Brady Connor - SVP, IR Lowell McAdam - Chairman & CEO Hans Vestberg - Incoming CEO Matthew Ellis - CFO

John Hodulik - UBS Simon Flannery - Morgan Stanley Philip Cusick - JPMorgan David Barden - Bank of America Brett Feldman - Goldman Sachs Michael Rollins - Citi Craig Moffett - MoffettNathanson Jennifer Fritzsch - Wells Fargo

Good morning, and welcome to the Verizon Second Quarter 2018 Earnings Conference Call. At this time all participants have been placed in a listen-only mode and the floor will be open for questions following the presentation. [Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time. It is now my pleasure to turn the call over to your host Mr. Brady Connor, Senior Vice President, Investor Relations.

Thanks, Brad. Good morning, and welcome to our second quarter earnings conference call. This is Brady Connor, and I'm here with Lowe McAdam , our Chairman and Chief Executive Officer; Hans Vestberg, our incoming Chief Executive Officer; and Matt Ellis, our Chief Financial Officer. As a reminder, our earnings release, financial and operating information, and the presentation slides are available on our Investor Relations website. A replay and a transcript of this call will also be made available on our website. Before I get started, I would like to draw your attention to our Safe Harbor statement on Slide 2. Information in this presentation contains statements about expected future events and financial results that are forward-looking and subject to risks and uncertainties. Discussion of factors that may affect future results is contained in Verizon's filings with the SEC, which are available on our website. This presentation contains certain non-GAAP financial measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are included in the financial materials which we have posted on our website. The quarterly growth rates disclosed in our presentation slides and during our formal remarks are on a year-over-year basis unless otherwise noted as sequential. Before I turn the call over to Low for his remarks, let me start with a walk through of the second quarter consolidated earnings on Slide 3. For the second quarter of 2018 we reported earnings of $1 per share on a GAAP basis. These reported results include a few special items that I would like to highlight. Our reported earnings this quarter included charge for product realignment of $658 million, mainly related to the discontinuation of the go90 platform and associated content. Severance charges of $339 million, and acquisition integration related charges of $120 million primarily consisting of costs pertaining to Oath. The net impact of these items after-tax was approximately $0.9 billion or $0.20 per share. Excluding the effect of these special items and the net effects of tax reform and the adoption of the revenue recognition standard adjusted earnings per share was $0.99 in the second quarter compared to $0.96 a year ago. On a comparable basis adjusted earnings per share before the impacts of tax reform and revenue recognition were up 3.1% year-over-year. Let's now turn to Slide 4. Consistent with the approach we established last quarter we have provided a table that illustrates the ongoing effects from the adoption of the revenue recognition standard on our financial results. As a reminder, the adoption of the revenue recognition standard results in a reduction of the wireless service revenue offset by an increase in wireless equipment revenue, as well as the deferral of commission expense in both our wireless and wireline segments. The impact from this change has been fairly consistent throughout the first two quarters of 2018. On a year-to-date basis, the cumulative impact of revenue recognition was $0.14 per share. For the full year we expect the impact of earnings per share to be between $0.27 and $0.31. The accretive benefit to operating income in 2018 is expected to moderate in 2019 and then become insignificant in 2020 as the timing impacts to revenue and commission costs converge. But the remainder of this call, financial results will exclude the impact of this accounting change to provide clear comparability with prior periods unless otherwise noted. With that, I will now turn the call over to Lowe.

Thank you, Brady and good morning everyone. This is the last time I'll have to discuss Verizon results with you so I'd like to take a minute and offer some perspective after serving as Verizon CEO for the past seven years. When I first took over from Ivan in 2011, the company was well positioned for the future. We were leading the charge in the wireless industry by pushing the ecosystem and driving new user experiences with our robust launch of 4G LTE service. We were growing our fiber to the home business, Fios, and expanding penetration in highly competitive markets. The company had a strong balance sheet and financial profile so that we had the flexibility to execute whatever strategy we chose. If I look at where we are today, once again the company is well positioned for the future. Our financial and operating results for the first half of 2018 are strong as evidenced by our service revenue, earnings and cash flow growth. Verizon has 100% ownership of our wireless business and it's industry-leading network and customer base. We have driven the 5G ecosystem by pushing the industry to adopt the next-generation several years ahead of original expectations. And we are positioned to be the clear leader in the deployment of 5G services based on our technological expertise, asset base, engineering talent and spectrum portfolio. This leadership position is attracting opportunities in areas such as over-the-top TV, smart cities, transportation, education and healthcare; just to name a few. I believe the impact of 5G on consumers will be much bigger than any previous generation but the biggest impact will be on businesses as we provide the platform for the fourth industrial revolution. We know the consumer requires a mobile first digital information experience, and the new businesses that we have added such as Oath and our IoT platforms are poised to be at the forefront of enhancing our ability to meet this growing customer demand. Our Fios business and our recent one fiber expansion have proven that fiber-based network solutions will continue to be in high demand and can take significant share in mature markets. The cornerstone of our strategy will always be network leadership and customer experience. Verizon has an outstanding leadership team, a unique portfolio of assets, solid financial profile and a strong balance sheet that enables us to deliver on the promise of the digital world. I'm also pleased to mention our recently announced tentative agreement with our unions to extend our labor contracts through August 2023; this will give all of our employees the ability to focus on our customers and execute our strategies without disruption. One of my least fond memories as CEO was a strike five days after taking over; I'm glad Hans won't share that experience. What Brady didn't tell you when he started the call this morning is that the four of us are in Houston, Texas; it's an honor for us to be in Houston today to talk about our second quarter results, spend valuable time with our employees in the area and celebrate the quality of our customers in this great city. We have an excellent relationship with the city, with Mayor Turner, and with the greater Houston area, and we are very proud of our overall customer experience, network performance and community involvement, especially during some of the hardest times like Hurricane Harvey. Verizon and the nation's best wireless network worked tirelessly to provide customers, loved ones, and first responders with an unparalleled level of reliability and quality when it matters the most. It is with great pleasure that we announce here today Houston as the third of our four initial commercial launch markets for our 5G residential broadband service that will be rolled out later this year. This is an exciting time for our company and the industry; I couldn't be more pleased with the progress that Verizon is making and our recent appointment of Hans Vestberg as CEO solidifies the leadership of this great company for years to come. As I've said before, I'm confident that Hans is the right person to bring Verizon and into it's next chapter and he is the energizing force we need to position Verizon to lead the upcoming fourth industrial revolution. Matt will now take you through the details of our second quarter financial results which highlight the strength of Verizon. Hans will then outline our strategic priorities and talk about the opportunities that lie ahead. With that, I'll turn the call over to Matt.

Thanks Lowe, and thank you for the many years of leadership and the support and encouragement you have provided to all of us. I'd like to start by reviewing the consolidated results on Slide 6. Consolidated revenue was $32.2 billion on a reported basis including the impacts of revenue recognition. Excluding the impact of Oath and divested businesses, consolidated revenue is $30.2 billion, an increase of approximately 2.6%. The wireless business continues to be the primary driver of growth generating solid service revenue results. On a GAAP reported basis, we are expecting low to mid-single digit percentage consolidated revenue growth for the full year. The update of full year revenue guidance is due to better than expected equipment revenue trends. Excluding special items, second quarter adjusted EBITDA margin was 35.6%, down from the prior year's margin of 36.5%. Adjusted EBITDA increased $0.2 billion due to service revenue performance and as we continue to drive operational efficiencies across the business. Strong revenue momentum and solid margin performance keep us on-track to achieve low single digit percentage growth and adjusted EPS in 2018 before the net impact of tax reform and revenue recognition. We expect the effective tax rate for the full year of 2018 to be at the low end of our guided range of 24% to 26%. Let's now focus on cash flow results and the balance sheet on Slide 7. Our business segments are generating substantial cash flows. During the second quarter of 2018 cash flow from operating activities totaled $9.8 billion, an increase of $1.9 billion from the prior year and $3.1 billion sequentially; this was driven by strong results from the business, benefits from tax reform, and the completion of the transition to on balance sheet financing of our device payment plan receivables. But the second quarter -- capital spending was $3.3 billion bringing the year-to-date spend to $7.8 billion. We currently expect capital expenditures for the full year to be closer to the lower end of our guided range of $17 billion to $17.8 billion driven by efficiencies from our business excellence initiatives and CapEx management process, as well as the Intelligent Edge Network design. 2018 capital expenditures include deploying 5G for both, residential broadband and mobility launches. Free cash flow totaled $6.5 billion in the second quarter. We ended the quarter with $114.6 billion of total debt which was comprised of $106 billion from secured debt and $8.6 billion of secured debt. As we stated at the beginning of the year, we intend to use the majority of the benefits from tax reform in 2018 to strengthen the balance sheet. We began to realize these benefits during the second quarter and our total debt balance declined by $4.4 billion sequentially. Our capital allocation methodology remains consistent focused on having a strong balance sheet with improving credit metrics while continuing to invest in our businesses and returning value to our shareholders. Now let's move on to reviews of the operating segments starting with wireless on Slide 8. Total wireless operating revenue increased 4.7% to $22.3 billion in the second quarter. Service revenue continues to generate strong results producing a 2.5% increase excluding the impact of revenue recognition driven by customer step-ups to higher access plans and increases in the average connections per account. Sequentially, service revenue increased by 1.5%. On a reported basis including the impact from revenue recognition, service revenue increased by 0.8% on a year-over-year basis. Customer migration to unsubsidized pricing continues to approach a steady state, currently at 82% for the quarter as compared to 75% a year ago, and 81% in the first quarter. In the second quarter equipment revenue increased 6.8% driven by higher priced handsets more than offsetting a reduction in activation volumes. Approximately 49% of our postpaid phone base had an outstanding device payment plan at the end of the quarter consistent with the prior year. Our wireless EBITDA was $10.3 billion in the second quarter which represents an increase of 5.5%. As a percent of total revenue EBITDA margin was 46.2%, up from 45.8% a year ago and was relatively flat on a sequential basis. Let's now turn to Slide 9 and take a closer look at wireless operating metrics. Wireless continues to deliver solid results driven by the quality of our network experience and strong customer retention. In the second quarter net phone additions were 199,000 including 398,000 smartphones, postpaid net adds totaled 531,000 including tablet net losses of 37,000 offset by 369,000 other connected devices led by wearable's. Our postpaid phone churn of 0.75% is a result of our compelling customer experience on the nation's best network. This represents the fifth consecutive quarter of customer retention at 0.80% or better. Total retail postpaid churn of 0.97% was slightly up compared to 0.94% in the prior year. In the quarter, postpaid device activations were 4.6% lower than the prior year of which about 80% were phones. Our retail postpaid upgrade rate was 5.0% as compared to 5.6% a year ago. During the quarter, 5.8 million phones were activated on device payment plans. Prepaid activity in the quarter reflected a total net loss of 236,000 devices compared to 19,000 prepaid net adds in the prior year. 150,000 of the prepaid losses in the quarter were basic phones. Now let's move to our wireline segment on Slide 10. Total operating revenues for the wireline segment decreased 3.4% from the quarter due to ongoing secular pressures from legacy technologies and competition, partially offset by growth from our high quality fiber-based products. Consumer markets revenue decreased 1.4% driven by legacy core declines partially offset by Fios growth. Fios consumer revenue increased by 1.7% primarily due to our broadband offerings. In Fios we added 43,000 internet customers and had video losses of 37,000 in the quarter. Internet ads were driven by strong demand as customers value their broadband connection more than ever before. Video results continue to face macro pressures from chord-cutting [ph]. Enterprise Solutions revenue decreased 4.2% from the quarter driven by declines in legacy services partially offset by growth in our fiber-based products. On a constant currency basis, revenue is down 5.1%. Partner Solutions revenue declined 2.8%, the increasing customer demand for fiber access is a growth opportunity for this business and is mitigating declines in copper-based products. Within business markets revenue decreased 7.4% mainly due to reductions in CPE sales and ongoing headwinds from legacy services. Fiber-based products continue to grow and are becoming a more significant component of recurring revenue. Wireline segment EBITDA margin was 19.6% excluding the impacts of revenue recognition. Price compression on legacy products, secular trends and increasing content cost continue to pressure wireline margin performance. Excluding the impact from revenue recognition we expect margins to be around 20% for the near-term. Let's now move on to Slide 11 to discuss our Media and IoT businesses. During the second quarter the Oath team continue to build out and operationalize it's content strategy and make progress towards the integration of Ad products into one interlinked cross platform and cross device solution. As we highlighted on our last call, the video platform became integrated in the first quarter. During the second quarter, half of the demand side platform for Ad inventory was integrated and Oath is on-track to complete integrating the remaining components of the platform within the second half of the year. We expect to see momentum build after advertisers and content owners have the ability to come to us on a single platform. For the second quarter Oath revenue is $1.9 billion which was relatively flat on a sequential basis. In our telematics business, total Verizon Connect revenue was $241 million. Total IoT revenue including Verizon Connect was up approximately 13%. Let's now move to Slide 12 to summarize our second quarter results. We delivered another strong quarter of financial results and our business is well positioned for growth into the future. Consolidated revenue growth was led by wireless service revenue turning positive, inclusive of the headwinds from revenue recognition. Our unlimited offerings are evolving to provide a new level of flexibility enabling people to customize their experience on the nation's best network. Churn rates remain low signaling excellent customer satisfaction and retention of the nation's best wireless customer base. Last year we announced our goal to drive $10 billion in cumulative cash savings throughout the business over a four year period. Our business excellence initiative which includes zero-based budgeting is off to a solid start in 2018, it has yielded approximately $500 million of cumulative cash savings on a year-to-date basis. Most of the incremental cash savings realized in the second quarter related to network activities and are reflected in the lower total capital spend. The program remains on-track to deliver against our goals over the four year period. Adjusted earnings per share for the quarter increased year-over-year driven by the strength of our revenue performance and operational efficiencies realized across the business. Finally, we are making significant strides in honoring our commitment to strengthen the balance sheet. We substantially reduced net debt within the quarter and the business is generating strong cash flows as we prepare for the upcoming launch of 5G. With that, I'll now turn the call over to Hans to discuss our strategic priorities.

Thank you, Matt and good morning everyone. First, let me say that it's a great honor to be named successor to Lowell, and I'm humbled by the opportunity to lead this great company. I'm looking forward to being part of leading the digitalization era into the more technology advanced market in the world which will have significantly positive impact on consumers, industries and our society for decades to come. During my tenure with your Verizon I've been actively involved in setting the strategy and priorities for the company alongside Lowell, the board, and the rest of the leadership team. We have a laid our focus on execution on the fundamentals, we're positioning the business of future growth, maintaining a disciplined approach to capital allocation, and driving sustainable financial performance for long-term value creation. We remain committed to announcing our network leadership position, strengthening our customer relationship, and driving efficiencies throughout the business. Verizon has assets in place to develop and provide the most advanced next-generation network which we called Verizon's Intelligent Edge Network. We are positioned for growth in the current generation and we are leading the way to fully capture the significant opportunity that lies ahead in the transition to the fifth generation of wireless services. We continue to be the clear leader in 4G performance driving further innovation, growth opportunities and implementing new network capabilities that will further enhance our customer's experience. We have made the strategic invest in millimeter way [ph], spectrum that enable ultra-wideband 5G services. Our fiber [indiscernible] would build out on the way in over 50 markets outside of our higher ILEC footprint that will allow us to take full advantage of the many used cases that will come to bear in 5G. Our Intelligent Edge Network design allows us to realize significant efficiencies by utilizing common infrastructure [ph] in the core and providing flexibility at the edge of the network to meet customer requirements. Our Oath and IoT assets will provide a platform for us to participate in the use cases that 5G will enable. We're rapidly approaching the launch of our first use case for 5G with a roll-up of residential broadband services. As you know, Sacramento and Los Angeles are two of four initial commercial launch market and you heard Lowell earlier announce Houston few minutes ago. News and updates on our full [ph] market will be provided soon. Residential broadband is here the first of many use cases for 5G that will be deployed on our multi-use network. Progress is well on the way across all of the use cases and we remain focused on providing 5G mobility in 2019. I'm super-excited for the future, we're on the cusp of the fourth industrial revolution and we have the assets in place to take full advantage of the opportunities that lie ahead. Now I will turn the call back over to Brady so we can get to your questions.

Thank you, Hans. Brad, we are now ready to take questions.

[Operator Instructions] The first question comes from John Hodulik of UBS.

Lowe, first I'd like to say congrats on your retirement and your career at Verizon, it's been really -- I've really enjoyed working with you over the years. And also quickly for Hans, it will be great working with you as you take the reins going forward. So Lowe, during your tenure as CEO you've really -- Verizon has really stuck to it's core competency of wireless network leadership while other companies have moved to diversify into adjacent areas. How confident are you that this is the right path? And as we look ahead to 5G deployment and adoption, do you believe that Verizon can sort of widen the gap and create a sustainable advantage versus other carriers [ph]? Thanks.

I think your strategy is based on the assets that you have in your portfolio and where you think you can go with a high degree of success. We talk about competing to win, we don't want to play to play, we want to play to win. We've looked at the things that we've done, network leadership is at the core, it's part of the values of the company, every individual here is proud of what we do on network leadership; and we've stayed close to that core, branching out though into things like Verizon Connect and Oath is a very logical near progression for us, and we see the advantages that will strengthen the core going forward. If I look at the things I'm proudest of, it's the things that you mentioned that we've done and pushing the envelope on 5G and 4G are some of those. I also love to say a little bit with a smile on my face, I'm glad we didn't follow a lot of the things the analysts and the bankers told us we had to do and that's put us in a position now that Matt outlined where we've got a strong balance sheet, we've got a clear strategy, and I think we are going to put a significant distance between us and the competition; and the first mover on the network generation changes usually gains a significant amount of market share, and with the assets that we have we think we're in that position with 5G.

The next question comes from Simon Flannery of Morgan Stanley.

I also wanted to share my best wishes to Lowell, good luck with your retirement. Good to hear the news about Houston; you've talked about a $30 million plus opportunity for the residential broadband, can you just help us think about the pacing of that? How are you thinking about the initial timing of the rollout? How many markets we'll see in terms of pops covered over the next 12-24 months? And then on the mobility side, you're starting to talk about that a bit more, we've heard some of your competitors talk about how many markets to launch this year; how rapidly do you think you're going to roll that out? And is that all going to be microwave or you're going to use some lower balance [ph] for the mobility 5G? Thank you.

So when it comes to the fixed wireless access, so as I said in the beginning, we will have an initial commercial launch of four markets this year, that's going to be based on our sort of software that we developed in the beginning calling TS [ph]. We are preparing the whole network with Intelligent Edge Network to be ready to launch 5G based on the and/or [ph] standard that is coming out right now; and vendors -- and again, equipment manufacturers and OEMs are preparing right now. So we will be ready as soon as that has the majority to be released to our customers; so that they will come back when we'll go for the full 30 million households which is our own ambitions that we have explained before. So that's where we are on the fixed wireless access. On the mobility, we do the same. Remember the Intelligent Edge Network is a multi-use network, so it's a same rate base station that is going to provide our fixed wireless access as mobility. So we are and as I said before, I mean we are now in deployment on fiber in more than 50 cities. So we are preparing everything to be ready for the majority of the equipment and the software's as well as having the CPE and handset market ready for launching those products, and right now that's the ambitions we see in 2019, we have not named the cities but as you can here we are deploying in 50 markets with fiber sales [ph], and I think that's an important point of it. So that's where we are and we will come back and give you updates all the time on the new things we're doing and today we're now launching the third city here in Houston, we're super excited over that; so we'll continue to flow all the information on what we're doing on 5G.

And when should you launch the first of the Sacramento, LA, Houston? Is that going to be in the third quarter or more likely the fourth?

Good question. Well, as we say -- we say that in the second half of 2018; so we promise we will come out and tell you as soon as we know exactly the date.

The next question comes from Philip Cusick of JPMorgan.

Hans, can you talk us through what's happening on the CapEx side to move towards the lower end of the guide; are you doing less this year than you expected or just getting more for it? And where are you in the shift of spending and focus from macro towers to more fiber and small cell? Thanks.

I think this is a great question; remember when I came in -- we decided together with Matt, Lowell and the whole management team to actually flip the whole network to the -- sort of the horizontal Intelligent Edge Network. And I also experienced there were two important factors where we did that; one, we wanted to deliver new type of services based on a horizontal network, especially the ones coming from 5G and we want to see some of them coming up very shortly. The second was that we also could be so much more efficient with new technologies in multipurpose equipment. At the same time we put in the new process for capital efficiency that Matt and I are sharing, and I think that's what you're seeing right now; we are actually doing much more than before when it comes to deployment. Then as we say here, we are already deploying 5G things at the moment, we're preparing all the network for it, so that's embedded in the numbers that you see. At the same time we also are making a big shift in our whole spending; I mean if I look what we spend in 2017 in the capital result CapEx than in 2018 it's very different; so we're also making shift at all time but this is nothing that we're limiting, we used our more efficient of using our capital and my engineering team are very happy with the investment that we're doing at the moment. So I think that we are also -- as you said, we are moving over to much more small cells than making bigger towers and macro cells. And I will say, if you go back a couple of years ago our -- majority of all our investment was on macro towers and today the majority is on densification with smaller cells. So we have shifted dramatically over the years and I've only been part of it now for more than one year but I've seen how the engineering team is responding to the new way of working and setting up the whole new network structure. So that's what you seen in the figures.

If I can follow-up; anything you can tell us given that efficiency about where 2019 CapEx might be upward or downward from 2018? Thank you.

We'll stay consistent with what we've done in the past where we'll talk about 2019 we get closer to that but I think we've been pretty consistent in our commentary that -- look, we expect CapEx to be reasonably consistent and as we [indiscernible] is to accelerate any spend on 5G as we see it but it's little too early in the process to get there yet. I'll just remind you as Hans said, a lot of the spending that we've been doing around densification supports both 4G and 5G. So the network really is in a great position to be preposition for us moving into 5G here without it requiring a significant step change in total spend. We've done this before, has moved from one generation of technology to another, and keeping total CapEx spend fairly consistent and we're confident we'll do that again.

The next question comes from David Barden of Bank of America.

Matt, could I just ask some questions on the finance side, just on the lower tax guide -- could you talk about the reasons why that is and is that flowing through to the cash flow side of the equation, and do we need to address that in the free cash flow number as well? And then the second one is, could you talk about -- I think as we've done historically, some of the changes in the union contracts forthcoming -- how should we think about that impact on the cost structure, I know you gave us about 20% margin in the wireline side for this year but is that -- did those negotiations give you some window in potentially having some upside in that margin number in the wireline business? Thanks.

I'll start with the tax question. So, as you look at the first half of the year the ETR [ph] was impacted certainly by tax reform but we had a couple of one-timers in there, especially related to the pension contribution we did in first quarter that you wouldn't see necessarily flow through to the second half of the year, so that's why we're guiding towards the lower end of the 24% to 26% range for the year as a whole. In terms of it flowing through to the cash flow; you know, I would say certainly you should expect cash taxes to be positively impacted this year by tax reform. We didn't have that in the first quarter because we had no scheduled payments; as you know, second quarter we had the first of two scheduled payments for the year and so started to see those flow through, expect to see lower tax rate flow through to our cash tax payments in the rest of the year and that's certainly behind the commentary that we gave around the ability to strengthen the balance sheet this year. So expect to continue to see the benefit from the lower tax rate. I'll let Lowell answer your question around the new union contract.

David, we're really pleased with the relationship that we've built with the union. During the last contract we get together at the senior level very frequently, we've been able to deal with some issues that had been thorns on the side for both, the union leadership and members, as well as the company. So when we decided to attempt to get a contract literally a year ahead of expiration -- that was a major change in our relationship, and I would like to thank the union leadership for the way -- the approach that they took during this. As far as your financial projections; I would say just continue with the projections that you've seen, we do have increases and contributions and that sort of thing but it's not a significant change to the bottom-line trajectory that you've seen the way it was after our last contract. But the beauty of all of this is now the management and all of our employees can focus on our customers and deploying 5G and deploying fiber, and they can all focus on work and their families and the customer instead of getting ready for a strike; and so we're very, very pleased about this outcome.

The next question comes from Brett Feldman of Goldman Sachs.

Thanks. And I'd also like to extend my congrats to Lowell for a distinguished career, and to Hans for the opportunity that lies ahead. I was hoping I could ask about postpaid ARPA; that metric has been under pressure for the last several years although it's shown a lot of stabilization recently. And even though you don't breakout phone ARPU intrinsically, we all know that it was phone ARPU that was causing that pressure as subs moved into EIP, and more recently into the unlimited plans. It seems like the EIP transition or the unsubsidized transition is fully behind us, I'm not entirely sure we are in the migration to the new unlimited plan; so I guess I was just kind of hoping you could talk through the drivers of postpaid ARPA going forward. Do we still have any headwind on the phone side, is that becoming a tailwind? And then of course you've highlighted you are seeing a lot of other devices including wearable's come into your accounts? Are we starting to get to the point where that's becoming a meaningful positive driver on ARPA as well? Thanks.

As you look ARPA, you're right that the transition to the device payment plans is essentially complete, the year-over-year difference in terms of the percentage of the base unsubsidized pricing is now in single digits as far as a year ago it was much more significant; so that shows up in ARPA. The other good things in the ARPA though is -- you continue to see the demand for our products and services, so we continued in the quarter to have our customers step up in terms of the plans they are on, whether that be from a metered [ph] plan to unlimited or even within our unlimited plans that we offer. And then we continue to see increases in connections per account whether that be wearable's or additional phones on the account; those things are coming through to ARPA and you see the impact there on service revenue overall. So certainly ARPA is stabilizing and we think as we continue to offer the right plans to customers and we continue to give them the opportunities to add additional devices to their plans that it's an area where we can continue to help drive revenue growth going forward.

Have you broken out how many of your customers are on unlimited plans? I apologize if I missed that.

We have not. As we said previously between unlimited and our Verizon 2.0 plans where customers have the ability to control over Edge, that would be significantly above 50% and certainly the number of customers unlimited continues to grow but we haven't broken that out at this point but it's becoming certainly a larger and larger percentage at the base.

The next question comes from Michael Rollins of Citi.

First on the strategic side; as I listened to the management commentary over the past year -- is the underlying goal for Verizon to become a leading provider of broadband in the home and on the go across the country? And if this is the direction how long would it take and how much can be driven by internal investments versus possible M&A? And then just one thing on the business trends; postpaid phone were at the industry level has risen more than twice the rate of population growth, do you have any thoughts on what's driving this change and the sustainability for postpaid phones at this new level of growth? Thanks.

Maybe I can start with the network question that you had on broadband. I think when I look into the assets we have and I've been now working here for quite a while; I really like the assets we have and the ones we're building, that will give us the opportunity to be much larger, broader than providing and I think the announcement that we did today that we now are having using it as well and we will continue without communication on the new cities we are going to deploy on; 5G gave us that opportunity. But we need to remember when we talk about 5G -- 5G is an access technology, there is so much more you need to do to actually have it, when I look what we are doing all the way from the data center with fiber unified transport, multi-service routers, they are all way -- I see that this is a big undertaking but we are in the midst of it and I've said a couple of times before -- I mean we have been onto this Intelligent Edge Network right now for quite a while and we see the benefits and we see the opportunity that is great. So you're right, of course it's going to take time to have it across the country but as I mentioned, we're already now deploying fiber in 50 cities. So we will come back and give you more color to it but I think we are preparing the network to be really using the networks and levering the efficiency markets; so that's for us a very important piece of it.

On the postpaid phone, you know we continue to see consumer demand there. And we believe certainly we'll give customers the opportunity to get on the nation's best network and we have the right price plans, we see good things happen there; so I can't comment in terms of the industry volumes overall but we certainly continue to see good consumer demand and we expect to continue to have postpaid phone net growth going forward, and we'll see how that plays out across the rest of the industry. One other comment I'll just add on the network side is, in addition to the broadband pace -- as we've talked about the strategy, it's -- once you have that pace what we -- the services that we can provide above that connectivity layer are also very important as we go forward, and we think we're in a great place to be able to deliver on that too. So hopefully that helps your questions, Mike.

And Mike, I think I'd just add one thing; it's funny when you're at this point in your career you get to look back and you see an awful lot of similar questions but just asked in a different way; I remember when we brought Verizon together back in '99 and we had about 20% market penetration on postpaid and there was no smartphone and people were saying, where is the industry going, you can't possibly get anymore penetration than you've gotten. And at that point I pointed to areas like Sweden, Hans's home country that was at 50% penetration, and we're -- see we've got all sorts of headroom and now we're over 100% penetration and you see wearable's, and with 5G, and Hans mentioned this, and I mentioned it in my opening remarks, you're going to see so much more penetration on all of the different business applications that are going to change people's lives. I really don't think much about postpaid or smartphones or any category you want to look at as an opportunity for future growth, there are so many things that we have literally 0% penetration on today that are going to be big businesses five years from now; that's why I'm so excited to see the way we're positioned and the leadership teams philosophy around dealing with customer pain points and providing on the products that they're going to need that will be indispensable five years from now; so that's my perspective on that.

The next question comes from Craig Moffett of MoffettNathanson.

Good morning, and let me join the parade of people saying congratulations to Lowell, it really has been a pleasure and also congratulations to you, Hans, I look forward to your great success. Let me ask a strategic question about video if I could; you've discontinued go90 in the quarter, there have at least been press reports about -- at least some discussion about how you move forward with Oath and whether Oath addressable advertising might actually be more successful outside the company instead of inside the company. I wonder if you could just talk about the role that you see video playing -- and now that you've had some time to play around with some of the different strategies around video and addressable advertising, and then as part of that if you could specifically comment on the situation in the press reports about Oath that would be helpful.

Let me deal with those in reverse order there Craig and then I'll let Hans come in and put a period on it. The questions around Oath -- I don't know where they're coming from. There is no intention of spinning out Oath in any particular format. We see the synergies that we expected to see and we see the future that we had hoped for. Matt talked about in his remarks the integration efforts that are going on, they are on-schedule, and so we see no reason to do that and there's no credible report out there that are otherwise in my view. So I'd be clear about that. On the video side, look that is the major driver of traffic that we see on the network today; we only expect that to go up overtime. But we're not fans of linear but I'm not trying to criticize anybody else's strategy here, it's just the fact of the assets that we have and the investments that we want to make, it's much better in our view to do digital; so we're -- as we've always said skating to where the puck is going, so that's where we're focused. I was very heartened by our time in Sun Valley two weeks ago, Hans went and we met with all of the major content providers, the sports leagues, healthcare, education, gaming, all of those segments and every one of them when they know what is going on with 5G, and especially, the latency certainly along with the capacity but when they see the latency their eyes light up about what's possible. So my view is, and I know Hans shares this -- we've developed these strategies together, he has always been one of my go-to-guys over the last five years to see where the industry is going but it's our belief that we're positioned perfectly to have the partnerships that we need to be successful; we're not going to be owning contents or we're not going to be competing with other content providers, we're going to be their best partner from a distribution perspective and I think that makes great sense for the company going forward.

And I can [indiscernible], I've been around now for quite a while, both as leading this but I've been seating together with Lowell, the management team, and the board on the strategic decision we've done and I'm fully onboard on all of them. And when I look at the assets we have, I'm really happy with them and I'm encouraged to see what we can do with them both, leverage them. And we also are going to get more of the synergies that Lowell talked about all of them [ph], and just talking about the Oath, for example; I mean today with the massive confidence we have in Oath when it comes to AIML [ph] and we are in the transformation of our network to virtualization that's a great synergy and creating a lot of newer possibilities for us on the front and we're constantly working how we can actually leverage our assets on our sort of the Verizon side and Oath side and we will continue to find those ways forward. So I feel good about the assets we have and I agree with Lowell that -- and we can partner with anyone and again, we are betting on that, we're going to have the best network, Intelligent Edge Network, we want to have a great 5G, the best; and of course, we can attract partners that we can work with and I think that is the model that we have and that we can continue to develop. And I see only opportunities when we go to 5G when you can build to connectivity platforms and applications, and sort of define where you're going to play in that or where you're going to have partners. So I'm feeling encouraged about the assets we have and what we can do with them.

The next question comes from Jennifer Fritzsch of Wells Fargo.

Can I just explore the wireline CapEx component -- it's down about $500 million from the first quarter and yet I hear you're doing it 50 fiber [ph] cities. Can you talk Matt maybe about the -- should we begin to see that wireline portion of that CapEx ramp as this fiber build comes together? And then I guess what does that mean for what I'll call traditional wireless spend? And then just separately on millimeter ways background, we do have an auction coming up in November, you guys have a lot of spectrum here; can you comment on interest if that might be part of your focus from the fall [ph]?

So on the CapEx side, certainly as you look between first and second quarter you got timing in there; but as we build out fiber and as you say, we mentioned the 50 cities outside of the ILEC footprint where we're deploying fiber today -- you'll see a blurring of the line of the CapEx between the segments, so obviously that fiber build shows up in our wireline segment but the largest customer for that build is the wireless piece of the business, so this is part of densifying the network, prepositioning the network to not just excel in 4G but also be ready for 5G, especially using millimeter wave spectrum as you mentioned. So I would expect to see a continuation of those spend but the total CapEx number as I said earlier, you should see consistency there, and as you -- what you're seeing is the continued evolution of our CapEx from one generation of technology to the next, and fiber build out is a key component of that. So you should expect to see a continuation of those trends and as part of the Intelligent Edge Network that will deliver 5G, and we're excited about it as we go forward. And I'll let Hans talk about millimeter wave.

When we think about data usage of our network we usually talk in a couple of different ways in order to define what we need, and first of all we have the choice between densifying and deploying on more spectrum, I think that the last round of Oath spectrum we decided to densify and I think that is now paying out very well for us. Secondly, looking to all new type of technology and features coming out in a network that can optimize everything from carrier engagement, etcetera. And lastly, we of course look into what spectra we need to have; that is putting us in a very disciplined way how we use these three type of assets when we decide what to do in order to have the best return-on-investment. Of course, we are looking into any auction that's coming up and see how that fits in in that pattern of decision-making with these different type of options, so we will look into that. However, we're also feeling pretty good about the position we have on millimeter wave right now; but again, we will look into if there are any holes we need to feel in this process but again, it will be in that discussion all the way from densification, looking into new features on the technology, and then looking into what spectrum is needed, and then we have the disciplined approach to our return-on-investment.

The next question is from Matthew Nicknam [ph] of Deutsche Bank.

One, on 5G, what are you hearing from your larger commercial enterprise customers in terms of demand for specific use cases? I'm wondering if that can facilitate any sort of acceleration in your pace of builds heading into next year? And then secondly, maybe for Matt on tax reform, you talked about using the benefits this year at least to strengthen the balance sheet; how should we think about optimal leverage for the business today? And how do the uses of access cash and tax reform benefits -- how do I potentially evolve into 2019?

Let's start with the 5G and enterprise; you're right, when we think about the eight different currencies that 5G is going to explore or we'll have -- I think that enterprise is the receiver [indiscernible] when it comes to latency, security, launched throughputs and all of that. We are in constant dialogue with our enterprise customers to see how we can build new type of services with them, and of course, we were building the Intelligent Edge Network and here we have the definition of Edge, how we do a specific slice for an enterprise, and that could be private 5G network with low latency or something like that. So we see that as a great opportunity, there are some features if I be little bit deep on technology that come out on the next revision of the N or 5G technology which is on the sick revision 16 [ph], that will be even more important for our enterprise customer. But again, we are building these as we speak and we have dialogue with all our enterprise customers to see that we are actually innovating together with them, new type of service where you sort of doing your real-time enterprise based on wireless which haven't been done before. So I think we are very far on our innovation and exploration in this area and I see great opportunities in it.

On your question around tax reform and certainly flowing through the cash flow and the capital allocation; look, the capital allocation we've talked about this numerous times and we are focused on being able to invest in the networks, providing a return to our shareholders, we know the dividend is important and we've increased the dividend for 11 years in a row now, and we've also said we want to strengthen the balance sheet and get back to those pre-Vodafone credit rating profile, and certainly tax reform helps accelerate our ability to do that, that's our focus for 2018. You saw good progress in the first half of the year, not just on the debt paydown but also -- when we say we strengthen the balance sheet we include what we did with the pension contribution as well; so we're making good progress there, too early to give specific views on 2019 but certainly as you know, tax reform will help us get to those leverage profile's quicker than we would have done otherwise and look forward to updating you on 2019 when we get closer to it.

Thanks, Matt. Brad, we have time for one more question, let's go and take one more please.

Your last question comes from Tim Hurrian [ph] of Oppenheimer.

Do you still think you're going to be able to use wireless customer data in terms of location and usage to do more targeted advertising -- and if so, kind of the timing on that? And then secondly, it does seem like wireless and wireline networks are converging; I'm just curious, how do the unions kind of feel about this? Do you have the flexibility to kind of really converge these networks in a timely basis? Thank you.

Okay Tim, thanks for the question, and I'd just say to all of you that asked questions today, thank you for your best wishes. First, on customer data, our hallmark on this Tim is transparency; we don't want to use data though -- unless customers know how we're using it. And so far we've been able to do a broad data analysis and target our advertising not based on individual customer data but overall data. And I think that anonymous usage -- we're very clear with customers about, and it's certainly got a lot of value to the old facets. On the convergence side, we're honoring the contract within the footprint and we're very open with the union about what we're doing, and we're very clear that areas that we manage outside of the union contract will stay clean as we go forward. So again, transparency is important to us, we think we can do exactly what we need to do without causing any footfalls and we're open about it; so we don't view that as a hindrance to our strategy going forward.

That's all the time we have for questions today. Before we end the call, I'd like to turn it back over to Hans for some closing comments.

Thank you, Brady. And I would like to close this call with a few key points as I prepare to start my tenure as CEO of Verizon but I have to start by thanking Lowell for a fantastic journey and the fantastic job you have done, and you're going to be here in the transition and I'm really grateful for that. And yesterday like this when we're in the field, here in Houston, meeting employees, investors, we're meeting partners, and of course the city -- I think it shows the relationship you have built over the years, and handing that over to me and the team I think is enormous. So I have to chime-in [ph] towards everybody, as I said, it's a fantastic journey you've had Lowell. And coming back to the first half of 2018 where we've achieved solely financial and operational performance in a competitive marketplace, and we are -- we're pleased where the business is positioned as we start the second half of the year. And we remain focused on the core strength of developing superior customer relationship and building the next-generation network for long-term growth, and I've talked about Intelligent Edge Network and the importance for our business, and I'm pleased to see where we're all with that. We're also committed to our strategy, and prior [ph] just led by investing in our network, leveraging the assets across all of Verizon, using platforms such as Oath to further monetize data and video consumption, maintaining disciplined capital allocation process and creating value for our customers and shareholders. We're confident in our ability to execute on our strategy, and we're positioned to take full advantage of the many opportunities that will take shape as we lead the evolution into 5G. As we say at Verizon, we don't wait for the future, we build it. Thank you for time 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.