seasonally low volume quarter. Total wireless revenue grew 6.9% and EBITDA was up 6.6%. As expected our wireless EBITDA margin returned to more historical levels. In wireline, consumer revenues grew 4% and we continued to increase our FiOS penetration with quality customer growth. Total wireline revenue was impacted by foreign exchange pressure, but our continued focus on productivity improvements and operating efficiency resulted in EBITDA margin expansion. Now let’s get into the first quarter performance in more detail starting with our consolidated results on Slide 4. Total operating revenue grew 3.8% in the first quarter continuing our consistent top line growth trend. If we excluded the first quarter 2014 revenues from the public sector business we sold, the comparable growth rate would have been 4.2%. Our consolidated revenue growth continues to be driven by wireless and FiOS. New revenue streams from the Internet of Things and telematics continue to emerge and grow. In the first quarter these revenues totaled approximately $150 million, an increase of 25%. We continue to build upon our Internet of Things and video platforms. In particular innovation within the transportation industry presents a great opportunity for us. Through Verizon telematics we are already providing a platform of manufacturer, aftermarket and fleet services through two-way broadband connectivity to vehicle. Additionally, we will be launching Verizon Vehicle, our direct to consumer aftermarket product which modernizes traditional roadside assistance and enhances driver safety and convenience. In terms of video we are on track to launch our mobile first OTT video product this summer and we have already announced some initial content partners. We are excited about these new growth opportunities which you will hear more about during the year. In addition to top line growth, we continue to focus on process and operating efficiencies and improving our cost structure. Consolidated EBITDA totaled $11.9 billion in the quarter, up 5.8% and our EBITDA margin expanded by 60 basis points on an adjusted basis to 37.4%. As Mike indicated, we reported $1.02 in earnings per share in the quarter for a comparable growth rate of about 12%. So we are off to a strong start from an earnings perspective. Let’s turn now to cash flows and the balance sheet on Slide 5. Consistent with capital allocation model, we have been executing in the last several years, our priorities are to invest in our networks through capital spending and spectrum acquisitions, return value to shareholders and maintain a strong balance sheet. Our strong cash flows enable us to execute on this investment strategy, pay competitive dividends and de-lever the balance sheet. The monetization of our tower portfolio enabled us to execute the $5 billion accelerated share repurchase program. In the first quarter, cash flows from operations totaled $10.2 billion. This included approximately $2.4 billion related to the tower monetization transaction which is non-recurring. The remaining portion of the $5 billion of cash proceeds is reflected in the financing activities section of the cash flow statement. We also securitized the portion of our wireless equipment installment receivables and received $1.3 billion in cash proceeds during the quarter. Free cash flow excluding the tower proceeds totaled about $4.2 billion. Capital expenditures were $3.7 billion in the quarter. Although spending was slightly lower in the first quarter, we expect 2015 capital expenditures to be within our stated range of $17.5 billion to $18 billion. In wireless we continue investing to proactively stay ahead of demand. In the first quarter, wireless CapEx totaled $2.4 billion. As we have previously stated, our capital investments are focused on adding capacity to optimize our 4G LTE network, primarily by increasing network density. We are deploying existing AWS spectrum in addition to utilizing small cell technology in building solutions and distributed antenna systems. We are also beginning to refarm our 1900 PCS spectrum from 3G EVDO to 4G LTE in select markets. Despite what others claim about certain network metrics, we are consistently acknowledged as the overall 4G LTE network performance leader in national studies conducted by widely recognized third-party organizations. We lead in what matters most to customers, coverage and consistent performance and continue to be the largest and most reliable 4G LTE network in the nation. Our balance sheet remains strong and we continue to have the financial flexibility to grow the business and pursue our strategic goals. Our financial de-leveraging plan had always assumed the purchase of new spectrum. In the first quarter, we paid the remaining balance of $9.5 billion for the AWS-3 licenses we won in the auction. During the past six months, we have been very active in the debt capital markets managing our maturities and taking advantage of the interest rate environment. We ended the quarter with $113.4 billion of gross debt, net debt of $109 billion and a ratio of net debt to adjusted EBITDA of 2.5 times. We are on track with the plans to de-lever and remain committed to returning to our pre-Vodafone transaction credit rating profile in the 2018 to 2019 timeframe. Now, let’s move into a review of the segments starting with wireless on Slide 6. Our wireless strategy is to provide the best customer experience while continuing to invest in our network to stay ahead of accelerating demand and higher customer usage. Wireless revenue growth, profitability and cash flows continue to be driven by our high-quality retail postpaid customer base. Total wireless operating revenues were $22.3 billion in the first quarter, up 6.9%. Total service revenue of $17.9 billion declined 0.4%. Keep in mind that lower service revenue from Edge customers have shifted to equipment revenue. Service revenue plus Edge installment billings were up 3.1%. During the quarter, customer demand for our Edge equipment installment plan continued to increase. The percentage of phone activations on the Edge program was about 39% compared with about 25% in the fourth quarter. We expect the percentage of phone activations on Edge to increase in the second quarter as we are currently running near 50%. Edge phone activations totaled $3.4 million in the quarter and we now have an Edge phone base of $10 million, representing 11.7% of our postpaid phone base. In terms of profitability, we generated $10 billion of EBITDA in the quarter, an increase of 6.6%. Our EBITDA service margin increased to 55.8%, up 370 basis points year-over-year. As customer acceptance of equipment installment plans evolves and the percentage of Edge adoption increases, equipment revenue is increasing. Therefore, you should look at EBIT margin on total wireless revenue rather than wireless service revenue. On this basis, our EBITDA margin on total wireless revenue was 44.8% in the quarter, which was similar to a year ago. Now, let’s turn to Slide 7 and take a closer look at wireless connections growth. We ended the quarter with $108.6 million total retail connections. Our industry-leading postpaid connections base grew 5.5% to $102.6 million and our prepaid connections totaled $5.9 million. As expected, first quarter seasonality resulted in lower volumes. Postpaid gross additions were $3.7 million, up 2.3% compared to a year ago. A majority of the gross adds were 4G smartphones and tablets. Retail postpaid churn improved both sequentially and year-over-year coming in at 1.03% for the quarter. We are maintaining a disciplined approach with a focus on retaining high value customers. We are seeing good results with our postpaid smartphone churn less than 0.9% as compared to our basic phone churns at more than 1.2% in the quarter. Our retail postpaid net additions of 565,000 were up 4.8%. The quality of the net adds was very good. We added 621,000 new 4G smartphones and total net smartphones adds were 247,000 in the quarter. We also added 820,000 new 4G tablets. Postpaid phone net adds were a negative 138,000 as the smartphone adds were more than offset by a net decline of 385,000 basic phones. Additionally net prepaid devices declined by 188,000 in the quarter. Let’s now take a look at 4G device activations and upgrades on Slide 8. Total postpaid device activations totaled 10.3 million in the quarter, up 4.4%. About 84% of these activations were phones and the rest were mainly tablets. We ended the quarter with 68.7 million smartphones in total, about 85% of which were 4G. Our smartphone penetration increased to approximately 80% of total phones. 4G devices now comprised approximately 70% of our retail postpaid connection space. About 86% of total data traffic is on the 4G LTE network. As you would expect growth in 4G device adoption continued to drive increased data and video usage. Within More Everything accounts average data usage continues to rise, up 54% year-over-year. This is beneficial to us because increasing consumption of content will ultimately drive higher revenue with a lower cost to serve due to the efficiency of our LTE network. In terms of our upgrade rate about 6.5% of our retail postpaid base upgraded to a new device in the first quarter. This represents a sharp sequential decline in the percentage of customers upgrading which was expected due to seasonality and the extraordinary volumes we experienced in the fourth quarter. We continue to have an opportunity to upgrade our basic phone and 3G smartphone customers to 4G devices. At the end of the quarter we had roughly 17 million basic phones and about 11 million 3G smartphones remaining in our postpaid connection space. We also have a profitable growth opportunity with tablets. We ended the quarter with about 8.8 million tablets in our postpaid connection space, so overall penetration is still under 10%. Tablets provide us a good value through increased data consumption and lower churn at the account level. Let’s move next to our Wireline segment starting with the review of our consumer and mass markets revenue performance on Slide 9. In the consumer business, we continue to see positive revenue trends driven by FiOS. In the first quarter, consumer revenues were up 4%, representing 11th consecutive quarter of 4% or better growth. Mass markets, which include small business grew 2.9%. FiOS now represents 78% of consumer revenue. In the first quarter FiOS consumer revenue grew 9.8% driven by customer growth, increased penetration of our Quantum products and some pricing actions. Our FiOS Quantum broadband service is scaling well and has a higher profitability contribution. At the end of the quarter, 62% of our consumer FiOS Internet customers subscribe to a data speeds of 50 megabits per second or higher. We are seeing the highest rate of growth in the 75 megabits speed tier. We are just over 20% of our consumer FiOS customers currently subscribe. We had a good quarter of FiOS customer growth. In broadband we added 133,000 net FiOS customers and now have a total of 6.7 million FiOS Internet subscribers, which is 41.5% penetration. Overall net broadband subscribers increased by 41,000 in the quarter. In FiOS video we added 90,000 net customers in the quarter and now have a total of 5.7 million FiOS video subscribers, which represents 36% penetration. One of the ways we strive to improve the customer value proposition is by creating new and innovative services on our FiOS platform. Last year we introduced quantum TV, Speed Match and our Quantum Gateway router. As part of the evolution of customer choice for video consumption, we just introduced FiOS Custom TV, which have been the last few days. The Custom TV option is a creative approach to the changing landscape allowing customers to better choose the type of content they want to watch. Customers will get a base package of pre-selected and local broadcast channels and choose at least two channel packs out of seven. This new option coupled with our traditional programming packages provides more choice, more control, and more value in an easy self-serve manner. In terms of our ongoing network evolution initiative, we converted about 47,000 Copper customers in the quarter. For the year, we plan to convert a total of 200,000 Copper customers to fiber. We are also in the process of decommissioning 10 central offices. Post conversion, we are seeing improvements in customer satisfaction and a lower cost to serve. These conversions also provide a long-term opportunity for customers to purchase FiOS services from us. Our focus in 2015 will be to continue adding quality customers driving higher penetration in existing markets and generating profitable growth. Residential broadband and video are highly competitive markets and we will be disciplined and rationale in our approach to customer acquisition. With that, let’s turn to Slide 10 and cover enterprise and wholesale as well as the wireline segment in total. In the enterprise space, we continue work through secular and economic challenges. In the first quarter, global enterprise revenue declined 6%. Excluding foreign exchange pressure, the revenue decline would have been more in line with trends we experienced in the second half of 2014. The overall story is unchanged as declines in legacy transport revenue and CPE continue to outweigh growth in newer and more strategic applications, which are smaller in scale. Revenue from services in the IP layer has been impacted by competitive price compression, which is offsetting growth in applications and services. In our global wholesale business, revenues declined 3.7% in the first quarter. Healthy demand for Ethernet services continues, but revenue declines from price compression, technology migration and other secular challenges more than offset this growth. We also had a favorable, which improved revenue this quarter and which will not reoccur. Total operating revenues for the entire wireline segment were down 2%, which included the FX pressure. In terms of profitability, the EBITDA margin was 22.7% in the quarter, up 20 basis points. Our path to a stronger and more profitable wireline business includes driving further FiOS penetration and continued improvements in operating and capital efficiency. On the enterprise business side, we are changing the revenue mix to higher growth areas like cloud, security and professional services. In terms of our cost structure, we are realizing a number of noteworthy process improvements and efficiency gains utilizing our Verizon’s Lean Six Sigma principles. However, we are far from satisfied and we will continue working to improve our overall cost structure. Let’s move next to our summary slide. We are off to a strong start to 2015. From a strategic standpoint, we were successful in the spectrum auction, executed a tower portfolio monetization, and signed a definitive agreement to sell certain wireline properties. At the same time, we return value to shareholders with an accelerated share repurchase program. We also delivered strong operating and financial performance with 12% growth in earnings per share on an adjusted basis. Our first quarter results demonstrate that we are in a strong market position with a proven ability to compete effectively and execute our strategy. Our high-quality customer base and superior networks are the hallmark of our brand and provide the fundamental strength upon which we will build our competitive advantage. We are on track to achieve our targets of at least 4% consolidated revenue growth, sustained profitability and capital spending in the range of $17.5 billion to $18 billion in 2015. Consolidated EBITDA grew by 5.8% and our EBITDA margin expanded to 37.4%. In addition to our ability to deliver strong financial metrics, we are very focused on developing new products and services in the Internet of Things and video. We are excited about the potential for revenues from these new products and services to grow quickly and become more meaningful in the future. Our de-leveraging plans are on track. And we remain committed to getting back to our pre-Vodafone transaction credit rating profile in the 2018 to 2019 timeframe. With that, I will turn the call back to Mike so that we can get to your questions.

Thank you, Fran. David we are now ready to take questions.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Simon Flannery with Morgan Stanley. Please go ahead.

Thanks very much. Good morning Fran. So, you had a couple of management changes in the first quarter, John Stratton taking over as President of Operations and combining the IT and network units, can you give us a little bit of color of any sort of implications, any strategies or anything that has happened as a result of that? Thanks.

Sure. Thanks Simon. So, as we have moved into our next space as well has consolidated the operational performance under John. This gives us a better breadth of consolidation if you will post the Vodafone acquisition. And if you go back to when we did the acquisition, we stated that there were some internal valves that could be broken down and we could become more efficient. And with the establishment of Marni Walden’s organization around new products and services this is where we are get into the Internet of Things and over the top video she runs Verizon digital media services and some of the other incubation companies we have. So the focus is running the day-to-day operations out of John’s organization and streamlining, implementing Verizon lean six sigma and driving those cost benefits and efficiencies that we are looking for. With Marni’s organization it’s creating the new products and services that we can launch to grow the future of the businesses. And then with Roger and the consolidation of the network and the IT organization, it just makes sense as we move into more software developed network areas and more the network is driven out of data centers it makes sense that Roger would take over the entire thing from an efficiency and consistency of management perspective. So I think what you are seeing here is more well organized within the company, more cohesiveness and more direct relationship between growing revenue and cost reduction.

Okay, great. So no real changes in the sort of cost trajectory or the CapEx trajectory?

Well, CapEx we have given you guidance of $17.5 billion to $18 billion. And right now we are staying on track with that. You should see that ramp up through the rest of the year and obviously coming out of the auction we added $500 million to that to densify and build out and that takes a little bit of queuing up time, so you will see that more in the back end of the year. And as far as cost reductions you have seen some of the measures we took at the end of the fourth quarter. If you look at wireline alone, wireline is down over 5,400 people from the beginning of last year. So continuing to streamline that business and become more efficient. And for wireless as John has taken over we are starting to see some streamlining around customer service and some the other things that we have talked about in the past. So I wouldn’t downplay the cost reductions that we will realize in the future here.

Great. Thanks for the color.

Okay David. Let’s take the next question please.

One moment please. Your next question comes from David Barden of Bank of America. Please go ahead with your question.

Hey guys. Thanks for taking the question. Maybe just two if I could, Fran on the quarter, I think the two numbers that really stood out to people were number one, the really low SG&A in wireless, I think going back for a model maybe the lowest percentage of wireless revenue we have ever seen, if you can kind of step us through how we got there from last quarter and what the outlook for that would be, it would be huge. And then the second big number was really the ARPA number, which I think stepped down further than people thought, that could have been related to EIP or it could have been pricing environment in the market or retention efforts that you are executing on, could you kind of give us the picture for how we got to where we got in ARPA and kind of what we can think about that for the rest of the year? Thanks.

Thanks David. Just a clarification here on the wireless revenue you are talking about service revenue?

I was actually talking about total revenue as a percentage for SG&A, but either way was a really low number?

Okay, yes. So look, I mean I think that if you look at the service revenue and ARPA it all goes to the same issue which is as we start to elevate Edge and we start to increase the take rate of Edge and customers move, you are shifting revenue out of service and into equipment. So you are going to continue to see a decline in service revenue. You are going to continue to see a decline in ARPA, but I think what I would center around is what we said in the script, which was we grew overall revenue by 6.9%. And also if you look at the EBITDA margin which kind of normalizes out the Edge impact, I mean, not 100% of it, but if you look at a dollar of revenue and a dollar of cost there is zero margin. So, if you look at total revenue, 44.8% whereas last year at 44.9%. So, it’s a very consistent profitability measure. The other thing too is if you look at the Edge benefits, you are getting benefits from both lower commissions and so forth, so that is also impacting the SG&A line, because you are indirect before if you think about how that works. We were refunding the indirect through a commission payment for the subsidy of the handset that all goes away. So, you are going to see a decline in the commission expense line, which is impacting the SG&A line. But overall, if you look at the profitability of wireless and I think this is important, if you look at the service margin of 55.8%, if you were to normalize out Edge, the wireless service margin would still have been in that over 50%. So, the profitability of wireless continues to be extremely strong. And again I would go back to what Simon brought up. I would not discount all of the cost reductions and efficiencies that we are creating in the environment.

So, this is a good baseline for kind of extrapolating the rest of the year?

Well, I mean, from a rest of a year standpoint, I think that the outlook is strong. I think that obviously as Edge continues to escalate, you are going to get some benefit there. We highlighted the depreciation benefit. But I think as far as wireless goes, I think we need to be careful here a little bit, because January normally is a slow promotional, slow seasonal quarter. As you go into the second quarter and you enter into Mother’s Day and Father’s Day, I would expect that the promotional activity and competitive is going to heat up here. So, that will offset some of the benefits that you are going to see. So, look I think that service revenue and ARPA will continue to decline as the Edge rate takes up, but it’s really about overall revenue growth and the profitability of the business and we feel good about that.

Perfect. Thanks, Fran.

Okay, thank you. David, next question please.

Your next question comes from Phil Cusick of JPMorgan. Please go ahead with your question.

Hey, guys. Thanks. I guess first if I can follow-up, Fran on the Edge stuff, can you help us think about the high-end of the Edge mix given the distribution of where you sell this? What portion of your sales are in channels that don’t have access to the Edge program?

Well, all of our channels have access to the Edge program, but obviously within our store channel, it is very, very heavily weighted towards Edge at this point. We are doing very little subsidy model selling out of the store channel and it’s because where the market has moved. I mean, when your entire competitive environment is just advertising and promoting service pricing and ignoring the whole equipment side, we have to follow that in order to be competitive. So, the store channel by far is very heavily weighted towards Edge. Indirect is starting to come up as time goes, but also keep in mind the business channel and our enterprise channel are not really taking the Edge product. So, if you are asking me, we will get to 100%, the answer is no. I can’t tell you exactly what that percent will be, but we do see that second quarter will probably be in the neighborhood of a 50% take rate.

Okay. And then second I like the Custom TV launch this morning, there is some controversy around ESPN and Disney, can I ask do you guys have explicit permission for this and have Disney and other pushed back since Friday to you or is this just a storm in the media? Thanks.

Well, I think the right way to answer this without getting into too public about our contractual situations. Look, this is a product that the consumer wants. It’s all about consumer choice. I mean, if you look at the TV bundles today, most people only on average watch 17 channels. So, this is a way to give consumers what they want on a choice basis. And we believe that we are allowed to offer these packages under our existing contracts. So, we will leave it at that.

Thanks, Fran.

David, next question please.

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

Thanks. Just a couple of follow-ups and then a question. The follow-ups is first, can you just give us the ending net receivable balance for the installment phones and what that was last quarter? And then are you allowing for installment plans early migration on them, is that something you are using to get the take rate of Edge up? And then just a broader question I had if I could is if you could just address the larger strategy for wireline as you went through a quarter of monetizing some additional or announcing the monetization of some additional assets, what’s your thoughts longer term for your wireline business? Thanks.

Thanks Mike. So, on the accounts receivable, I am not going to get too much detail here on this call, but if you look at the fourth quarter to the first quarter with the securitization that we did it’s relatively flat. On early migration on Edge customers, obviously we have an Edge up feature, but you must pay 75% of the phone off. So, if you decide to pay 75% of your balance off, you can upgrade at any point in time you want. And we do have customers who are taking that and edging up, but there is no “early migration” other than what’s instituted in the price plan. On the wireline strategy, look I mean if you look at the three properties that we announced to sell Florida, Texas and California, they were more or less islands to us. They were some of the first properties we build out with FiOS. They are heavily penetrated properties. But the majority of those properties are still copper. And as we look at that strategically, when we laid this out, it just made sense based on the offer that Frontier had in front of us to actually sell those properties. So, I wouldn’t read too much into it other than the fact that they were not strategic properties, because they were islands, but if you look at the rest of our wireline footprint from DC all the way up through Boston, it’s very contiguous. It’s highly populated. We have almost 20 million homes passed now with FiOS. So, it’s extremely viable for us to continue to penetrate these properties. And if you look at the penetration rates, New York is still the lowest penetrated market that we have and still has the highest growth opportunity that we have. So, we are holding on to some of the markets that we believe are contiguous. You will see more and more with wireless and wireline combined under John’s leadership. So, there is more that we can do strategically with the footprint that we have and again it just made financial sense to return that back to our shareholder and bring that cash into de-lever the balance sheet. So, that’s really there all is to it, Michael.

Thanks very much.

Okay, next question please.

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

Thanks for taking the question. The smartphone metrics continue to be really impressive. But as you note in the presentation about 20% of your subs still have feature phones, so I was wondering if you could just walk us through what is the strategy for upgrading and retain those subs, particularly because it seems that your competitors are continually targeting that base? And should it be reasonable to think that at this point in the upgrade process, we might continue to see some modest degree of net losses in the phone base whereas what we saw in the first quarter is just a seasonal factor?

Thanks, Brett. Well, I guess a couple of things here. So, we still have 17 million basic and 11 million 3G phones and coming out of the fourth quarter, you heard me say that we were going to protect our base. And that was a key ingredient going into the first quarter. And I think with the churn rate you have seen if you look at the basic phone losses on a year-over-year basis, we actually improve that by over 400,000. So last year, we had almost doubled the number of basic phone loss customers than we did this year. And as you notice, we came out with some strong promotional pricing that was targeted towards the basic phone customer and the 3G customer. Now, having said all that, look the environment is, is that there if you look at prepaid on a standalone basis, our prepaid retail pricing is slightly at a premium to some of the other competitors’ postpaid pricing. So, we are in a competitive pricing standpoint. And as I said coming out of the fourth quarter, we will not – we have to be rationale and we will not chase every customer, but we are making every effort to maintain our base and keep our customers and upgrade them into a price plan that’s fitting for them. And we made improvement in that. But I will tell you we still have some more improvement to do, but we are not satisfied with any losses. But then again, we will not chase every add either, based on just cheap price. So, I think that’s the balanced equation that we showed in the first quarter.

And just a quick follow-up I believe in the past you said some of the small offices you have seen have generally been customers that were not as profitable, is that still the case?

Well, I think what I said was if it’s not quite I wouldn’t put it in a profitability perspective, but what I would say is if it’s customer who is just price sensitive and does not care about the quality of the network or is sufficient with just paying a lower price, then that’s probably a customer we are not going to be able to keep on the Verizon wireless network.

Thanks for taking the question.

David, next question please.

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

Hey, guys. Thanks. Fran, maybe if you could just comment regarding subscriber quality, maybe add net add quality or base quality and just thinking about the credit scores within the base, the prime mix and obviously we are seeing a lot of prepaid migration into postpaid is what you guys are seeing with respect to that? And as a follow-up, just a comment if you would on the appetite for additional factoring, how we should be firming that for the full year? Thanks.

Sure. So, on the securitization piece of the business, yes, you should anticipate that this will be an ongoing program on a quarterly basis going forward. As far as the quality of our base, I think the quality of our base speaks for itself. We have not made any credit policy changes. We have a very strong quality base, but there are a certain segment of our customers as I just discussed around basic, where we are trying to bring them up into a price plan that’s meaningful for them. But if you look at – again, if you look at the lay of the land around price plans, as I said our prepaid pricing is a little bit of a premium to some other postpaid pricing in the marketplace. And as you saw this quarter, we lost 188,000 prepaid retail customers. I can’t answer specifically where they went, but I would say that they probably made a choice to go to a price – postpaid price plan, because it’s actually slightly lower on some competitors than it is with us on prepaid. So, I can’t factually state that, but I think that’s some of the migration, but also I would also say that on the reseller side, which we don’t talk much about, we had a very strong growth through our TracFone relationship over 400,000 some net adds this quarter. So, it could have been a migration from retail to wholesale, but I do think there is a migration from the prepaid base into some other postpaid bases and I think others will have to talk to that, but we are not seeing a lot of that within our base.

And Fran, just how do you frame the credit risk on these installment plans, I mean, I am assuming you guys obviously have pretty tight credit standards, but if you see this as a risk for you guys on the industry, just I mean more and more loans out there for Apple phones?

Well, sure, I mean, obviously it adds risk to the balance sheet, because you are putting up a very large receivable now before it was just service revenue that you are risk add. And if you look at the economics of service revenue, it really is what’s the economic loss to the company really comes down to what’s the actual economic loss of providing the service to the customer. It’s not actually the retail service revenue that’s the loss. So, obviously, the cost of service is minimal. So, the loss was a lot less. Now, you are actually putting up a receivable that has a dollar for dollar loss if the customer does not pay. And again, we are very comfortable with the credit models we use. As I said, we really haven’t changed our credit and we have a very strong credit base. So, I am not – at this point, I don’t see any trends that will be concerning me on the outstanding receivable at this point.

Great. Thanks, Fran.

David, next question please.

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

Hey, thanks. Two quick ones. First, following up on the video tiering, Fran, could you talk a little bit about maybe sort of expected sort of penetration that you expect with these new plans and maybe compare the profitability of these new services to sort of traditional TV subscriptions? And then from Edge standpoint, you have guided to flat consolidated margins for the year, but as you see the higher take rate of Edge and first of all, where that can go for the year, could that drive better wireless margin trends and lead to better overall consolidated margins for the company? Thanks.

Thanks, John. So, on the video tiers look, I think it’s way, way too early to start talking about what the take rate is or where the profitability. So, we will leave that until we get some trending behind us. Obviously, we have done this because of consumer benefit, give the consumer a better choice. So, let’s see what happens here as we go in and we can address that later. On the EBITDA margins, look I mean I am kind of reiterating our guidance that we came out of the fourth quarter from an outlook perspective. And I think that you have to be cognizant of the fact that this is the first quarter of the year. If you look at last year’s trending as we said coming out of the Vodafone transaction, our earnings profile would be more consistent across the quarters. We wouldn’t be as bumpy as we had been in the past. I think that you have to look at the whole thing in retrospect. And also the other thing is I would not get focused in on the service margins side and as I said I would really prefer as to look at the total margin – total revenue and the EBITDA margin. And if you saw the EBITDA margin was very, very strong for wirelesses this quarter. And that kind of normalizes out a little bit of what the Edge take rate is. And then again I also can’t speak to what we are in for from a competitive standpoint on additional pricing moves through the year. So, I am kind of reserving on that side of the equation as well from an outlook perspective. So, on outlook and profitability, I would say reiterating what we said in the fourth quarter and more consistent earnings profile moving forward. So, I think that’s where we will leave it.

Great. Thanks Fran.

David another question please.

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

Thank you very much and good morning Fran and Mike.

Good morning Amir.

Good morning.

You folks highlighted that 4G devices now constitute approximately 70% of the retail postpaid connections and that traffic or LTE network handles about 86% of the total wireless data traffic for the quarter, given these dynamics what seems to be a rapid adoption of LTE technology, I was wondering if you could give us an update on your ability to reform spectrum in order to take advantage of the network efficiency opportunities. Fran you had mentioned that they are continued cost reduction opportunities that your scale provides you and any color there would be helpful?

Good. Thanks Amir. Yes. So I think that this is all point to where the future growth of the business comes from. I mean there is not many businesses where consumers want to consume more and more and if you look at it 86% of the usage is on the LTE network. And if you look at our More Everything accounts they are up 54% in consumption year-over-year. So, obviously consumers are willing to consume the content on their wireless devices which is why we were so optimistic around Internet of Things and of course over the top mobile. Now as you start to look at the densification and the efficiency of the network, as I said in my prepared remarks we are already starting to reap on the 1,900 PCS licenses in certain markets and we still have a long way to go there. Also we are looking at as I said the LTE unlicensed which is a really good fit with the licensed LTE piece which will give us a lot more download capability in a managed network comparability. So there is a lot that we can still do around our spectrum and efficiency and obviously with the LTE network as you have seen with 86% of that traffic running on it with a 54% overall year-over-year increase the cost structure of the business really has not changed because the ability to deliver this on a very cost efficient network is there. So I would just continue to say that as we continue to grow on the consumption model what we did in the AWS spectrum in buying the licenses and our plan to build out and densify, I think we are in a very good financial position to execute on that in a very financially disciplined manner and continue to generate the returns that are expected of us.

Great. And then one quick follow-up if I may, you folks have been consistent noting that de-leveraging the balance sheet is the priority for you. And as you mentioned it seems as though the approach you took to the AWS-3 bidding process seems to reflects that strategy, how should we think about your ability or resources available to pursue other assets in the market, specifically I am thinking about the potential broadcast spectrum auction or any material third party portfolios if they were to come to market?

I think look I mean we are very focused on our balance sheet and we are committed to de-lever and as we said coming out of the Vodafone transaction we had four priorities. One was to continue to invest in our networks and platforms, which we are, to buy spectrum, which we did to have a competitive dividend payout, which we are and to de-lever the balance sheet. And we will continue to do all that. As far as any type of strategic acquisitions or additional spectrum we are probably alluding to the incentive auction and I think that we are just going to have to wait to see what the rules are before we decide how we are going to execute on or around the incentive auction. So I think that still a little bit ways out before we can make that decision. But look, we have positioned the balance sheet to be able to execute on the strategies that we need to execute on in order to deliver the future growth and earnings of the business. And I think we are in a very, very sound position to do that.

Great. Thank you very much for the color.

David next question please.

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

Hi, Fran. Thank you for taking the question. I wanted to ask about over the top video service offering, I know we are going to see a more formal unveiling this summer, but can you just discuss kind of the news floor, what we should be honing? And two, as you go into that announcement, I mean, I assume it’s more content announcements? And then on the packages you announced last week, should we consider this separate from the OTP or kind of a precursor of this integrated wireline – wireless model?

Okay. So, first on over-the-top video, as we have talked before you see us announcing some of the content deals that are in this, but it goes back to what I said before, this is all around having the consumer consume more content on their wireless handset through the Verizon wireless network. And we know that consumers want one content. We know what the viewership is and this is appealing to mobile content and let’s not confuse that with linear TV content. So, I would not read into the Custom TV package as a precursor to the over-the-top video, it’s not. These are two very distinct ecosystems. As far as the monetization model, when you think about the monetization, there is many different avenues we can do on this. There could be premium subscriptions. There could be pay-per-views using the multicast technology. There can be advertising model so that the consumer does not pay for the content consumption or as others would call sponsored data. So, I think there is lot of models that we can use and I hate to say this, but let’s wait until Marni and team are ready to make the big splash here this summer and then we can have more discussion around what it means.

Great. Thank you very much.

David, we have time for one more question if we can take the last question please.

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

Thanks guys. Fran, the wireless data growth is fairly incredible at this size and base. Do you think you have pricing power for wireless data to your competitors aren’t really charging all that much for? Do you think that will change in the industry as maybe the networks get filled up, your thoughts? Thanks.

Well, I think this is the great lead way into the over-the-top mobile. And it’s developing more ecosystems around monetizing the consumption that happens on the network. Obviously, we are in a period of time where we see the service pricing dilution because of the installments out. And I think that will continue. And of course, we are increasing bundles, so more data for the same price, but this is no different, Tim, than what we saw on the voice world way back where we had a price and then all of a sudden everybody started seeing dilution on the minute per minute price, because more minutes were being given away in the bundle and we saw a little bit of access accretion, but overall, pricing was coming down. And then all of a sudden, the usage tracks started up again and revenue took a turn. And I think that’s the piece that we are in with – right now with the data world, but the key to this is to develop these other ecosystems to create more monetization around customer usage whether that’s premium subscription pay-per-view or advertising models. And that’s really what we are concentrating on.

Thank you.

David, thank you. Before we end the call, I would like to turn it back to Fran for a few closing remarks.

Thanks Mike. Thanks for everybody for joining Verizon this morning. We are absolutely off to a good start to the year. We stated coming out of the fourth quarter that we return to historical margin in wireless and we delivered on that. We also stated that we would continue to improve the profitability of our wireline business and we delivered on that. We had a good growth quarter. We had strong profits and strong cash flows. We look forward to a very positive 2015 and we look very hopeful and confident in our ability to execute on our strategy, grow the business profitably, and invest for the future. Thanks everyone for joining us today.

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