Earnings Call Transcript
VERIZON COMMUNICATIONS INC (VZ)
Earnings Call Transcript - VZ Q4 2020
Operator, Operator
Good morning, and welcome to the Verizon Fourth Quarter 2020 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. 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.
Brady Connor, SVP, Investor Relations
Thanks, Brad. Good morning and welcome to our fourth quarter earnings conference call. This is Brady Connor, and I am here with our Chairman and Chief Executive Officer, Hans Vestberg; 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 transcript of this call will also be made available on our website. Before we get started, I'd 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 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. As a reminder, we were in the quiet period for spectrum auction 107. So we will not be able to comment on our midband spectrum holdings or strategy at this time. Now let’s take a look at consolidated earnings for the fourth quarter and full year. In the fourth quarter, we reported earnings of $1.11 per share, resulting in full year earnings of $4.30 per share on a GAAP basis. Reported fourth quarter earnings include a pre-tax loss from special items of approximately $523 million. This includes a net charge of $404 million primarily related to severance, including voluntary separations under our existing plans and the annual mark-to-market for our pension and OPEB liabilities as well as a net loss of $119 million primarily related to the disposition of the HuffPost business. Excluding the effect of these special items, adjusted earnings per share was $1.21 in the fourth quarter and $4.90 for the full year. Let’s now move to Slide 4 and take a closer look at our fourth quarter earnings profile. The impact to earnings from the adoption of Accounting Standards ASC 606 for revenue recognition is illustrated for comparability purposes and reflects a reduction in the benefit realized due to the deferral of commission expense versus the prior year. We also continue to monitor the ongoing impacts of COVID on our business. The year-over-year impacts of both ASC 606 and COVID were not significant in the fourth quarter. The full year 2020 impacts from ASC 606 and COVID were $0.09 and $0.21 respectively on both a reported and adjusted earnings per share basis. We do not expect the adoption of ASC 606 to have a significant impact on the comparability of 2021 results to 2020. Full year adjusted EPS growth of 1.9% illustrated on the earnings waterfall slide reflects the strong underlying performance of the business. With that, I’ll now turn the call over to Hans to take you through a recap of 2020.
Hans Vestberg, CEO
Thank you, Brady, and Happy New Year to all of you. First of all, 2020 was a challenging year and I can only say that I’m super proud how Verizon responded to the changing environment during 2020. And we supported our customers, our employees, and society in a way that I’ve never seen before. So, all in all, a great year. At the same time, we executed well on our strategy and so that we had really good financial performance as well. When it comes to our 2020 strategic priorities, let me walk through the execution of them. First of all, strengthening and growing the core business, I’m really proud to announce that we continue to have the best network in the nation. We just got for the 15th time the overall best network with RootMetrics on all seven different categories. That includes 5G, which is so important to us that we continue to have that lead. I'm also happy to announce that we won for the 26th consecutive time the J.D. Power’s award. It tells a lot about our network and technology team, how they have been building a network and how we continue to lead this market. When it comes to the customer innovation, you have seen us working with our customers to give them richer offerings and also even better performance on the network. This year with Disney+, Discovery+, also adding in the iPhone 5 from Apple has, of course, supported a lot of innovation that we're doing in the Verizon Consumer Group. And we see a great migration of our customers to unlimited and to the premium unlimited. Finally, you can see also that Verizon Business Group has had a year of investments to see that we are putting a foundation to be much stronger for the future, had good growth in the wireless, and also in some areas like the public sector, very good performance and also adding local new customers on the enterprise side. When it comes to us leveraging the assets to drive new growth, the commitments we did in February 2020 when it comes to 5G were all met or exceeded. I'm extremely happy with that. We now have 64 Ultra Wideband cities. We have more than 10 cities on our home 5G Ultra Wideband, we have 10 Mobile Edge Compute centers public with Amazon. All in all, we deployed more than 5x more Ultra Wideband sites during 2020. And we launched the nationwide 5G that now is covering 230 million POPs in 2,700 cities. On the financial side, a strong year ended where we had more than 2% growth in the wireless service revenue. We also have growth on our EPS in the fourth quarter, over 7%. We had an operational cash flow full year of $41.8 billion, which is a growth of 17%. A very strong year that put us in a good position while going into 2021. And finally, we’ve a really large focus on how to include all our four stakeholders in the work we are doing. And I’m really proud of the Citizen Verizon that we launched during last year, which is a great way for us to see that the society aspect is part of our strategy, where, of course, our focus on being carbon neutral is very important; and the second green bond was launched in the second half of 2020. So, all in all, I’ve to say it was a very different year, but a great execution where we hit all our strategic milestones at the same time as we pivoted and supported all our stakeholders. At the November sell-side event, I presented the five vectors of growth. Those are the vectors that are based on our strategy of Network-as-a-Service. Those are also the enablers for us to get to GDP plus. We have great traction on them, and we also have done quite a lot in 2020, all the way from the 5G adoption to the customer differentiation that I talked about, the new markets that we are addressing still pending the acquisition of TracFone, but we have other segments we are addressing, as well as the next-generation business-to-business applications based on our unique Mobile Edge Compute offering that we have with Amazon, also now with Microsoft and many other partners. And finally, the network monetization with our MVNO partners, who are enjoying the best network that we have and we are building. All in all, this is built on the Verizon Intelligent Edge Network that we outlined some three years ago and gives us the opportunity to have great execution in the future. With that, I would like to hand over to Matt to go through the financials in a little bit more detail.
Matthew Ellis, CFO
Thank you, Hans, and good morning, everyone. I would like to start by saying how proud I am of the Verizon team and the results we delivered in 2020. In the fourth quarter, consolidated operating revenue was $34.7 billion, down 0.2%. Total wireless service revenue growth and strong results in Verizon Media Group were offset by lower wireless equipment revenue and ongoing declines in legacy wireline products. Adjusted EBITDA for the quarter was $11.7 billion as compared to $11.1 billion last year, a 5.3% increase driven by service and other revenue growth and disciplined spending. Full year consolidated adjusted EBITDA totaled $47.1 billion and adjusted EBITDA margin was 36.7%, 90 basis points higher than last year, including headwinds of approximately 40 basis points from the deferral of commission expense. Our continued focus on our Business Excellence program has resulted in realized cumulative cash savings of $9.5 billion, and we are well positioned to achieve our $10 billion goal ahead of our year-end 2021 target. COVID has brought about new ways of working, and we believe some of these will be long-term in nature. This will create additional savings opportunities beyond the current program. As Brady mentioned, adjusted EPS for the fourth quarter was $1.21, up 7.1% from $1.13 a year ago. We are pleased to report 1.9% growth of full-year adjusted EPS at the high end of our revised guidance, demonstrating the strength and resilience of our business. Let’s now turn to cash flow results on Slide 8. Our cash generation was exceptionally strong in 2020, reflecting our subscription-based business model and the quality of our customer base. This enabled us to continue to execute on our capital allocation model, investing in our business, increasing our dividend for the 14th straight year and strengthening our balance sheet. Cash flow from operating activities totaled $41.8 billion for the year, an increase of $6 billion from the prior year, driven by continued performance and strength in the business, lower tax payments due to a one-time cash tax benefit received earlier in the year and reductions in working capital primarily due to lower wireless volumes. Capital spending in 2020 totaled $18.2 billion, as we continued to support traffic growth on our 4G LTE network, while expanding the reach and capacity of our 5G Ultra Wideband Network and launching our nationwide 5G network. As a result, free cash flow for the year was $23.6 billion, up 32.4% year-over-year. Throughout the year, we opportunistically diversified our debt portfolio, optimized our cost of borrowing, and retained a higher level of cash as a result of the pandemic. We exited the quarter with net unsecured debt of $96.3 billion, and our net unsecured debt-to-adjusted EBITDA ratio was approximately 2.0x versus our targeted range of 1.75x to 2.0x. We remain committed to our capital allocation model. Now let’s review our operating segment results, starting with Consumer on Slide 9. Our competitive position is based on compelling unlimited plans that provide choice to consumers, paired with the best devices and attractive promotions, all built on the country’s best network. This quarter, we launched our nationwide 5G service to coincide with the release of the iPhone 12 lineup, which fully supports our Ultra Wideband offering, enabling Verizon customers to utilize a full range of connectivity provided by this iconic device. Partnerships remain a critical component of our value proposition. We recently added Discovery to our list of existing successful partnerships, which includes Apple and Disney. As the early cohort of Disney+ customers have come off of the initial free 12-month period, more than two-thirds have maintained their subscription, either through their Verizon direct billing relationship or by opting into one of our newest Mix & Match plans with the Disney bundle included. Volume activity in the quarter was tempered by consumer behavior, given rising COVID cases and elevated store closures that limited foot traffic in addition to the retention offers in the market. As a result, the pool of consumers switching carriers was lower than a year ago. Fourth quarter phone gross adds were down approximately 24% year-over-year, relatively consistent with declines experienced in the third quarter. We are pleased with the quality of the additions we are attracting, as over 90% of new accounts came in on an unlimited plan, and over 55% of these accounts opted for premium unlimited service. At quarter end, over 60% of our base was on an unlimited plan with more than 20% of our base taking a premium plan. Our customer retention remains high with phone churn of 0.76% for the quarter, down 7 basis points from a year ago, contributing to postpaid phone net adds of 163,000. Disconnects related to customers in our Stay Connected program totaled more than 135,000 phones in the quarter. Our Stay Connected program continued to see great results with approximately 95% of customers making a payment since entering the program, and collection cure rates are in line with our expectations. More than 50% of all customers in the program are current on their payments. December was the final month of service billings for the program, and payment activity remained stable, though we will continue to closely monitor payment trends in 2021. Turning to Fios. We continue to build on our strong third quarter with consumer Fios Internet net additions of 92,000, more than double the fourth quarter of 2019. Total Fios Internet net additions of 95,000 were the best fourth quarter we have had since 2014 and reflected strong demand for our gigabit offering as consumers continue to work and learn from home. Cost cutting trends continued, resulting in consumer Fios Video net losses for the quarter of 72,000. Now let’s move to Slide 10 to discuss the Consumer financial performance. Consumer operating revenues for the fourth quarter were $23.9 billion, down 1.2%. This was primarily driven by a 3.8% decline in wireless equipment revenue due to softer volumes in the quarter. For the full year, total Consumer revenue decreased 2.8% to $88.5 billion driven by the decline in wireless equipment revenue. Consumer wireless service revenue for the quarter was $13.6 billion, a 1.2% increase. The results reflect the resilience of our business as we recovered from a 2.7% decrease in the second quarter. In the fourth quarter, we delivered ARPA growth of 1.8% year-over-year, even as TravelPass and other usage fees remain at subdued levels, demonstrating that our tiered approach to unlimited provides a strong foundation for delivering revenue growth. For the full year, Consumer wireless service revenue was $53.6 billion, relatively flat from 2019 levels. Consumer Fios revenue totaled $2.8 billion, a 2.5% decline from a year ago. Customer credits related to regional sports networks negatively impacted Fios revenue by 4.2% in the quarter and also reduced our content expense. We expect Fios revenue to benefit as growth in the broadband base offsets the impact of the shift from the triple-play bundle to stand-alone service. Consumer segment EBITDA grew 2.9% to $9.9 billion. Margins were 41.5% in the quarter, up 160 basis points from last year, including headwinds of approximately 30 basis points from the deferral of commission expense. For the full year, EBITDA margins were 45.5%, an increase of 120 basis points from the prior year, including an impact of approximately 50 basis points from the deferral of commission expense. Now, let’s move to our Business segment on Slide 11. Business wireless trends remained resilient throughout the year and the fourth quarter was no different. Public sector demand remained strong on the success of our distance learning program and support for increased needs of state and local government agencies. Small and medium business trends improved sequentially, while we experienced modest pressures in enterprise. Business segment fund gross adds for the quarter were down 11% from the prior year due to store closures and continued economic weakness. Segment postpaid phone churn was 0.98% in the quarter, which was down 2 basis points over the prior year. As a result, postpaid phone net adds were 116,000. Let’s now move to Slide 12, to review the Business financial performance. Operating revenues for the Business segment were $8.1 billion in the fourth quarter, down slightly year-over-year. Full year operating revenues of $31 billion, represented a decline of 1.5% from the prior year. Wireless service revenue in the quarter accelerated to 7.1% year-over-year from 4.9% in the third quarter, which was more than offset by reductions in wireless equipment volumes and secular pressure on legacy wireline products. Looking at wireless service revenue, public sector had a particularly strong quarter and small and medium business growth improved for the second straight quarter, although it was still below pre-pandemic growth rates. Legacy wireline product trends appear to be normalizing after initially benefiting from the transition to a work-from-home economy. The growth in advanced communication services continues to drive opportunities for the segment. While we are pleased with the revenue performance of the Business segment and exit 2020 with momentum, there are uncertainties around how businesses will perform in 2021 given the challenges within the macro environment. The elevated demand experienced in public sector and parts of enterprise throughout 2020 could potentially create headwinds to growth in the Business segment, particularly in the back half of 2021. Business segment EBITDA margin was 24.6% in the quarter, up 390 basis points from the year-ago period, reflecting the strength in wireless service revenue and the benefits of our transformation initiatives, including back office digitalization and optimization. Full year margins of 25.4% were up slightly versus last year. Now let’s move on to Slide 13, to discuss Verizon Media Group. We are very pleased with Verizon Media Group performance. Total revenue for the quarter was $2.3 billion, up approximately 11% from a year ago, the first quarter of year-over-year growth since the Yahoo! acquisition. Growth in the quarter was fueled by strong advertising trends with demand-side platform revenue growing 41% compared to the prior year. Advertising strength came from political, consumer products, technology, and retail, among other verticals. The fourth quarter also saw continued high consumer engagement in commerce as offline to online shopping behaviors continued through the holiday season on our owned and operated properties. In particular, mail e-commerce revenue growth was seven times that of the prior year, and we saw continued strength in finance and news as daily active users grew 52% and 11%, respectively. Let’s now move on to Slide 14 for a quick look at overall wireless performance. Key metrics and financial data of the combined wireless products and services from the Consumer and Business segments are illustrated on this slide. Total wireless service revenue was up 2.2% year-over-year in the fourth quarter and up 0.7% for the full year. Additional details are provided in the financial and operating information and the supplemental earnings release schedules on our website. Now let’s focus on our outlook for 2021 on Slide 15. We are excited to deliver 2021 expectations that include accelerating revenue and earnings growth driven by our five growth vectors as wireless service strengthens and 5G continues to scale. This year, we are providing an outlook for service and other revenue, which includes revenues from across all of our businesses, but excludes wireless equipment revenue given its variability, especially in the current environment. For 2021, we expect service and other revenue growth of at least 2%, reflecting an acceleration of total wireless service and Fios revenue growth as well as continued momentum in Verizon Media, partially offset by ongoing legacy wireline product declines. Included in this outlook is total wireless service revenue growth of at least 3% driven by our tiered unlimited plans, new customer contributions, and ongoing strength in business. For the full year, we expect to see adjusted earnings per share of $5 to $5.15 driven by recurring service and other revenue growth as well as ongoing cost initiatives. We assume no significant year-over-year impact from below-the-line items based on the 2021 opening balance sheet. The adjusted effective tax rate is expected to be in the range of 23% to 25%. Our consolidated capital spend for full year 2021 is expected to be between $17.5 billion and $18.5 billion, consistent with the prior year and within our normal capital intensity range. Our focus for the year includes further expansion of our 5G Ultra Wideband Network in new and existing markets, densification of our network to manage future traffic demands, and continued deployment of our fiber infrastructure. Our cash flows in 2021 are expected to be driven by higher operating income, offset by taxes and working capital. We anticipate that our cash taxes in 2021 will be higher than in 2020, given expectations for higher pre-tax income this year and a one-time $2.2 billion cash tax benefit received in the second quarter of 2020. Working capital was a tailwind in 2020 due to the lower equipment volumes, which we do not expect to repeat in 2021. With that, I will turn the call back over to Hans to discuss our 2021 priorities.
Hans Vestberg, CEO
Thank you, Matt. Let me review the 2021 priorities based on the four pillars of strategic priorities, starting with the core business. And as you heard Matt talking about accelerating the service revenue, I’m pleased that we are guiding for a plus 3% wireless service revenue growth in 2021. That’s based on that we will continue to differentiate our value proposition for customers. We also will continue to invest in our Verizon Business Group to capture that potential we see in the Business segment with a new platform that we are developing together with our customers. When it comes to our 5G and investing in our business, we have a big year in front of us in 2021. Again, we are going to almost double the number of 5G Ultra Wideband sites. We are going to have 14,000 new sites coming in during 2021. That will enable us to continue to increase with more than 20 cities regarding 5G Ultra Wideband. And we are also going to add some more than 20 5G Home cities, at the same time, focusing very much on the 5G Mobile Edge Compute with 10 more sites concerning the public side. And then on the private side, we will scale that network together with the demand that has come as we know already, all underpinned with the Verizon Intelligent Edge Network and the fiber that we are deploying. When it comes to the financial, Matt talked about that we continue to focus on accelerating the earnings per share growth, now with guidance of $5 to $5.15 earnings per share. The year 2020 solidified our balance sheet, and we will continue to focus on cash flow generation. And finally, when it comes to our culture and our purpose, we have very much focused on customer-centricity and the brand strength that we have built in the market. That will continue, as well as we will have also the Citizen Verizon totally included in the overall strategy. You see that we are managing all four stakeholders that is making the success for Verizon in the future. So very clear, a year of execution. We have progressed one more year on the Verizon 2.0. We are in a great position. I’m really excited to go into 2021. I’m pleased to announce that we will have our normal Investor Day in the early part of 2021. We will come back with the exact date in due time. And by that, I would like to hand over to Brady for Q&A.
Brady Connor, SVP, Investor Relations
Thanks, Hans. We are now ready to take the questions.
Operator, Operator
Your first question comes from Phil Cusick of JPMorgan. Your line is open.
Phil Cusick, Analyst
Hey, guys, thanks. Two, if I can. First, Hans, can you talk about the strategy of revenue growth from here given the higher promotional environment? Is it important that you grow accounts or can you make the revenue growth on the existing base? And clearly, you're looking for customers to move up to premium unlimited. Where is that next now? And then second, where are we on the fiber builds and how should that start to come through in revenue and expense management this year? Thank you.
Hans Vestberg, CEO
Thank you, Phil. Let me start by discussing the subscribers. We entered the third quarter with our model focused on migrating customers to provide a better network and experience. This approach has helped us gain good momentum. In the fourth quarter, we experienced service revenue growth exceeding 2%, which we had indicated in our guidance. This growth is critical for us as our net additions are a key element of our strategy. As Matt mentioned, over 60% of our customers are on unlimited plans, and in the fourth quarter, 90% of the new net additions opted for unlimited plans, with 55% selecting premium options. The premium segment, where we integrate services like Discovery+ and Disney+, is strengthening due to the efforts of Ronan and his team in managing these migration paths. We believe this will support organic service revenue growth, and we have consistently proven this model over the years. The business side has also been strong, particularly in wireless accounts with public sector and large enterprises, which provides positive momentum going into 2021 with our guidance for continued service revenue growth in wireless. We are continuously assessing our actions and feel optimistic about our direction. Regarding fiber, we are in the third or fourth year of our rollout. Most of our 5G sites are equipped with our fiber, and we are migrating our 4G sites to our fiber where it makes sense from an ROI standpoint. This will eventually create opportunities for resale to enterprise and wholesale customers. We are already seeing benefits from using our fiber in the 5G build, but it will take a couple more years to achieve full coverage. We are making significant progress on our fiber build and will continue to pursue opportunities that justify the investment, which is a key part of our Verizon Intelligent Edge Network.
Brady Connor, SVP, Investor Relations
Thanks, Phil.
Phil Cusick, Analyst
Thanks.
Operator, Operator
Brad, we will move to the next question. Thank you. The next question comes from Brett Feldman of Goldman Sachs. Your line is open.
Brett Feldman, Analyst
Thanks for taking the question. I think you called out in the release that COVID ended up being a $0.02 benefit in the quarter. I imagine that was probably a mix of things that were good and bad. So can you maybe give us a little bit of insight into that. And then the EPS guidance that you gave for this year, what are you assuming about the COVID impacts over the course of this year? If you could give us any insight into how that breaks out? And then also one last question on guidance. Does that factor in any potential future spectrum purchases? Or does it just reflect the portfolio spectrum you have today? Thanks.
Hans Vestberg, CEO
I can start with the last question, and Matt can come back to the first. So when it comes to our guidance for EPS in 2021, of course, there are uncertainties of the pandemic and so on. But some things we know, I mean the roaming charges will continue to be a headwind. We also think that as the pandemic and economic recoveries is coming back, probably in the latter part of '21, the public sector will not have an equally strong year as they had in 2020. We also believe the SMB will continue to be subdued and have a challenge in '21. And as we saw during the full year, the switch pool has been lower due to the traffic in the stores, etc. So that's what we've factored in. But on the other hand, we have line of sight to what we're doing because we're executing on a strategy when it comes to migrating our customers. What we're doing in Verizon Business Group and also Verizon Media Group, as Matt said, we now for the first time ever have a year-on-year growth of 11%. All in all, that is giving us the confidence that we can live up to this guidance. But there are some uncertainties and there are some headwinds from COVID, but we think that with those assumptions we have we can actually do this. This is ongoing work with the EPS growth and acceleration that we've talked about for so many years now. We continue to show that we can do it with the assets we have and how we're executing. Matt?
Matthew Ellis, CFO
Yes. Thanks, Hans. So Brett, just in summary on the COVID assumption and the EPS guidance, I think I'd say that certainly some level of pressures will continue to exist on the business throughout the year. I would say we're not overly pessimistic, but we're not overly optimistic either. We assume some level of pressures that you saw from the second half of the year, while our ability to still execute within that type of environment was strong. In terms of the fourth quarter, as you say, there was actually the COVID impact was actually a $0.02 benefit. What you saw there was a couple of one-timers, but primarily it was a case of the revenue pressures we saw declining versus what we'd seen in 2Q and 3Q. You think of media as an example, which had been significantly hit by COVID impacts earlier in the pandemic but certainly no impact in 4Q as we recorded that 11% revenue growth there. Some of those revenue headwinds moderated in the fourth quarter, while the expense benefits continued. That's why you saw the $0.02 net benefit, which completely offsets the $0.02 headwind from accounting standard 606. So, if you think about in the fourth quarter, the effects from 606 and COVID had no net impact on the results, and that $1.21 stands on its own with a 7% increase on a year-over-year basis.
Brett Feldman, Analyst
Thank you.
Brady Connor, SVP, Investor Relations
All right. Thanks, Brett. Brad, we are ready for the next question.
Operator, Operator
Thank you. Your next question comes from Simon Flannery of Morgan Stanley. Sir, your line is open.
Simon Flannery, Analyst
Thank you. Good morning. Hans, I wonder if you could talk about 5G monetization in 2021. You mentioned the expansion of the network, the Ultra Wideband Network, more 5G home locations, and more Mobile Edge Compute. So can you just take us through both on the Consumer side, particularly 5G Home, and on the B2B side, what we should be looking for and what you're kind of including in your forecast for '21?
Hans Vestberg, CEO
Yes, absolutely. We are excited about the 5G in 2021. I mean, on the mobility side, we're already seeing monetization happening. I mean in the fourth quarter, with so many customers taking the premium and going for unlimited, that's sort of where we have our sweet spot with the 5G. And, of course, with the Apple iPhone right now in 5G that has now kicked off that, so you will see throughout the year when it comes to our mobility case. When it comes to 5G Home, we’ve had very solid progress in 2020, came out with this new CP, we added some 12 cities, now with 5G Home with the NR technology. Our plan is to open in 20 plus markets more in 2021. So now we're starting to get a solid foundation for the 5G Home. As you heard in my remarks, we're going to double the amount of sites almost in 2021. So, we're now getting to a very, very solid positioning there. But I said before on the Ultra Wideband deal, we're building it mainly in the very dense urban areas and then in stadiums, etc. in the beginning. So we covered less of houses or residential in the beginning. But as these continue right now, we're capturing more and more. So I'm really excited. We also know that the CPE is really good so and the self-install is working well. So we're looking forward to seeing that happening over the year more and more. On the 5G Mobile Edge Compute, we have a great funnel of customers on the Business side. We are not expecting that to yield significant revenues in '21, but you're going to see a lot of customers signing up for 5G Mobile Edge Compute both public and private in 2021, in order for us to have a very solid base going into 2022. So, a lot of excitement around 5G. I think we have built it absolutely right. We have an opportunity in front of us that we have been working on for a couple of years right now. So, I'm happy with my sales team. I'm happy with the technology team, and we have a big year in front of us.
Simon Flannery, Analyst
Great, thank you.
Brady Connor, SVP, Investor Relations
Yes, thanks, Simon. Brad, we are ready for the next question.
Operator, Operator
Thank you. The next question is from John Hodulik of UBS. Sir, your line is open.
John Hodulik, Analyst
Great. Thanks, guys. I got three quick ones. First, in terms of the 3% plus service revenue growth, can you give us a sense in terms of whether that's weighted more towards subs or ARPA improvement? Obviously, you guys in your commentary talked about some of the headwinds to the sub growth. I’m just wondering if you guys think you can maintain sub growth as you look through the year? That's number one. Number two, just any thoughts on the ability to continue to drive margin improvement in the business, given that considering you're close to achieving the $10 billion in savings. And then lastly, sort of a follow-up to Brett's question, is the CapEx guide that we've heard, is that something that could be revised during the year if the circumstances change? Thanks.
Hans Vestberg, CEO
Let me start, I mean, on the 3% growth, I think we have our strategy when it comes to how to grow with the migration of customers and all of that. And as always, the team is validating how to make offerings, if we should be more aggressive or not, but we always think about doing positive long-term impacts for our shareholders financially. You have seen us now working for the last 2.5 years since we launched unlimited, and we are doing the right things in order to make a long-term impact positively for shareholders and for our customers. Especially Ronan and the team, they've quite a lot in the portfolio, but we have proven that this model is working when it comes to migrating unlimited with the best network and adding in new value-added services like everything from Disney+, Discovery+, Apple Music, and it might be more coming up in the year as well. I'm confident that this model will continue to perform. And as you heard about Disney+, it's quite remarkable how we can help direct to consumers with two-thirds signing up or more after one year. That is something that stands out. On the EBITDA, Matt will come back later on, but I can say that we continued with efficiency. And that's the reason why we are giving guidance that we will grow the EPS again, and the majority or all of it is basically above the line. This is operational improvements and improvements as we are growing our top line. Again, we have proven the model, the five vectors of growth, and now we're in the middle of executing. And finally, on CapEx. This is what we need to do right now. The technology team has all the means to execute on a strategy with assets we'll have to date. The only thing I can say, as I said, I'm not sure how many times before. We will only increase CapEx if we find something that has a really good return on investment. Then we'll come back and talk about it. Right now, we have everything that we need to execute the plans that we have in front of us.
Matthew Ellis, CFO
John, regarding your questions about the guidance, the 3% service revenue is a blend of subscriber growth and ARPA, which Hans detailed as key drivers of the business. We certainly anticipate growth in subscribers, accounts, and net additions, which are vital for us. We will pursue this growth in a disciplined manner without chasing unprofitable avenues. You can expect to see increases in both volume and ARPA. On margin improvement, we are close to achieving our $10 billion cost savings program ahead of schedule, but that won't mean we'll stop. We see significant opportunities to enhance efficiency, and the team is dedicated to this effort. Hitting the $10 billion target won't alter our ongoing plans. Revenue will significantly influence margin improvement, and cost savings will complement that. It's worth noting that while we might see an increase in EBITDA margin dollars if equipment revenue rises this year — which we hope reflects broader economic activity — it might not translate into proportionate margin growth due to the relationship between revenue and costs. However, we remain focused on the dollar aspect of this equation and are excited about the guidance we've provided for the year.
John Hodulik, Analyst
Okay. Thanks, Matt.
Brady Connor, SVP, Investor Relations
Yes, thanks, John. Hey, Brad, we are ready for the next question.
Operator, Operator
Thank you. The next question comes from David Barden of Bank of America. Your line is open.
David Barden, Analyst
Hey, guys. Thanks so much for taking the questions. Hans, I guess the first question for you just on the strategy side with the sale of the HuffPost. Is this the beginning of a dismantling of the Verizon Media business? Is it on the block? What is the game plan for that unit as we think longer-term for Verizon? And then, I guess the second question would be for Matt. Matt, you called out that the 2H '21 might have some tough comps for the business side of the business. Could you kind of elaborate a little bit on what that might be and what the numbers might look like? Thank you.
Hans Vestberg, CEO
Thank you. On the Verizon Media Group, I just want to remind you that we started this journey somewhere in 2018, resetting the overall strategy of Verizon Media Group. We started with that. We started to take out costs. We changed the product portfolio. We went into a very clear brand value of trust and privacy. The team has just done an outstanding job. I mean, they have brought this from sort of going down with a decrease in growth of 15% to 20% per quarter. Now they are turning around with extremely sharp products including consolidating some, I'm not sure if it was 10 or 15 different ad tech platforms to one. I think it's great. We have put them in a position that we are really happy with. So, I'm looking for how these guys will execute, and we are now in the position where I wanted it to be. And then, David, on your question on the VBG volumes. So certainly, as you think about what we've seen this year, especially in the public sector part of Verizon Business Group, very, very strong year. Obviously, some of that is due to the circumstances that we've seen across the country. So I would actually be very happy if we saw some pressure on those volumes in the second half of the year. That would mean good things were happening elsewhere that would be very supportive of our Consumer business and very supportive of our SMB businesses as well. So certainly, it's part of some of the uncertainty that exists as we think about the year, but just wanted to call out the fact that if we see the improvements we expect, we may see some impact there on the public sector side of our Verizon Business Group volumes. But as I say, I think that would be more than offset by other parts of the business. So, what you've seen and what we expect in '21 is that as we have so many different parts of the business, irrespective of how the macro environment plays out, we can put together very strong consolidated results.
David Barden, Analyst
Thanks, guys.
Brady Connor, SVP, Investor Relations
Yes, thanks, Dave. Brad, we are ready for the next question.
Operator, Operator
Thank you. The next question comes from Craig Moffett of MoffettNathanson. Your line is open.
Craig Moffett, Analyst
Hi, could we discuss the competitive landscape in the wireless market for a moment? Your gross additions, particularly in the Consumer sector, are significantly lower across both Consumer and Business segments. Although your churn rate is impressive and your ARPU is showing improvement, this contrasts with the trends we've observed over the past few years. This might indicate a reduction in competitive pressure, but it also highlights a decline in your capability to attract new subscribers. Could you elaborate on this and share your perspective on how this situation may evolve in the 5G era, especially as more 5G handsets are being sold?
Hans Vestberg, CEO
Thank you. First of all, I think the competitive landscape is always there and competition is also equal. I think we just have a little bit different strategy. I mean, first of all, quality net adds are very important for us. As you can see, we are adding these very important net adds. We want quality customers that appreciate our network, that like our offerings and our experience. If you look at what we have done in the last 2.5 years with our migration story, that's exactly what we have done. And that's what you see an impact in the fourth quarter. We are growing our service revenue as well as the guidance for next year. So we are confident with the strategy we have, and that might not be the same strategy that others have, but we can grow. That's part of the five growth vectors we have to get to GDP plus. With the guidance that Matt gave of plus 3% on the wireless service revenue, I think we have full confidence in the model we have and how we will work with it. But it's also true that the switcher pool during 2020 in the fourth quarter was lower due to COVID, less traffic, and all of that. But all in all, we are very pleased with the high-quality net additions that we are getting and that we can create growth with that and continue.
Matthew Ellis, CFO
Yes. Thanks, Hans. Craig, I think the retention side of the business is performing very well and we are doing that through the quality of the network, the quality of the customer experience and not having to do anything additional to drive that type of retention numbers that you see. So, it's been a very strong story there, and we would expect that to continue.
Craig Moffett, Analyst
Thank you. If I could ask one more question, I apologize for switching topics. Your video strategy appears to be quite different between wireline and wireless. In wireless, you have established partnerships with Disney and Discovery, positioning yourself as a neutral player. I wonder if this raises any questions regarding Fios. Should you continue with your current video business model, where you offer a direct package, or would it be more beneficial to adopt a similar approach to wireline, where you provide a variety of third-party aggregators across your network?
Hans Vestberg, CEO
Thank you, Craig. No, first of all, you're absolutely right. On the wireless side, our D2C strategy is great. We have a platform that nobody else, regarding distribution, brand, and network, and we can cope with this. We are not going to have 100 different types of offerings. But the Discovery+, the Disney+, they are super A brands that we want to work with, or Apple Music. We will look for more of these to see that they're fitting into our customer base, that they like it and are willing both to upgrade and migrate. So, we will continue with that. On the Fios side, of course, we will continue with the video right now. But you’ve seen us also starting with Mix & Match, starting to shop up this because ultimately, I want our customers to have choices. They should be able to choose whether they want the D2C solution, a linear, or over-the-top; they should have that choice. And looking at the numbers in the fourth quarter again, we continue to grow our Fios Internet customers and we have a decline in the video customers. That's good for us, financially. But ultimately, it is to meet our customers' needs. I think the whole setup that we did in Verizon 2.0 is just catered for us to do things that we never thought about before. We have a Consumer division thinking about how we are now delivering to consumers and that's what you see in the numbers, and that's what you see in the numbers that we have. We have the same in Verizon Business Group. They are thinking totally different than we have done before. We still have more to do with platforms and things to be even more scalable and be able to bring more to the bottom line. But I have to say, I'm pleased, and I hope that you guys and what you see, are pleased as well. I mean the strategy is working. We have the five vectors of growth. We're going into 2021, and we have proof points on all those five, including the video strategy you asked about.
Craig Moffett, Analyst
Thank you.
Brady Connor, SVP, Investor Relations
Yes, thanks, Craig. Brad, we are ready for the next question.
Operator, Operator
Thank you. The next question comes from Michael Rollins of Citi. Your line is open.
Michael Rollins, Analyst
Thanks, and good morning. Two questions, if I could. First, if you look at the improvement in postpaid churn year-over-year, can you unpack what portion of that might be coming from the pandemic and the lower switcher pool versus what's coming from the Verizon initiatives on the network strategy, the tiering and content bundling that you're doing or any other factors that you think may be improving retention? And then secondly, on the wireline business, is there at some point down the road a step function opportunity to take margins up, especially as you've continued to fiberize the local footprint? Thanks.
Hans Vestberg, CEO
Thank you. I will start and will let Matt make some comments as well. But on the postpaid churn, I think that we are just having a great moment with our customers. They love our network and the performance we have and the additions we're doing with 5G and 5G Ultra Wideband. At the same time, our offerings are so distinct and different than anybody else in the market, where they can go to the unlimited premium together with Discovery+ or Disney+ or Disney+ Plus. We have ESPN and Hulu included. I think nobody else has those types of things in the market. Our partners, at least if you ask them, I think you should, are very happy and pleased with how we can deal with this. We are happy with it, both from a retention and from a bottom-line side. We are making money on this, which is the whole idea behind the Network-as-a-Service that we're building on the Verizon Intelligent Edge Network. On the wireline side, I think the whole idea of the Verizon Business Group is really to see that we are working on this year-over-year. This is nothing that you fix in a month or a quarter or two. This is things that we need to invest in billing systems, direct-to-consumer, call centers, everything being set up to deliver scalable platforms for our customer in the Business side. That will, over time, improve our margins in the Verizon Business Group. If you look at 2020, I mean, it was a good performance for them, still doing investments to get where we want to get over time. Then we add to that new opportunities, like 5G Mobile Edge Compute. Matt?
Matthew Ellis, CFO
Yes. So just back on the postpaid churn, Mike, for a second. Certainly, there is a pandemic contribution, but as Hans mentioned, there are a lot of Verizon-specific pieces too. I'd also point out that the fourth quarter churn number included the impact. If you think about the Stay Connected customers, there was a delay in those customers going all the way through a collections process and so on. You had a positive benefit from that in Q2 and Q3, and a little bit of a catch-up in 4Q. But even with that, a very strong churn number, and it's based off of the best network experience as you saw confirmed again by RootMetrics yesterday. When you put that together with everything else we do, customers who get on the Verizon network want to stay on the Verizon network.
Michael Rollins, Analyst
Thanks.
Brady Connor, SVP, Investor Relations
Yes. Thanks, Mike. Hey, Brad, we are ready for the next question.
Operator, Operator
Thank you. The next question comes from Doug Mitchelson of Credit Suisse. Your line is open.
Doug Mitchelson, Analyst
Thank you very much. Hans, I was hoping you could reflect on the introduction of 5G in the United States. Many people anticipated that the iPhone 12, being 5G compatible and featuring all the necessary bands, would initiate a significant shift in consumer adoption of 5G in the U.S. I'm curious how much of the slower adoption can be attributed to the pandemic, which has limited retail access, versus the absence of exciting applications that would encourage consumers to upgrade. Additionally, how do you see this evolving over the next year or two or three? Will it be a gradual process, or are there exciting developments on the horizon? And for Matt, besides working capital, are there any other factors affecting free cash flow for 2021? Is there a way to estimate or quantify working capital? It's difficult to determine historically what might be considered normal. Thank you.
Hans Vestberg, CEO
When discussing devices and the upgrade situation, it's important to note that the Apple 5G phone launched late in the fourth quarter, coinciding with the pandemic's onset. We are pleased with the transition of our customers to 5G, especially since a significant portion of our base consists of Apple users. This upgrade cycle appears to be a standard one, perhaps slightly muted, but overall typical. We expect 5G technology to continually improve. Our network is being fortified, and performance enhancements are ongoing. For instance, our Ultra Wideband speeds have increased from about one gigabit per second to now four or five. There's plenty more progress to be made. The same trend applies to our nationwide coverage, which is also getting better. We anticipate this trend to continue into 2021 and 2022. Customers are taking longer to transition to new phones as they're quite attached to their current devices. However, this is consistent with the 4G upgrade cycle, and I believe this transition is progressing even faster than the previous cycle. Our memories might be short, making it hard to recall how things were. Nonetheless, this upgrade cycle is comparable to or even better than what we experienced with 4G around a decade ago.
Matthew Ellis, CFO
Thanks, Hans. So on the cash flow question, Doug, so when you talk about the swing factors, obviously, it starts with higher earnings for the year. Above the line earnings will be the largest driver in the cash flow for 2021. In terms of things that could potentially go the other way from a cash flow standpoint, we would expect higher earnings will lead to higher cash taxes. But in addition to that, we had the $2.2 billion one-time cash tax benefit in the second quarter last year that obviously won't repeat. So that will be a year-over-year difference in the cash flow. And then working capital, as you say, the biggest item in working capital is going to be in the receivables side, predominantly on the handsets. Obviously, as volumes go down, the amount of device payment contracts with customers goes down as well. So, even if we don't see an uptick in volumes this year, if they're just flat year-over-year, you have the removal of that tailwind from last year. So, all in all, you're going to see the increase from higher earnings with some offsets from cash taxes, and hopefully on the equipment receivables side are going to be the key factors in there.
Doug Mitchelson, Analyst
All right. Thank you, both.
Brady Connor, SVP, Investor Relations
Yes, thanks, Doug. Hey, Brad, we are ready for the next question.
Operator, Operator
Thank you. The next question comes from Peter Supino of Bernstein. Your line is open.
Peter Supino, Analyst
Good morning. Could you provide some insights on the service revenue outlook? Specifically, within the Consumer segment, what are the expected margin characteristics associated with the anticipated growth in service revenue? How will this revenue's profitability compare to typical service revenue levels?
Hans Vestberg, CEO
I believe it's clear that for 2021, we are aiming for profitable growth. This has always been Verizon's approach, and while I haven't been here forever, our focus remains on profitable growth. This applies to the Consumer group as well. We will ensure we provide the best offers for our customers while effectively managing our P&L, and we will take aggressive measures if necessary to achieve long-term benefits. As indicated in the guidance, our focus is on profitable growth, and we anticipate being able to grow while maintaining profitability, which is reflected in our guidance.
Matthew Ellis, CFO
Yes. So, Peter, I think that's exactly it. If the 3% plus service revenue guide is going to drive, it's driving the EPS growth, that's in the guide as well. So certainly, it's profitable growth. In terms of comparing it to historical incremental revenue, there are obviously different components all the time. But absolutely, everything that we're doing to step customers up from a revenue standpoint also creates incremental lifetime value with those customers. So, you should expect that to be a continuation of how we approach the marketplace that we bring customers on, and we do it in a way that creates significant economic value for us over the long term as we provide best-in-class experiences for those customers. Nothing changes there in our mindset.
Peter Supino, Analyst
That's a great explanation. Thanks.
Brady Connor, SVP, Investor Relations
Yes, thanks, Peter. Hey, Brad, we've got time for one more question. Let's do one more if we have somebody on the line.
Operator, Operator
Thank you. The last question comes from Colby Synesael of Cowen. Your line is open.
Colby Synesael, Analyst
Great. Thank you. Just want to circle back on CapEx for a moment. I feel like messaging earlier in the year was that CapEx in 2021 would be up. If you look at Street expectations, they were indeed expecting CapEx to be up in '21 versus '20. So, I'm just trying to get a sense of what might have changed to have the CapEx guidance flat year-over-year? Secondly, Biden is proposing increasing the corporate tax rate to 28%. I'm curious how you think about that and whether that would have a huge impact on free cash flow and dividend coverage? Or do you think that there will be offsets that you would be able to kind of absorb much of that increase? And then just as a housekeeping, is TracFone included in your 2021 guidance? Thank you.
Matthew Ellis, CFO
Thank you, Colby. To address your questions, we expect TracFone to close in the second half of the year, but our guidance indicates that it won’t significantly affect EPS this year. We'll provide updates as needed. Regarding corporate taxes, we're assuming a rate of 23% to 25%, consistent with recent years. We base our outlook on existing legislative conditions and are eager to see how the new administration addresses various issues. If these factors alter our business outlook, we will communicate that at the right time. We're confident in our business position. In the past, we've had solid dividend coverage even with higher tax rates. While we recognize that the current tax rate has supported job and economic growth, we're comfortable with our business setup as the administration explores different policies. Concerning CapEx, our capital deployment is efficient, resulting in guidance that remains consistent year-over-year. This includes our investments in LTE and the 5G build, as well as the ongoing fiber expansion. The team has built momentum in these areas, which continues to drive our operational efficiencies and reflects in our guidance.
Colby Synesael, Analyst
Okay. Thank you.
Brady Connor, SVP, Investor Relations
Yes, thanks, Colby. Let me hand it back over to you, Brad, and we'll close up the call.
Operator, Operator
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.