VZ - Verizon Communications

[LearningMachine]

As to whether the spectrum & fiber buildouts are investments or expenses:

 

Do they provide incremental revenues, or do they maintain current revenues?

 

That's a great question.

 

Fiber buildouts (instead of paying cableco for data) and spectrum purchases (instead of letting them land in a competitor's hands) are needed to

• (1) widen the moat with respect to cablecos & other telcos,
  
• (2) strengthen the strategic market position with loyal customers that strengthens the monopsony power with respect to Apple, Disney, Discovery, etc., to be able to sell more services to loyal customers in the future
  
• (3) have some incremental revenues now and more in the future through additional monetization of that spectrum & backbone
  

 

Perhaps it's easier to get at this issue with a specific example.  The five-year financials are on page 7 of Verizon's 2019 annual report:  https://www.verizon.com/about/sites/default/files/2019-Verizon-Annual-Report.pdf  (I use 2019 because I don't think the 2020 version with the five-year trailing financials is out yet.)

 

They show essentially no growth in either revenue or operating income over that five-year period.  Cash flow from Ops and FCF were also higher in 2015 (pg 43: https://www.verizon.com/about/sites/default/files/annual_reports/2016/downloads/Verizon-AnnualReport2016.pdf), but there's noise from working capital movements and other things.

 

From those facts, it appears that what they're spending on CapEx is mainly maintenance.  What does that admittedly very high-level "analysis" (might be too generous a word) overlook or miss?

 

Thanks KJP.  Here is what I see for Cashflow from operations:

• 2016: $22.715 Billion.  See page 43 of https://www.verizon.com/about/sites/default/files/annual_reports/2016/downloads/Verizon-AnnualReport2016.pdf
  
• 2017: $24.318 Billion. See page 42 of https://www.verizon.com/about/sites/default/files/2019-Verizon-Annual-Report.pdf
  
• 2018: $34.339 Billion. See link above.
  
• 2019: $35.746 Billion.  See link above.
  
• 2020: $41.8 Billion.  See https://www.verizon.com/about/investors/quarterly-reports/4q-2020-earnings-conference-call-webcast
  

 

I haven't yet reconciled why their 2015 cashflows were high.  Looks like Accounts Receivable and Accounts Payable were much different than other years for some reason.

[dwy000]

damn Learning... I typed out a long response that was exactly the same as your comments on Operating Cash Flow.  By the time I finished you had replied and I had to delete it.

 

2015 was prior to the sale of the wireline residential business that got sold to Frontier with the shares being spun off to shareholders.

[LearningMachine]

damn Learning... I typed out a long response that was exactly the same as your comments on Operating Cash Flow.  By the time I finished you had replied and I had to delete it.

 

2015 was prior to the sale of the wireline residential business that got sold to Frontier with the shares being spun off to shareholders.

 

Thanks dwy000 :-).  That makes sense why 2015 was off.

 

Increasing cashflows from $22.715 Billion in 2016 to $41.8 Billion in 2020 is 16.5% compounded annual growth rate over four years.

 

If this continues by any chance, this would be on top of the 18.2% cash flow from operations available to invest in a business that is growing cashflow at 16.5% compounded annual growth rate, while paying a dividend of about 4.5%.

 

Edit: May I add something that is inflation protected with price-insensitive customer base, doesn't have to have a praying session to increase prices by a cent, and has ability to lock in long term debt at low rates to be paid back in deflated dollars.

[KJP]

damn Learning... I typed out a long response that was exactly the same as your comments on Operating Cash Flow.  By the time I finished you had replied and I had to delete it.

 

2015 was prior to the sale of the wireline residential business that got sold to Frontier with the shares being spun off to shareholders.

 

Thanks dwy000 :-).  That makes sense why 2015 was off.

 

Increasing cashflows from $22.715 Billion in 2016 to $41.8 Billion in 2020 is 16.5% compounded annual growth rate over four years.

 

If this continues by any chance, this would be on top of the 18.2% cash flow from operations available to invest in a business that is growing cashflow at $16.5% compounded annual growth rate, while paying a dividend of about 4.5%.

 

Those cash flow numbers are too good for me not to look into them further.  It appears to me that there may be some one-time events and potential reversals in those aggregate numbers.  So far I focused on the two big jumps, 2019 – 2020 and 2017 – 2018.

 

1.  Big jump from 2019 to 2020 was about $6 billion and appears to be entirely from working capital movements.  WC produced $2.8 billion in cash flow in 2020 but used $3.6 billion in cash flow in 2019.  (pg. 57:  https://www.sec.gov/ix?doc=/Archives/edgar/data/0000732712/000073271221000012/vz-20201231.htm)  Will that reverse or is that a permanent increase in working capital effciency?  If the latter, will capital efficiency continue to increase or is this a one-time boost that will normalize and thus no longer produce cash flow from WC?

 

2.  Big jump from 2017 to 2018 is more complex.  If we subtract the $1.774 gain on sale from 2017 EBIT and add back the $4.6 billion media impairment to 2018 EBIT, we get adjusted EBITs of $25.6 billion in 2017 and $26.9 billion in 2018.  At a constant tax rate, I’d assume that to produce only $1 billion or so in additional cash flow from ops, not the $10 billion increase actually occurred.  So what happened?

 

a.  Trump tax cut.  Verizon paid $2.2 billion less in cash income taxes in 2018 despite higher adjusted EBIT.  Cash income taxes went up in 2019, but nevertheless some of this cash flow increase ought to be permanent, so long as corporate tax rates don’t go up.  On the other hand, this type of benefit can't be the basis of compound annual growth going forward unless corporate tax rates continue to decline.

 

b.  Pension contributions.  Based on the pension footnotes, Verizon contributed $4.8 billion to its pension and health plans in 2017, but only $2.2 billion in 2018.  (You can get most of the way there by noting the disparity in "other income" between the two years and then accounting for the pension adjustments in the cash flow statement.)  I would need to look further to determine which figure is more likely to be the case going forward.  (In 2019, Verizon contributed only $800 million to the plans, or $1.4 billion less than in 2018.  Cash flow from ops between those two years also increased by $1.4 billion.)  But again, given that pension/health plan contributions went down from $4.8 billion in 2017 to $800 million in 2019, I wouldn't use this a source of estimating compound future cash flow growth rates.

 

c.  Working capital:  In 2017, working capital movements (ex-pension) used $5.2 billion in cash, but in 2018, they used only $1 billion.  Is this permanent and does it relate somehow to the poor wireless equipment margins in 2017?

 

So, my first take is that the $10 billion jump from 2017 to 2018 appears to be roughly 40% from increased working capital efficiency, 25% from decreased pension contributions, 20% from tax cuts, and 15% from business improvement. 

 

If this is roughly right, then I would expect future changes in operating cash flow to more closely coincide with changes in adjusted EBIT, and perhaps lag it from time to time if WC reverts, significant pension contributions are necessary, or corporate tax rates rise.

 

 

 

 

[dwy000]

damn Learning... I typed out a long response that was exactly the same as your comments on Operating Cash Flow.  By the time I finished you had replied and I had to delete it.

 

2015 was prior to the sale of the wireline residential business that got sold to Frontier with the shares being spun off to shareholders.

 

Thanks dwy000 :-).  That makes sense why 2015 was off.

 

Increasing cashflows from $22.715 Billion in 2016 to $41.8 Billion in 2020 is 16.5% compounded annual growth rate over four years.

 

If this continues by any chance, this would be on top of the 18.2% cash flow from operations available to invest in a business that is growing cashflow at $16.5% compounded annual growth rate, while paying a dividend of about 4.5%.

 

Those cash flow numbers are too good for me not to look into them further.  It appears to me that there may be some one-time events and potential reversals in those aggregate numbers.  So far I focused on the two big jumps, 2019 – 2020 and 2017 – 2018.

 

1.  Big jump from 2019 to 2020 was about $6 billion and appears to be entirely from working capital movements.  WC produced $2.8 billion in cash flow in 2020 but used $3.6 billion in cash flow in 2019.  (pg. 57:  https://www.sec.gov/ix?doc=/Archives/edgar/data/0000732712/000073271221000012/vz-20201231.htm)  Will that reverse or is that a permanent increase in working capital effciency?  If the latter, will capital efficiency continue to increase or is this a one-time boost that will normalize and thus no longer produce cash flow from WC?

 

2.  Big jump from 2017 to 2018 is more complex.  If we subtract the $1.774 gain on sale from 2017 EBIT and add back the $4.6 billion media impairment to 2018 EBIT, we get adjusted EBITs of $25.6 billion in 2017 and $26.9 billion in 2018.  At a constant tax rate, I’d assume that to produce only $1 billion or so in additional cash flow from ops, not the $10 billion increase actually occurred.  So what happened?

 

a.  Trump tax cut.  Verizon paid $2.2 billion less in cash income taxes in 2018 despite higher adjusted EBIT.  Cash income taxes went up in 2019, but nevertheless some of this cash flow increase ought to be permanent, so long as corporate tax rates don’t go up.  On the other hand, this type of benefit can't be the basis of compound annual growth going forward unless corporate tax rates continue to decline.

 

b.  Pension contributions.  Based on the pension footnotes, Verizon contributed $4.8 billion to its pension and health plans in 2017, but only $2.2 billion in 2018.  (You can get most of the way there by noting the disparity in "other income" between the two years and then accounting for the pension adjustments in the cash flow statement.)  I would need to look further to determine which figure is more likely to be the case going forward.  (In 2019, Verizon contributed only $800 million to the plans, or $1.4 billion less than in 2018.  Cash flow from ops between those two years also increased by $1.4 billion.)  But again, given that pension/health plan contributions went down from $4.8 billion in 2017 to $800 million in 2019, I wouldn't use this a source of estimating compound future cash flow growth rates.

 

c.  Working capital:  In 2017, working capital movements (ex-pension) used $5.2 billion in cash, but in 2018, they used only $1 billion.  Is this permanent and does it relate somehow to the poor wireless equipment margins in 2017?

 

So, my first take is that the $10 billion jump from 2017 to 2018 appears to be roughly 40% from increased working capital efficiency, 25% from decreased pension contributions, 20% from tax cuts, and 15% from business improvement. 

 

If this is roughly right, then I would expect future changes in operating cash flow to more closely coincide with changes in adjusted EBIT, and perhaps lag it from time to time if WC reverts, significant pension contributions are necessary, or corporate tax rates rise.

 

Verizon has so many accounting items that it is really tough to start from income and use EBIT or other measure.  The change in pension flows into income (or out) but it's not an operating cash flow.  The sale of phones, which is a zero margin business, fluctuates with the timing/rollout of iPhones (so every 2 years or so).  It also impacts working capital because of the amortized nature of the phone sale as part of a 2 year contract.  But they also have to book the entire commission on the phone sale upfront.  Finally, when they sell things they move it out of operating income and into held for sale which has impacts on cash flows and working capital when doing year over year comps. 

 

Where it will get funky going forward is that they said they are going to capitalize and then amortize all the spectrum moving costs.  So that will be buried below the Operating Cash Flow line and yet because it's tax deductible they said they will get $5bn in reduced tax costs - which WILL flow through Operating Cash Flow.

[KJP]

 

Verizon has so many accounting items that it is really tough to start from income and use EBIT or other measure.  The change in pension flows into income (or out) but it's not an operating cash flow. 

 

I can't tell if you mean that pension flows shouldn't be thought of as operating cash flows (I generally agree) or that they don't in fact flow through operating cash flow in the GAAP statement of cash flows.  If you're saying the latter, I'm far from an expert on this, but I'm pretty sure that at least some of them do.

 

Verizon's disclosures say that GAAP pension costs flow through both EBIT and "other" income/expense":

 

In accordance with our accounting policy for pension and other postretirement benefits, operating expenses include service costs associated with pension and other postretirement benefits while other credits and/or charges based on actuarial assumptions, including projected discount rates, an estimated return on plan assets, and impact from health care trend rates are reported in Other income (expense), net.  [2019 AR at 76]

 

In 2019, I believe they reported the following GAAP pension expenses/credits through OpEx

Pension service cost:  ($247 million)  [2019 AR at 78]

Health plan service cost:  ($96 million)  [2019 AR at 78]

Total cost through OpEx:  $343 million

 

I believe they reported the following GAAP pension expenses/credits through "Other" income:

"Other components" pension cost:  ($232 million)  [2019 AR at 78]

"Other components" healthcare credit: $859 milllion  [2019 AR at 78]

Total "other" pre-tax income:  $627 million  [2019 AR at 78 and 91]

 

So, net through EBIT and "other income" under GAAP in 2019 was 627-343 = $284 million income.

 

But Verizon actually contributed $820 million to its various plans as follows: "In 2019, we made a $300 million discretionary contribution to our qualified pension plans, $71 million of contributions to our non-qualified pension plans and $449 million of contributions to our other post-retirement benefit plans."  [2019 AR at 82].

 

The cash flow statement starts with net income, so somewhere it needs to reconcile that difference between GAAP income and actual cash outflow.  The first reconciling entry I see is a "use" of cash of $284 million, which appears to reverse the $284 million in non-cash GAAP pension income.  Further down there's another "use" of cash of $300 million to account for the discretionary pension contribution.

 

But that still leaves the $520 million of cash contributions unaccounted for in the cash flow statement.  I cannot find them, but I believe they are rolled up into the “other” line in net cash flow from operations.  Page 92 of the AR provides some detail into that line item, and does not list pension contributions, but does have an “Other, net” use of cash of $228 million.  That’s my best guess of where the $520 million of non-discretionary contributions are recorded, but I welcome any insight from someone who knows more about this than me. 

 

In any event, it's clear that "discretionary" pension contributions run through and reduce operating cash flow.  So, to the extent Year 1 includes such contributions and Year 5 does not, I believe a calculation that uses the change in operating cash flow from Year 1 to Year 5 to calculate compound annual growth rates in cash flow would include at least some impact from pension contributions.

 

[Spekulatius]

I went through tikr for the cash flow statement snd also notice some strange working capital and other income items that likely distort cash from operation trends. I would personally just use net income plus depreciation and amortization and adjust for some extraordinary items. I typically would ignore working capital changes and pension payments or st least average them out. When adjusting for this, I do t see huge growth in cash from operations.

 

[vince]

  a.  Trump tax cut.  Verizon paid $2.2 billion less in cash income taxes in 2018 despite higher adjusted EBIT.  Cash income taxes went up in 2019, but nevertheless some of this cash flow increase ought to be permanent, so long as corporate tax rates don’t go up.  On the other hand, this type of benefit can't be the basis of compound annual growth going forward unless corporate tax rates continue to decline.

 

True it should not be a basis for predicting future growth but it absolutely is an increase in earning power (assuming tax rates are constant) and therefore a more valuable business.

[vince]

damn Learning... I typed out a long response that was exactly the same as your comments on Operating Cash Flow.  By the time I finished you had replied and I had to delete it.

 

2015 was prior to the sale of the wireline residential business that got sold to Frontier with the shares being spun off to shareholders.

 

Thanks dwy000 :-).  That makes sense why 2015 was off.

 

Increasing cashflows from $22.715 Billion in 2016 to $41.8 Billion in 2020 is 16.5% compounded annual growth rate over four years.

 

If this continues by any chance, this would be on top of the 18.2% cash flow from operations available to invest in a business that is growing cashflow at $16.5% compounded annual growth rate, while paying a dividend of about 4.5%.

 

Those cash flow numbers are too good for me not to look into them further.  It appears to me that there may be some one-time events and potential reversals in those aggregate numbers.  So far I focused on the two big jumps, 2019 – 2020 and 2017 – 2018.

 

1.  Big jump from 2019 to 2020 was about $6 billion and appears to be entirely from working capital movements.  WC produced $2.8 billion in cash flow in 2020 but used $3.6 billion in cash flow in 2019.  (pg. 57:  https://www.sec.gov/ix?doc=/Archives/edgar/data/0000732712/000073271221000012/vz-20201231.htm)  Will that reverse or is that a permanent increase in working capital effciency?  If the latter, will capital efficiency continue to increase or is this a one-time boost that will normalize and thus no longer produce cash flow from WC?

 

2.  Big jump from 2017 to 2018 is more complex.  If we subtract the $1.774 gain on sale from 2017 EBIT and add back the $4.6 billion media impairment to 2018 EBIT, we get adjusted EBITs of $25.6 billion in 2017 and $26.9 billion in 2018.  At a constant tax rate, I’d assume that to produce only $1 billion or so in additional cash flow from ops, not the $10 billion increase actually occurred.  So what happened?

 

a.  Trump tax cut.  Verizon paid $2.2 billion less in cash income taxes in 2018 despite higher adjusted EBIT.  Cash income taxes went up in 2019, but nevertheless some of this cash flow increase ought to be permanent, so long as corporate tax rates don’t go up.  On the other hand, this type of benefit can't be the basis of compound annual growth going forward unless corporate tax rates continue to decline.

 

b.  Pension contributions.  Based on the pension footnotes, Verizon contributed $4.8 billion to its pension and health plans in 2017, but only $2.2 billion in 2018.  (You can get most of the way there by noting the disparity in "other income" between the two years and then accounting for the pension adjustments in the cash flow statement.)  I would need to look further to determine which figure is more likely to be the case going forward.  (In 2019, Verizon contributed only $800 million to the plans, or $1.4 billion less than in 2018.  Cash flow from ops between those two years also increased by $1.4 billion.)  But again, given that pension/health plan contributions went down from $4.8 billion in 2017 to $800 million in 2019, I wouldn't use this a source of estimating compound future cash flow growth rates.

 

c.  Working capital:  In 2017, working capital movements (ex-pension) used $5.2 billion in cash, but in 2018, they used only $1 billion.  Is this permanent and does it relate somehow to the poor wireless equipment margins in 2017?

 

So, my first take is that the $10 billion jump from 2017 to 2018 appears to be roughly 40% from increased working capital efficiency, 25% from decreased pension contributions, 20% from tax cuts, and 15% from business improvement. 

 

If this is roughly right, then I would expect future changes in operating cash flow to more closely coincide with changes in adjusted EBIT, and perhaps lag it from time to time if WC reverts, significant pension contributions are necessary, or corporate tax rates rise.

 

Although it may be hard to adjust their numbers to try and figure out what their steady state earning power is, I think the 3-5% growth rate is relatively more predictable.  That is what they are guiding for revenues and they don't expect Ebitda margin expansion.  One thing that has driven their cash flow growth rate is their cost cutting efforts which they claim has more legs.  So I was a little disappointed when they replied that we should expect flat margins going forward.  Can't figure out how to reconcile both claims

[dwy000]

 

Verizon has so many accounting items that it is really tough to start from income and use EBIT or other measure.  The change in pension flows into income (or out) but it's not an operating cash flow. 

 

I can't tell if you mean that pension flows shouldn't be thought of as operating cash flows (I generally agree) or that they don't in fact flow through operating cash flow in the GAAP statement of cash flows.  If you're saying the latter, I'm far from an expert on this, but I'm pretty sure that at least some of them do.

 

Verizon's disclosures say that GAAP pension costs flow through both EBIT and "other" income/expense":

 

In accordance with our accounting policy for pension and other postretirement benefits, operating expenses include service costs associated with pension and other postretirement benefits while other credits and/or charges based on actuarial assumptions, including projected discount rates, an estimated return on plan assets, and impact from health care trend rates are reported in Other income (expense), net.  [2019 AR at 76]

 

In 2019, I believe they reported the following GAAP pension expenses/credits through OpEx

Pension service cost:  ($247 million)  [2019 AR at 78]

Health plan service cost:  ($96 million)  [2019 AR at 78]

Total cost through OpEx:  $343 million

 

I believe they reported the following GAAP pension expenses/credits through "Other" income:

"Other components" pension cost:  ($232 million)  [2019 AR at 78]

"Other components" healthcare credit: $859 milllion  [2019 AR at 78]

Total "other" pre-tax income:  $627 million  [2019 AR at 78 and 91]

 

So, net through EBIT and "other income" under GAAP in 2019 was 627-343 = $284 million income.

 

But Verizon actually contributed $820 million to its various plans as follows: "In 2019, we made a $300 million discretionary contribution to our qualified pension plans, $71 million of contributions to our non-qualified pension plans and $449 million of contributions to our other post-retirement benefit plans."  [2019 AR at 82].

 

The cash flow statement starts with net income, so somewhere it needs to reconcile that difference between GAAP income and actual cash outflow.  The first reconciling entry I see is a "use" of cash of $284 million, which appears to reverse the $284 million in non-cash GAAP pension income.  Further down there's another "use" of cash of $300 million to account for the discretionary pension contribution.

 

But that still leaves the $520 million of cash contributions unaccounted for in the cash flow statement.  I cannot find them, but I believe they are rolled up into the “other” line in net cash flow from operations.  Page 92 of the AR provides some detail into that line item, and does not list pension contributions, but does have an “Other, net” use of cash of $228 million.  That’s my best guess of where the $520 million of non-discretionary contributions are recorded, but I welcome any insight from someone who knows more about this than me. 

 

In any event, it's clear that "discretionary" pension contributions run through and reduce operating cash flow.  So, to the extent Year 1 includes such contributions and Year 5 does not, I believe a calculation that uses the change in operating cash flow from Year 1 to Year 5 to calculate compound annual growth rates in cash flow would include at least some impact from pension contributions.

 

The pension income/expense/cash can be mind numbing.  As can some of the other items.  For example, just check out page 12 of the 2019 Annual Report for Other Income (Expense).  Between 2018 and 2019 they had $4.3Bn of early debt redemption costs.  Obviously good in the long run but what a hit to earnings.  On the other side, they had a $2.1bn pension credit in 2018 which flows through to income but is not cash available to shareholders.  And beyond the contributions to pensions there are the severance costs.  For example they expensed $2.1bn for severance in 2018 but paid out only $560 in cash.  Then in 2019 they expensed only $260m but paid $1.85bn in cash.

 

For all of these reasons I like to start at Operating Cash Flow and work upwards to see what is unusual or one time.  Cash doesn't lie.  While the OCF growth has been huge, that is real cash not accounting items and adjustments.  There are definitely one time items in there as well as movement for the changes in how people contract for phones (fixed contracts vs. device payment plans) but at the end of the day operations have generated substantial and growing cash flow.

 

The other telling item is the Equity line.  They pay out $10bn in dividends per year and equity has risen by $8-10bn per year over the past 3-4.  That back of the envelope equates to the $18-20bn of free cash flow less dividends.

 

[kab60]

Trying to reconcile the two sides, if I may, and I really appreciate the input - do any longs care to take a stab at "normalized" spectrum purchases going forward? Do they have to plunge down 50b every fifth year? I know it is unknowable with precision, but it seems very important.

 

[KJP]

  a.  Trump tax cut.  Verizon paid $2.2 billion less in cash income taxes in 2018 despite higher adjusted EBIT.  Cash income taxes went up in 2019, but nevertheless some of this cash flow increase ought to be permanent, so long as corporate tax rates don’t go up.  On the other hand, this type of benefit can't be the basis of compound annual growth going forward unless corporate tax rates continue to decline.

 

True it should not be a basis for predicting future growth but it absolutely is an increase in earning power (assuming tax rates are constant) and therefore a more valuable business.

 

Yes, that's what I was trying to say, though probably didn't articulate it well.  Something like a tax cut (assuming it's not all competed away ) is a permanent increase in the cash flow going to equityholders, but it will not be the source of future compound growth in cash flow.  In other works, if in year 1 free cash flow is 1 billion and after taxes of $200 million, and then there is a tax cut such that in year 3 free cash flow is $1.1 billion and taxes are $100 million, I think it would lead you astray to calculate the compound annual growth in cash flow from year 1 to year 3 and use that as a baseline to estimate future growth in free cash flow. 

 

 

 

[LearningMachine]

Trying to reconcile the two sides, if I may, and I really appreciate the input - do any longs care to take a stab at "normalized" spectrum purchases going forward? Do they have to plunge down 50b every fifth year? I know it is unknowable with precision, but it seems very important.

 

While I wouldn't want Verizon to overpay for spectrum, I'd be more worried about a big chunk of prime spectrum getting in the hands of a competitor.

 

Verizon claims they have a model that they use to price the spectrum.  I'm assuming it takes into account how much they can cashflow it.  Over time, we have seen spectrum is increasing in value as the bids are going up. I'm sure someone could research and draw a chart of price per unit of spectrum over the years in auctions, and would probably find it going up over years, maybe even faster than inflation.

 

Imagine you owned rights to 40% of the continental U.S. land, weighted by value, including a higher percentage than any competitor of land with high-density zoning (similar to high-bandwidth high-band) in prime high-density areas, and it was cash-flowing well.  Imagine now that another 5% of the continental U.S. land goes up for sale.  Imagine you have the ability to raise long-term debt that has interest rates much lower than you could cashflow it.  If you had the strongest balance sheet in the industry, the highest margin customers in the industry, the highest cashflows in the industry, and the highest debt rating, and knew you could always pay more than others while getting it to cashflow more than interest rates, while getting IRS to pay you cash by deducting the interest and amortization on it, that is getting cash every year for buying it, would you buy it or let it go to a competitor?

 

Would you be concerned about your amazing position to be able to get each additional percentage of land going up for sale while getting paid cash yearly, or would you think of that as an opportunity to consolidate more and more of the continental U.S. land in one entity?

[Spekulatius]

It doesn’t really look like the price of spectrum as measured in MHZ/ pop has increased over the last 30 years.

https://www.fiercewireless.com/regulatory/lessons-from-spectrum-auctions-entner

 

Price per MHZ/pop isn’t quite a fair metric, because lower frequency bands are more valuable than higher frequency band (due to more reach and building penetration) but it is a close as we can get. I also think that larger blocks nationwide (let say 50MHZ at the same frequency across the entire USA) would be worth more than let’s say 5x 10 MHZ slices at different frequency’s across different locations covering the same. It works really like real estate in a sense.

[LearningMachine]

It doesn’t really look like the price of spectrum as measured in MHZ/ pop has increased over the last 30 years.

https://www.fiercewireless.com/regulatory/lessons-from-spectrum-auctions-entner

 

Price per MHZ/pop isn’t quite a fair metric, because lower frequency bands are more valuable than higher frequency band (due to more reach and building penetration) but it is a close as we can get. I also think that larger blocks nationwide (let say 50MHZ at the same frequency across the entire USA) would be worth more than let’s say 5x 10 MHZ slices at different frequency’s across different locations covering the same. It works really like real estate in a sense.

 

Thanks Spekulatius for sharing.  Looks like the article went only as far back as 2008, but maybe I missed it as I just skimmed through it.  Wonder what price history is like over 30 years.  Good to know Verizon didn't overpay in the CBRS and C-Band auctions from the perspective of $/MHz Pop in the article.

 

Also, wondering what the price vs. value is for high-band (e.g. 28GHz, 39 GHz) in high-density areas, e.g. near stadiums, high-rises & airports.  As long as you have some low band and mid-band available at lower speeds for reliability inside buildings away from windows in high-density areas, I wonder if you can create more value for customers with smaller cells & much much higher speed with high band in those areas.    Even if the acquisition cost of high band by $/Mhz pop is not too high for high-density area, as long as you have some low and mid band at lower speeds available for reliability, I wonder if you can build a stronger brand and make more money by providing 4.0 Gbps speed to 1 million people in a 10 square mile area that includes a stadium than by providing 300 Mbps speed to 10,000 people in a 100 square mile area, making that high-band more valuable.

 

[dwy000]

I think the other consideration on spectrum pricing is who might be the buyer.

 

There are really only 3 companies that are using spectrum for nationwide wireless service. Once those companies have the spectrum they need or have figured out workarounds I would imagine the remaining spectrum value plummets.  If you're one of those 3 and you need more, no price is too high (see Verizon acquisition of Straighpath or what they paid in the recent auction).  Once you have enough, no price is too low.

 

Dish spent years accumulating spectrum and deferring the legal requirement to build it out - all in the hopes of holding the real players for ransom (either through sale of spectrum or the company).  Everyone else stocked up in auctions and found workarounds, leaving Dish with a great and rare asset that people want but don't necessarily need. And the longer it goes, the less they need it. Now Dish is painted into a corner of building out the asset (as required by the regulators in order to keep it).  I really don't think they want to because they are unlikely to get any real return on the sunk cost and the build costs when there are 3 huge, very competitive players out there with nationwide coverage.  And they will have to focus on the lowest valued customers (low price, prepaid, high churn, etc).  But they have no choice.

 

It will be interesting to watch how it plays out

[LearningMachine]

I think the other consideration on spectrum pricing is who might be the buyer.

 

There are really only 3 companies that are using spectrum for nationwide wireless service. Once those companies have the spectrum they need or have figured out workarounds I would imagine the remaining spectrum value plummets.  If you're one of those 3 and you need more, no price is too high (see Verizon acquisition of Straighpath or what they paid in the recent auction).  Once you have enough, no price is too low.

 

Dish spent years accumulating spectrum and deferring the legal requirement to build it out - all in the hopes of holding the real players for ransom (either through sale of spectrum or the company).  Everyone else stocked up in auctions and found workarounds, leaving Dish with a great and rare asset that people want but don't necessarily need. And the longer it goes, the less they need it. Now Dish is painted into a corner of building out the asset (as required by the regulators in order to keep it).  I really don't think they want to because they are unlikely to get any real return on the sunk cost and the build costs when there are 3 huge, very competitive players out there with nationwide coverage.  And they will have to focus on the lowest valued customers (low price, prepaid, high churn, etc).  But they have no choice.

 

It will be interesting to watch how it plays out

 

Interesting thoughts.  Thanks dwy000 for articulating the complex nature of it so well.

 

Wonder who will end up taking spectrum at the 2.5 GHz and 3.45 GHz auctions later this year.  See https://www.fcc.gov/auctions.

• T-Mobile is signaling they want to return capital to shareholders, but will be opportunistic.
  
• Verizon didn't say no even though they did indicate they have enough.
  
• AT&T probably needs it the most but T-Mobile/Verizon won't let it have it cheap.
  
• Dish doesn't have the money.
  

 

Anyone else won't be able to make good use of it as they can't build a network on just mid-band.

 

Wonder if Verizon will end up taking it as well.  Interesting that Verizon didn't want to wait for the upcoming auction sales.  Maybe because the amount for sale won't be as much as what Verizon wanted and was able to get at the earlier auction.  I might be wrong but it seemed that 3.45 GHz sale was announced after the earlier auction was done, almost making it feel like bait and switch, i.e. not showing that more spectrum will be available later this year before the earlier auction. Will be interesting to see who will end up buying it and if the cost will be in similar $/MHz Pop range, which means overall cost will be much less than the earlier auction as the total amount available for sale seems to be much less than the earlier auction.

 

 

 

[LearningMachine]

Ronan clarified a few things yesterday at https://www.fiercewireless.com/operators/verizon-s-ronan-dunne-says-carrier-may-densify-network-for-c-band

 

Verizon is going after having the largest addressable market for broadband in the U.S. compared to any other provider. I understand some may disagree.  This is what Verizon is saying, and I believe them.

 

Independently, another announcement to provide more services to the higher-income customer base, leveraging their biggest direct-to-consumer digital services platform: https://www.verizon.com/about/news/verizon-cloud-unlimited.  It will be interesting to see how they eventually do compared to Apple, Google, Microsoft & Amazon on consumer cloud storage.  Sticky business!

[mcliu]

What is the incentive for someone to us Verizon Cloud vs Apple iCloud or Google Drive?

[LearningMachine]

What is the incentive for someone to us Verizon Cloud vs Apple iCloud or Google Drive?

 

Verizon Cloud is cross-platform today and will stay cross-platform in the future also, that is, it will work with all types of devices & computers the same, i.e. iOS, Android, Windows, Mac, etc.

 

You can backup unlimited number of devices & computers in your family, and can also share with four other family & friends.

 

Another reason Verizon has a chance of doing well here compared to competitors is that they already have a monthly billing relationship with vastly bigger customer base that they can sell to compared to Apple and Google.  On the flip side, Apple & Google can provide a more integrated user experience and can constantly nudge people to sign up for storage for their own platform.  Some, consumers will probably figure out that they need a cross-platform solution that works for all platforms today and will continue working for all platforms in the future as someone in family has a different device, or that they would like the option of someone in family being able to have a different device in the future.

[changegonnacome]

What is the incentive for someone to us Verizon Cloud vs Apple iCloud or Google Drive?

 

(1) power of default....its installed on your Verzion handset....Android ones (not iPhone obviously Apple wouldnt allow them)

(2) Verizon gives you 1TB free for one year / two years as part of your monthly contract.....you do (1) & then load your life/photos into it. Freebie period rolls off, your life is loaded into it already.....you cave and pay $10 per month on top of bill

(3) Verizon doesn't count the uploads & downloads against your monthly data plan......Google Drive / iCloud does

(4) Advertising campaign saying Verizon isnt Google its not trying to look at your photos.......its not Apple trying to lock into buying iPhones forever

 

Can see the rational and could be reasonable business over time........building a sync everyhwere/ photo backup tool that works and is intuitive is non-trivial.....look at how many goes it took Apple to get Google drive/photos level

[LC]

https://www.nature.com/articles/s41598-020-79500-x.pdf

 

An interesting concept

[KJP]

Here's an overview of T-Mobile's fixed wireless offering:  https://www.lightreading.com/opticalip/four-questions-dogging-t-mobiles-5g-fixed-wireless-ambitions/a/d-id/768606?_mc=RSS_LR_EDT

"The offering costs $60 per month, promises download speeds around 100Mbit/s and does not cap customers' monthly usage. The company said it is now offering the service across 30 million households. A third of those locations are in rural areas, and the rest are in suburban and urban areas. The company's target area represents around 24% of all US households."

I agree with this take:  "There won't be demand for the service in fiber and upgraded cable markets where the service is no better and the price is not meaningfully lower," argued the New Street analysts."

It will be interesting to see whether Verizon can scale up a much more robust (in terms of speed) fixed wireless offering.

 

[LearningMachine]

5 hours ago, KJP said:

Here's an overview of T-Mobile's fixed wireless offering:  https://www.lightreading.com/opticalip/four-questions-dogging-t-mobiles-5g-fixed-wireless-ambitions/a/d-id/768606?_mc=RSS_LR_EDT

"The offering costs $60 per month, promises download speeds around 100Mbit/s and does not cap customers' monthly usage. The company said it is now offering the service across 30 million households. A third of those locations are in rural areas, and the rest are in suburban and urban areas. The company's target area represents around 24% of all US households."

I agree with this take:  "There won't be demand for the service in fiber and upgraded cable markets where the service is no better and the price is not meaningfully lower," argued the New Street analysts."

It will be interesting to see whether Verizon can scale up a much more robust (in terms of speed) fixed wireless offering.

 

 

Interesting price point they picked of $60/month for 100 Mbps to possibly signal oligopolistic pricing to Verizon :-).

Verizon has been pricing at $70/month for non-Verizon customers, and $50/month for Verizon customers for typical speeds around 300 Mbits/s, and max speed around 1 Gbps. 

https://www.verizon.com/about/news/verizon-5G-home-internet-is-available-in-more-cities

Now, Verizon has to increase the lowest price a little to signal back to T-Mobile: signal received, wink wink :-).

Edited April 8, 2021 by LearningMachine

[LearningMachine]

On 3/16/2021 at 2:06 PM, LearningMachine said:

Let's see what long-term interest rates and duration they are able to lock in, and then pay back in deflated dollars in case of inflation scenario.

 

For those curious, VZ ended up locking in average interest rates of 2.5% for average maturity of 17 years for $31 Billion.  See https://www.verizon.com/about/investors/quarterly-reports/1q-2021-earnings-conference-call-webcast.

Their net unsecured debt is now at $137.4B, which is 2.9X adjusted EBITDA.  They expect that multiple to go 2.8x by end of year, implying $49B adjusted EBITDA for 2021. 

Wonder if Buffett is salivating over being able to get his hands on another ~$40-50B cash per year to invest for so cheap.  Very few companies generate so much cash per year -  none available for a price like this.  Also, recurring cash coming in didn't skip a beat even during the pandemic - might even be better than the equity-bond like performance of BNSF that insurance regulators love.

Edited April 22, 2021 by LearningMachine