T-Mobile’s Business Push, Technology Advantages, and 5G Slicing with Daryl Schoolar

Full Transcript

0m10s Speaker 0

Hello, and welcome to the two hundred and fifteenth episode of the week with Roger, conversation between analysts about all things telecom, media, and technology by Recon Analytics. I'm Don Kellogg, and with me as always is Roger Hintner. How are doing, Roger?

0m23s Speaker 1

I'm good. How are you?

0m24s Speaker 0

I'm good. So it's earnings season again. Verizon just had their sell side analyst meeting as well as their Q3 earnings call. So I thought we could talk a little bit about that. What do you think?

0m35s Speaker 1

Yeah, so Verizon had an improving quarter, right? They had consumer postpaid net adds of 81,000. They had business postpaid phone net adds of 158. Prepaid excluding SafeLink added 80,000 on the broadband side. They added 389,000 in total, 363 of that were fixed wireless, and 26,000 were BIOS and DSL.

1m8s Speaker 1

I don't know who adds DSL these days, but okay, I believe them. They still lost 50,000 consumer accounts. So they are continuing to wring water out of a rock. I think what's important, and especially as we talk about also the Investor Day, is to look at Verizon through the lens that Verizon tells us that we should look at them. And to look at what their goals are, and how they're executing against that.

1m39s Speaker 1

And the three goals are wireless service revenue growth, adjusted EBITDA expansion, and strong free cash flow. And on these three metrics where management and the rest of the company is rewarded on, they are performing. The metrics that everybody else cares about, but they don't get rewarded for, you know, they're getting there, right? So I think that's what's really important to look at, and what a lot of people misunderstand is, look at the goals that they have set themselves, and that their board has set for them. And that's all that matters, right?

2m16s Speaker 1

And so churn has improved, but is not the best. Subscriber growth is still coming from the base. Broadband net adds have been slowing down. But, you know, as long as you drive wireless service revenue growth, and it's wireless, not wireline, right? Important.

2m36s Speaker 1

Or broadband, it's wireless service revenue. And as long as that drives EBITDA and strong cash flow, everything is okay. Will everything get better if and when they become a churn leader as they have been in the past? They are clearly trying to do this? Yes, it will come better.

2m55s Speaker 1

Their gross ads have gone up, and with gross ads, when you control for churn, your net ads come up. And so they need to drive more gross ads, and then everything else will become easier as well. And so I think that's really important when we look at Verizon, and especially when we look at what they talked about at their Investor Day, where they laid out their strategy for the next year, if not going further.

3m23s Speaker 0

So let's talk about that. What did we learn that was new at the Investor Day this year?

3m28s Speaker 1

What was interesting, right, is when you look at it today, they talked about the looming Frontier acquisition. They did not talk about the rebellion of several large

3m41s Speaker 0

Shareholders, yeah.

3m42s Speaker 1

Shareholders of Frontier about the price. But when they talk about broadband, at Fyres, they're building right now about a million passings a year with Verizon. That Frontier builds about a million passings for Frontier. And that when the two companies come together, the combined entities will also build 1,000,000 passings, you know, a year.

4m8s Speaker 0

I'm not sure about the math on that. That doesn't necessarily sound like synergy to me.

4m12s Speaker 1

Well, the math ties back again to the metrics, right? Broadband is not directly one of the service revenue growth. It's not also with the build, it's not in the EBITDA, but it shows up in free cash flow. And so what this tells me is they need to push up free cash flow, because basically revenue minus cost gives you EBITDA, right? So wireless service revenue plus the ancillary broadband revenue gives you adjusted EBITDA expansion.

4m44s Speaker 1

So they want to do more. And then when you subtract CapEx out of that, you get the strong free cash flow. In a very simplified way here, right? So don't nitpick us to death. I know there's more on it.

4m56s Speaker 1

But basically what this tells me is with the slowdown of expansion of a joint company, they are supporting here the strong cash flow. Now, this conflicts with their story about, oh, where we have fiber, we have more market share, we have like 5% more market share, and we have 40 basis points less churn. You know, it's a really good thing margin accretive. If it's really such a good thing, why not accelerate it? Why slow it down?

5m28s Speaker 1

The answer lies in probably in the free cash flow side. And so that's on the fiber side. On the FWA side, they also talked about the expansion that they hit their goal of four to five. They hit their 4,000,000 goal, fifteen months early, right? And we predicted this year left and right.

5m46s Speaker 1

And that they're going to go to eight to 9,000,000 subscribers. But Joe Russo, friend of the show who has been here, pointed out that the build for FWA is mobility driven, that they are not doing a build just for FWA. Which all has very interesting implications. When you know that today the wireless build with C band and millimeter wave is largely urban, They tell us and we see it in our numbers that 70% of their FWA customers are from urban areas. And that's where they build out.

6m28s Speaker 1

And over the next couple of years, they want to build out 80 to 90% of their mobility footprint. And we've done math around it in detail. They're probably mostly done with their FWA expansion, customer expansion in urban areas.

6m46s Speaker 0

Well, that's the lowest hanging fruit, right?

6m48s Speaker 1

It's lowest lowest hanging

6m49s Speaker 0

It's customer density, right? You don't have to worry less about propagation because it's denser. All the reasons. All that stuff, right?

6m56s Speaker 1

Yeah. But they also focused and most of their customers have come from urban areas. Contrary to T Mobile, which has a very spread out FWA customer base, and we see about give or take a third, a third, a third, right? So Verizon is much more concentrated, which to me means the FWE caravan is going to pick up its harvesting of customers from urban areas, and is moving further out to suburban and rural, as the mobility C band build goes in that direction. And so it should be good news for the cable guys, at least in urban areas, where Verizon's and the T Mobile's have harvested their customer base.

7m44s Speaker 0

We also know that Verizon penetration tends to be a little better in more rural areas because at least historically they tended to have better coverage in more rural areas. So to the extent that a lot of FWA customers are on bundles along with wireless, If there's already a larger customer base or a proportionally larger customer base in a rural area, that may be an easier upsell as well.

8m7s Speaker 1

Yeah. So they wanna go to like 300,000,000 ultra wideband coverage, which is 90%. Also what's interesting is on the broadband side, they want to cover 90,000,000 households, 90,000,000 homes and businesses with FWA. Just as a benchmark, benchmark, there are 125,000,000 households in The US, and 143,000,000 housing units. So that gives you an indication.

8m37s Speaker 1

They want to do 35 to 40,000,000 fiber passings, if they close Frontier with fiber. But like by 02/1930, right? This will be like Hans' successors promise to keep. And 35 to 40,000,000 by 2030 tells me, even though they say it on the call, oh, we don't need they want BEAT money, right? And BEAT has been delayed and delayed and delayed.

9m4s Speaker 0

But why would you build out on your own dime when you could build out on somebody else's dime, right?

9m8s Speaker 1

Well, why not, right? And commissioner Carr is like giving us a daily count on how many days that the money hasn't given out. So the broadband is more like a slow rolling thing. We internally have always the discussion, and you very nicely put it, are happy people bundling, or are bundles making people happy? Right?

9m30s Speaker 1

Right. Right. One of the financial analysts, in different words, posed that question and they punted on it. I think we have our hypothesis. I certainly have my hypothesis.

9m40s Speaker 1

Oh, why don't you share your hypothesis?

9m42s Speaker 0

You know, this is obviously a chicken or the egg type thing, but are you more likely to do business across multiple product lines with somebody you're happy with? I think you are. Right? Something has to come first for most folks. And then if you deliver on that promise, then they're open to upsell.

9m57s Speaker 0

And I think that's the right way to do business. Right? So I don't necessarily think that bundling is a causal function of satisfaction. I think satisfaction is a causal function of bundling. At the end of the day, you want happy people.

10m8s Speaker 1

I think happy people bundle. Yes. Bundling doesn't make you happier. If you hate what you're buying from somebody today, you're not gonna buy more for it. Thank you very much, right?

10m18s Speaker 1

And wear lipstick with it.

10m19s Speaker 0

Well, you know, unless you're giving it away, right? And on some level there's some

10m23s Speaker 1

But not even then. But not even then.

10m25s Speaker 0

No, no, no. I think there's some cable wireless numbers that

10m27s Speaker 1

When you look at that, even there, the happy cable people are the ones who are bundling. The unhappy people are not that looking at our data.

10m36s Speaker 0

Not too wild on it. Yeah, you know, look at it.

10m38s Speaker 1

And then Samba's talking about he has two engines for growth, mobility and broadband. And I think the two engines are actually linked together. But the other thing is, it is easier to add mobility to broadband, than for broadband to add mobility. Which would give like a lot of support to what, for example, AT and T is doing. Right?

11m0s Speaker 0

In the case of all the national the MNOs, right, you already have a national wireless network that's built on a fiber core in most circumstances. Whereas in every circumstance, you've got a regional fiber broadband operation. Yeah. Even for AT and T and for Verizon.

11m15s Speaker 1

But even in footprint, it is easier. It is easier to do that. So the two are actually closely linked. And what's really interesting is like the AT and T strategy is now being copied by both Verizon and T Mobile, and cable was always a bundler, but they were already there. And I think this should give John Stankey, one had a lot of satisfaction of, yes, I've been right when, you know, everybody's copying me.

11m44s Speaker 1

And he's executing very well on that strategy. And AT and T both on cable and on mobile right now is executing better than Verizon is. T Mobile is executing on the mobility side better than anybody else. You have to give it to them hands down. On the mobility side and consumer, with business they have big goals.

12m9s Speaker 0

I I think the T Mobile model as far as vis a vis fiber is a little different. Right? They're taking a much more capital light approach by doing partnerships, which is different from the way that, you know, AT and T's kind of in footprint build is their own capital, Gigafiber is also capital light. Yeah. I'm actually kind of surprised that Verizon hasn't come out with a capital light flavor of this as well.

12m32s Speaker 1

Yeah. But and I'm not surprised at all. Because if Verizon thinks that something will make a meaningful difference for them, they want to own. Verizon wants to own and wants to control. Whereas AT and T is much more a partnering company, and T Mobile even more so.

12m53s Speaker 1

T Mobile right now is, I would say, pretty light on the product side. I think T Mobile is phenomenal on the network innovation side, where they have become really the leader and maintain being the leader. The way I look at T Mobile, they're really very gifted marketers. AT and T has a very solid, very good product group, which T Mobile is lacking. And Verizon, if they think this rocks, then they wanna own the rock, right?

13m22s Speaker 0

Yes. But I I mean, I also feel like when we were talking about managing the free cash flow and EBITDA and everything else, if you can build out fiber for, you know, less investment, There's an argument to do that as well, right? All I'm saying is that two out of three of the MNOs have figured this piece out. And I would be surprised if there wasn't some flavor of that that Verizon plays around with in the future.

13m42s Speaker 1

And thank you for queuing me up. They probably changed their leverage goal from 1.75 to two point zero to two point zero to 2.25, right? Right. There they gave themselves moves. Now, I would be shocked if Verizon goes and Partners.

14m0s Speaker 1

Partners on something that they think is so important to them. Right? I'm much more likely shocked that they

14m7s Speaker 0

Well, mean, here's the thing though, is that T Mobile talked about this at their Investor Day, you know, they believe this is a foot race. Right? And AT and T's actions would also suggest that they believe this is a foot race. I think some of the reactions to the Verizon investor day have been that their pace of and, you know, you mentioned it earlier in the podcast, like, it's a little bit slow. Right?

14m26s Speaker 0

And so if this is a land grab, if, you know, owning fiber is the end goal here and, you know, if you don't take it now, it's not gonna be yours. What are you waiting for? What are you waiting for exactly? And and one of the ways to do that is a capital light model so that you can, you know, extend the speed at which you do this. Right?

14m44s Speaker 1

Well, sometimes, Don, you can't argue with facts and logic. It doesn't get you anywhere. And it's that kind of deeply ingrained cultural value where it's religion, good luck arguing.

14m59s Speaker 0

Well, we'll see. We'll see. Right? I mean, think as you always say, people make decisions. Right?

15m4s Speaker 0

But they also make decisions based on incentives. Right? We know what the incentives at Verizon are based on their kind of goals.

15m10s Speaker 1

Exactly. And they will execute on the incentives. The takeaway here is really look at Verizon through wireless service revenue growth, adjusted EBITDA expansion, and cash flow. And that explains everything that they do. All right.

15m25s Speaker 0

Well, I'm sure we'll revisit this.

15m27s Speaker 1

Over and over again.

15m28s Speaker 0

Over and over and over again,

15m29s Speaker 1

T Mobile and AT and

15m32s Speaker 0

T. Yep.

15m33s Speaker 1

All

15m33s Speaker 0

right. We'll talk to you next week. Thanks.

15m35s Speaker 1

See you next week. Bye.