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Verizon (NYSE:VZ)
Q3 2017 Earnings Conference Call
Oct. 19, 2017, 8:30 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Good morning and welcome to the Verizon Q3 2017 Earnings Conference call. At this time, all participants have been placed in a listen-only mode and the floor will be opened for questions following the presentation. To ask a question, press star one on your touchtone phone. If at any point your question has been answered, you may remove yourself by pressing star two.

Today's conference is being recorded. If you have any objections, you may disconnect at this time. It is now my pleasure to turn the call over to your host, Mr. Michael Stefanski, Senior Vice President, Investor Relations.

Michael Stefanski -- Senior Vice President, Investor Relations

Thanks, Janice. Good morning, and welcome to our third quarter earnings conference call. This is Mike Stefanski, and I'm here with Matt Ellis, our Executive Vice President and Chief Financial Officer; and Brady Connor, who will be assuming my role as the Head of Investor Relations later in the fourth quarter.

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 I get started, I'd like to draw your attention to our Safe Harbor statement on Slide two. Information in this presentation contain statements about expected future events and financial results that are forward-looking and subject to risks and uncertainties. Discussion of factors that may affect future results is contained in Verizon's filings with the SEC, which are available on our website.

This presentation contains certain non-GAAP financial measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are included in the financial materials we have posted on our website. The quarterly growth rates disclosed in our presentation slides and during our formal remarks are on a year-over-year basis, unless otherwise noted as sequential.

Before Matt goes to the results, I'd like to highlight a few items. For the 3rd quarter of 2017, we reported earnings of $0.89 per share on a GAAP basis. These reported results include a few special items that I would like to highlight.

Our reported earnings include a net pre-tax loss of about $620 million, primarily associated with early debt redemption cost of $454 million and acquisition and integration-related charges of $166 million pertaining to Yahoo! and other acquisitions. And any impact of these after tax was approximately $374 million or $0.09 per share.

Excluding the effect of these special items, adjusted earnings per share was $0.98 in the third quarter compared to $1.01 a year ago. Included in our EPS is a $0.01 impact due to the natural disasters in Texas and Florida during the quarter.

With that, I'll now turn the call over to Matt.

Matt Ellis -- Chief Financial Officer and Executive Vice President

Thanks, Mike. Good morning to everyone on the call, and thank you for joining us today. Let me start by reviewing the progress in our strategic initiatives before getting into detailed results.

The cornerstone of our strategy is to provide our customers with the Best Network experience available. We are steadily investing to advance our 4G LTE leadership and actively building the network of the future. Our network performance leadership was evidenced by a sweep of third-party surveys for the first half of 2017 and the network's resiliency during the recent hurricanes and wildfires.

We delivered solid operational and financial performance in a competitive environment. We grew our retail postpaid and prepaid wireless basis with new unlimited data options and maintained strong customer retention. Service revenue trajectory also improved, as expected.

Our wireline results were consistent with the past quarters despite ongoing consumer video headwinds throughout the industry. Demand for our high-quality fiber-based products remains strong. Our team's integration of AOL and Yahoo! is ahead of our internal expectations.

We are confident in the execution of our strategy to drive profitable growth, generate strong cash flows and produce long-term value for our shareholders. The Board of Directors demonstrated our commitment to return value to our shareholders when they declared the 11th consecutive annual dividend increase last month.

We will start by reviewing the third quarter segment operating performance followed by a progress update on our new businesses, a walk-through of consolidated results, and finally, network and technology updates.

Now on to the wireless segment on Slide five. Our wireless business delivered another strong quarter of operational performance in a highly competitive environment. We grew and retained high-value postpaid customer relationships profitably.

In August, we expanded our postpaid unlimited data plans to include a lower-priced access entry point, which provides consumers with more choices to experience the leading 4G LTE network. With confidence in our network, we are now addressing a larger market with unlimited.

Given our clearing comparable service value proposition, momentum continued in the quarter. Smartphone net adds were 486,000 versus 242,000 last year. Total postpaid net additions of 603,000 included phone net adds of 274,000, 91,000 tablets and 238,000 other connected devices, led by wearables. We added 30,000 postpaid accounts versus a loss of 107,000 last year.

Total retail postpaid churn was 0.97% for the third quarter, which improved by 7 basis points year-over-year. Postpaid phone churn was 0.75% and was the main driver of the improvement in total postpaid churn. Postpaid device activations were nearly 9.8 million, of which 82% were phones. Our retail postpaid upgrade rate was 5.5%. During the quarter, 6.1 million phones were activated on device payment plans.

Prepaid net adds were 139,000 for the quarter, with an increased focus on the smartphone value proposition. Additionally, we recently expanded our offering to allow families the flexibility to combine different prepaid plans at a great value.

Let's turn to Slide six and take a closer look at wireless revenue and profitability. Total wireless operating revenue decline 2.4% in the third quarter as compared to a 3.9% decline a year ago. On a year-over-year basis, service revenue declined 5.1% versus a 6.7% decrease in the previous quarter. Sequentially, service revenue increased for the first time in 12 quarters.

The key drivers of overall improvement in service revenue include increased access revenue through customer migration to higher access points, new account formation and the tail end of the transition of customers to unsubsidized pricing. We now have approximately 78% of the postpaid phone base on unsubsidized plans as compared to 60% a year ago. We expect the service revenue trend to continue to improve in the fourth quarter and to exit the year with a decline of less than 4% year-over-year.

In the third quarter, equipment revenue increased 5.5% due to a higher device payment plan take rate. The percentage of phone activations on-device payment plans was about 77% for the quarter, which is consistent with the prior period. We expect the take rate for device payment plans for the fourth quarter to increase seasonally due to heightened consumer equipment activity. Approximately 49% of our postpaid phone customers had an outstanding device payment plan balance at the end of the quarter.

Wireless EBITDA margin, as a percent of total revenue, was 46.2%, up slightly sequentially and up from 44.9% a year ago. In the fourth quarter, we expect the improvement in service revenue to flow through wireless EBITDA margin, partially offsetting pressures from higher seasonal volume, advertising expenses, and promotional activity.

Let's move next to our wireline segment on Slide seven. Total reported wireline revenue grew 1.1%, including extra operations and data center divestitures. On an organic basis, wireline segment revenue decreased 2.7%, which was consistent with the prior quarter.

Our fiber offerings continue to gain share and grow revenue, partially offsetting the decline in legacy copper products. Consumer markets revenue increased 0.9%, driven by Fios Internet activity. Consumer Fios revenue grew 4.6%, including the impact of 2 marquee pay-per-view events during the quarter.

Verizon was recognized by a leading third-party study as the top-rated residential Internet provider for customer satisfaction in the Fios footprint. Fios Gigabit Connection, which launched early this year, continues to gain traction, offering symmetrical speeds of up to 1 gigabit per second. We added 66,000 Fios Internet customers in the quarter.

Fios Video results were pressured due to ongoing shift from traditional linear video to over-the-top offerings as well as competitive promotional activity. Fios Video losses were 18,000 in the quarter.

Enterprise solutions revenue, excluding XO, decreased 5%, while growth in fiber-based products continues. On a constant-currency basis, revenue was down 5.3%.

Partner solutions revenue declined 3.9% on an organic basis, which is an improvement over prior periods. Within business markets, fiber revenue is increasing, driven by demand for Fios broadband products.

On an organic basis, total revenue declined 5.8% year-over-year. On a comparable basis, the third quarter wireline EBITDA margin was 21.1% compared to 20.3% a year ago and up 40 basis points sequentially, driven by ongoing cost control measures.

Let's move next to Slide eight to discuss our progress in new businesses, starting with media. During the quarter, our Oath team has been executing on more than 20 integration work streams. We are positioning the business for the future, locking in early synergies and setting out a roadmap for the next several years with expectations to realize $1 billion in operating expense synergies through 2020.

With the addition of Oath, Verizon's addressable market has expanded from millions of wireless and wireline customers to about 1 billion global content consumers. We are combining the best aspects of AOL and Yahoo! to create a uniform and integrated platform to drive engagement and consumer value. Oath revenue was $2 billion for the quarter. We will provide additional information on Oath in future quarters as we progress through the integration phase.

Telematics revenue was over $220 million in the quarter, including Fleetmatics and Telogis. Total IoT revenue on an organic basis increased approximately 13% in the quarter.

Let's move next to Slide nine to wrap up with our consolidated results for the quarter. The solid segment results in the quarter and addition of new businesses drove improvements in the consolidated top line reported results.

In the third quarter, total operating revenues were higher by 2.5% on a reported basis. On a comparable basis, excluding divestitures and acquisitions, consolidated revenue declined 2.3%. Similar to recent quarters, the primary driver was the year-over-year decrease in wireless service revenue.

On a consolidated basis, excluding special items, adjusted EBITDA margin was 36.7%, up slightly from prior year's margin of 36.5%. We are focused on driving profitability through cost and capital efficiencies across our business. As Lowell announced in September, we have targeted $10 billion in cumulative cash savings over the next 4 years.

Let's turn now to cash flows and the balance sheet on Slide 10. We had a strong quarter of cash generation supporting our consistent capital allocation program and returning value to shareholders. Year-to-date cash flow from operations was $17.2 billion, including working capital pressure, primarily due to the $3.7 billion increase of device payment plan receivables.

The year-to-date capital expenditures were $11.3 billion with a sequential increase for the quarter driven by increased spending in wireless supporting growing network while prepositioning for 5G. We expect the full year 2017 capital expenditures to be at the lower end of the guided range of $16.8 billion to $17.5 billion.

Free cash flow from the first nine months of the year totaled $5.9 billion, which included a net after-tax discretionary pension contribution of $2.1 billion. In addition, our free cash flow does not include proceeds from asset-backed securitization, which we initiated in the third quarter of last year.

We do not execute an asset-backed securitization during the third quarter but have generated $2.9 billion year-to-date from our ABS borrowings. Over the last few days, we completed our third public ABS transaction this year for $1.4 billion.

The impact of device payment plans and on balance sheet securitization is expected to approach a steady state by year-end, reducing working capital headwinds during 2018. We anticipate working capital fluctuations throughout the year due to seasonality in wireless equipment volumes.

We ended the quarter with $117.5 billion of total debt comprised of $109.6 billion of unsecured debt and $7.9 million of on balance sheet securitizations. Our near-term unsecured maturities are modest at $2.3 billion through 2019. Our balance sheet is strong and provides us with the financial flexibility to grow the business.

Let's move next to Slide 11 to discuss our network and technology. Our industry-leading wireless and wireline networks are the cornerstone of our strategy, and we consistently invest to ensure that we have capacity to serve growing demand, technology to reduce the cost to serve and a network position to lead the industry into the future.

We continue to win awards in third-party studies that test the combination of coverage, speed, and reliability. Based on the confidence in our network, we broadened our unlimited options to offer more customers and unmatched unlimited experience on the best wireless network.

As expected, the introduction of unlimited pricing plans has increased the LTE network usage across various busier time frames and geographies as our customers enjoy the experience of consuming more data throughout the day. We are more effectively utilizing existing network capabilities and service plan features to handle the increased traffic without interrupting the quality of the customer experience.

Just over 50% of our available low and mid-band spectrum portfolio is being used for 4G LTE. Network reliability and resiliency are critical elements to our wireless network. We are thankful and proud of the work performed by our employees during the tragic natural disasters in Texas, Florida and Northern California to ensure their first responders and all of those affected were able to rely on our network in the time of need.

We maintained a high level of performance for our planning, network redundancy, and rapid response despite widespread power outages. Although we are not a wireless network operator in Puerto Rico, we have offered assistance to the local carriers and government officials as they work to recover from unprecedented hurricane damage.

We are steadily investing in the network of the future, which we call the Verizon Intelligent Edge Network. This network has many components that lead to a multiuse, software-driven network at scale.

It goes from the wireless or wireline access networks to an intelligent distributed computing platform to a highly automated, software-enabled core network. This architecture is enabled by dense, flexible radio network with deep, multiuse fiber that we have been building for years.

As we see new use cases, this intelligent edge network architecture will meet the new types of application demand. We will leverage these enhanced network capabilities such as latency, throughput, and security to create network slices that will be tuned to the specific needs of each application.

Our precommercial 5G fixed wireless broadband trials are continuing. Live customer experiences on the network provide key data and learnings that will give us valuable insights for commercial deployments. We are on track to share trial results later in the fourth quarter.

Over the past several years, we have been leading the development of 5G industry standards and the ecosystems for fixed and mobile. Global development is accelerating based on our work alongside industry partners for multiple use cases.

Let's move next to Slide 12 to review our strategy for future growth. We are confident in our strategy to drive future growth while delivering near-term results. We are laying the foundation for the network of the future while maintaining a strong lead in 4G LTE coverage, capacity, and reliability.

Our focus is on preserving and growing our customer relationships while expanding our presence in digital media and telematics. The execution model is to deliver strong fundamental results, allocate capital to our networks, maintain a strong balance sheet and return value to our shareholders.

Our wireless value proposition has evolved to allow more customers to experience unlimited wireless plans on the best U.S. network. We produce solid operational and financial performance across the business in a competitive environment while investing in our best-in-class networks and driving near-term cost efficiencies.

Our long-term strategy is to change people's lives by delivering the promise of the digital world while leading the industry and innovating for future technological applications. 5G provides a path of growth with fixed and mobility use cases with 4G interoperability. The 5G ecosystem is progressing with standards and technology development, and we are prepositioning our network with fiber investments, spectrum resources, and cloud architecture.

With that, I will turn the call back to Mike so that we can get to your questions.

Michael Stefanski -- Senior Vice President, Investor Relations

Thank you, Matt. Eunice, we're now ready to take questions.

Questions and Answers


Thank you. We will now begin the Question and Answer session. If you would like to ask a question, please press star one. Please unmute your phone and record your name clearly when prompted. Your name is required to introduce your question. To withdraw your request, please press star two. One moment please for the first question. Your first question comes from Simon Flannery of Morgan Stanley. Please go ahead with your question.

Simon Flannery -- Morgan Stanley -- Analyst

Great, thank you very much. Good morning. Matt, you mentioned the $10 billion cost-reduction program. Could you just give us a little bit more color around some of the buckets on that? And how should that layer through the next four years?

And then on unlimited, any updated stats on what percent of your base or what percent of your new customers are taking that plan? And of the -- since you changed it to the two -- or the three plans, who's taking -- who's taken the lower-rate plan versus the higher? Is that splitting more toward the higher-ARPU plan? Thanks.

Matt Ellis -- Chief Financial Officer and Executive Vice President

Thanks, Simon, and good morning. On your first question around the $10 billion, Lowell announced that last month. Since then, we have put a dedicated team against that, and we are starting to get around that work. It's a little early to get into some of the specifics of the timing of when you should see that.

But in terms of the buckets that's going to come across, really think about all of the -- all parts of the business are in focus here. Whether that is the network, whether that be distribution and care and even the -- obviously, the shared service parts of our business and across the complete supply chain, we're going to take a deep look across the whole business and identify areas where we have the opportunities to significantly improve the efficiency at how we operate the business.

And so we'll have -- as we get further into that program, we'll share more specifics over time both on where the savings are going to be realized from and also the expected timing. But I think we're off to good start with it.

In terms of your second question around unlimited and the new price plans, I would tell you that between unlimited and the Verizon 2.0 that we introduced last summer, we now have approximately 2/3 of the base on plans where they can control their overage spend. And so that's up, you would expect, from where we were a quarter ago. And so obviously, a significant part of the base now has the ability to do that. The expectation --

The mix is as expected between the 2 plans. We're not going to go into the specifics of each of those. I would tell you, though, that in the third quarter, what was -- we saw, as we expected, the migration of existing customers from data bucket plans to unlimited plans shifted to where the -- on average, they were stepping up in revenue from their bill prior.

And as we expected, we knew initially we would see optimizers who had the opportunity to move to unlimited and save money. We saw that in the first quarter as we introduced those plans.

In the second quarter, we continue to move through that. By the end of the quarter, essentially, that was flat as customers migrated over. And then in the third quarter, we got to the point where the customers migrating over are actually increasing, and you saw the increase in ARPA sequentially from 2Q to 3Q for the first time in three years. So we're seeing good progress there.

Simon Flannery -- Morgan Stanley -- Analyst

Great, just one quick follow-up. Any impact then on 2018? Or is it really going to be ramping through '18, so the impact is more '19, '20, from the $10 billion?

Michael Stefanski -- Senior Vice President, Investor Relations

You'll see some impact in 2018, but it's-it's accumulative number over those four years, but absolutely we will see benefit in 2018.


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

John Hodulik -- UBS -- Analyst

Great. Thanks. Matt, a couple of questions on the wireless sort of growth in profitability. First, on the upgrades. It's a low number in the third quarter. As you guys look out to the fourth quarter, do you think it's -- you think that changes and maybe bounces back a little bit like it maybe -- and you maybe won't see as much seasonality as you typically do? Basically trying to get a sense for whether sort of a lack of change in the technology or just customers at this point waiting for that 10 to come out?

And then related to Simon's questions, you saw sequential growth in the service revenue for the first time in a while this quarter, and it sounds like those trends are sort of inflecting. So could you guys return to sort of year-over-year growth sooner than the third quarter next year, given those underlying trends you're seeing in ARPU?

And related to your comments about margins, does that mean that we might not see the typical downdraft in margins we typically do in the fourth quarter given the flow-through effects that you mentioned?

Matt Ellis -- Chief Financial Officer and Executive Vice President

Thanks, John. Yes, as you mentioned, the upgrade rate in the third quarter was a little lower than we've seen in past years, and I think what you're seeing there is a difference in timing of some of the new devices coming out versus what we've historically seen.

Obviously, Apple is part of that. We're splitting the new devices between the eight, which came out in 3Q, and the 10, which comes out in 4Q. But also on the Android OS side of the house, we have the new Google device coming out this month as well. I think you're going to see more of -- we expect to see a shift in some of the volumes versus typically from 3Q to 4Q.

So look, as we get into the holiday season, some of those new devices come out. We think we'll see strong demand. And look, if you're paying $1,000 for a new handset, you're going to want that to be on a good network. So we're very confident that we'll get more than our fair share of that activity when it comes through in the fourth quarter. But obviously, we'll wait to see exactly how that plays out.

In terms of the sequential revenue trends, and as you highlighted, we were up in service revenue from 2Q to 3Q. That was in line with our expectations as we discussed on the last call. As you start to see a combination of a number of factors.

We've largely migrated the consumer base to unsubsidized pricing, which is 78% in 3Q, 75% in 2Q. So that transition is largely done, and so you're no longer seeing as much of a tail -- I'm sorry, a headwind from the reduction in the line access fee. And as I mentioned, we're starting to see step-up in migrators over.

In addition to that, we increased the number of accounts for the second quarter in a row. So you got the total volume in the business up as the rate we're getting from customer is going up, too.

So as I said in the script, we expect to be inside of 4% on a year-over-year basis in the fourth quarter. And as I've said previously, I expect we'll get to service revenue growth during 2018.

In terms of your questions about margins, it's a little too soon to say whether they're in play in the fourth quarter. Obviously, as we are now on unsubsidized, we don't have the same subsidy headwind, but we'll see what the environment is like in the fourth quarter competitively, and we will respond as necessary. So we'll see where that shakes out between now and the end of the year.

John Hodulik -- UBS -- Analyst

Great. Thanks.

Matt Ellis -- Chief Financial Officer and Executive Vice President

Thanks, John. Eunice, next question, please.


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

Brett Feldman -- Goldman Sachs -- Analyst

Thanks for taking my question. I was hoping you can maybe unpack the improvement you continue to see in postpaid churn, particularly in postpaid phone churn. You obviously have a much better visibility into your customer base than we do.

So for example, to what extent do you think that this is a structural improvement in churn as a result of customers moving into unlimited plans and other plans where they can control their overage? To what extent do you think it might just be that the seasonal pattern of device launches has been moved a bit, and so we could see it move back to prior levels as we go through that cycle?

And then just as an extension of this question, some of your competitors have been looking to lower churn by including free or just deeply discounted streaming video products as part of their bundles. I'm curious whether that's something that you think would make sense for Verizon as well. Thanks.

Matt Ellis -- Chief Financial Officer and Executive Vice President

Thanks, Brett. Look, I would say, as I look at the churn number, we've always had a good churn number. And obviously, [indiscernible] 75 conveys the trend that we saw in the second quarter and really continues the trend that we saw mid-February when we launch unlimited.

And as we said at the time, the key driver of launching unlimited was to protect our base of customers, which we think is the best and most valuable set of customers in the industry.

So look, there's a number of things that go into that, but I'll tell you one of the biggest pieces is that network experience that Verizon customers have, they get to see that they understand the reality of our network experience versus some of the others. And we saw that with some of the recent natural disasters.

So customers on our network understand that, when things really matter, it -- Verizon is a network they want to be on. So that continues to be a key part of it. And look, I believe we can continue to have very good churn without necessarily needing to bundle in other aspects into the core offering.

Brett Feldman -- Goldman Sachs -- Analyst

Is it fair to say that you would expect that, on a seasonal basis going forward, so for example, in this fourth quarter, you still think you might do better than you did a year ago even if there is an uptick in devices and maybe industrywide churn?

Matt Ellis -- Chief Financial Officer and Executive Vice President

You meant better year-over-year -- number?

Brett Feldman -- Goldman Sachs -- Analyst

Yes, yes, yes.

Matt Ellis -- Chief Financial Officer and Executive Vice President

Yes. Look, I think we've seen that ever since we launched unlimited, and we have a clear and comparable offer in the marketplace. We have demonstrated that our customers prefer being on Verizon rather than moving somewhere else, and I have no reason to believe that will change in the fourth quarter as we go forward. So very confident that we'll see that trend continue.

Brett Feldman -- Goldman Sachs -- Analyst

Thanks for taking the questions.

Matt Ellis -- Chief Financial Officer and Executive Vice President

Thanks, Brett. Next question, please.


Your next question comes from David Barden of Bank of America Merrill Lynch. Please go ahead with your question.

David Barden -- Bank of America / Merrill Lynch -- Analyst

Hey, guys, good morning. Thanks for taking the questions. I guess just a couple. First, Matt, you kind of highlighted the impact of divestitures and acquisitions on the revenue line, which was about a 5% swing versus reported numbers. Could you kind of maybe walk that down through EBITDA and then to earnings with respect to all the different moving parts year-over-year?

And then second, Lowell was pretty widely reported as kind of talking about working on a content type of program or partnership or acquisition as you work into the back part of the year. Could you kind of elaborate a little bit more on kind of what the goal is for that project and maybe how it ties to your plans for launching your own over-the-top video product? Thanks.

Matt Ellis -- Chief Financial Officer and Executive Vice President

Yes. So I'll start with the second one there. So with respect to Lowell's comment around content and a potential deal for usage rights, I would say we are continuing to work that particular transaction.

Lowell, when he made that comment, expected that it would be done by now. Unfortunately, it's just taking a little longer to dot the i's and cross the t's. But fully expect to see something there as we move forward.

In terms of the over-the-top, really nothing new to add for us as what Lowell said last month. Look, this is a space that we think there's an opportunity for us to play. We think that it makes sense for us to play in that space, but we don't want to launch just a "Me, too" type of product.

So we're continuing to look at what makes sense for us to launch something that's differentiated in that space, probably around life programming. But how and when we launch something will be TBD.

In terms of the -- your questions around the M&A side, obviously, the revenue line we brought Yahoo! in, brought XO in, and those brought revenue on day 1 when you close the transaction. So the same things with the other telematics businesses we closed in the back half of last year.

But initially, especially the Telematics businesses and Yahoo!, not significant at the EBITDA or EPS line, maybe a little bit of pressure at the EPS line, if anything, about $0.04 on a year-to-date basis.

And then they also bring depreciation and amortization, which is why they may not be a huge amount of pressure at the EBITDA line, but as you move down the income statement to the operating income and EPS, we see a little pressure this year as we expand those businesses going forward. We expect them to contribute in the future.

David Barden -- Bank of America / Merrill Lynch -- Analyst

Great. Okay.

Matt Ellis -- Chief Financial Officer and Executive Vice President

Okay. Thanks. Eunice, next question, please.


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

Mike Rollins -- Citigroup -- Analyst

Two, if I could. First, I was wondering if you could talk a little bit more about the 3 to 5-year view for wireless and just help us understand Verizon's expectations with the investments you're making, the technology that you're deploying, how an investor should think about top-line growth over a more extended period of time.

And then secondly, if you could delve into a little bit more detail on some of the businesses you've acquired now over the last couple of years in terms of Oath and Telematics. And how should investors think about the growth of those businesses over the next couple of years as well on the top line, especially? Thanks.

Matt Ellis -- Chief Financial Officer and Executive Vice President

Yes. Thanks, Mike. So as you think about the wireless business going forward, and obviously, we're -- I'm not going to talk specifically about our views on '18 and so on. We'll have those discussions when we get to January.

But you think of the business overall, we're very confident with where you're seeing the growth start to migrate to. We've talked about the trends in service revenue, the fact that we should expect those to get back to positive during 2018 once we work through the transition fully from subsidized to unsubsidized pricing.

We think it will continue from there. We'll continue to add net adds to the business based off the quality of the network. And then the network will be -- continue to expand the capabilities as we transition to 5G, and we think that will give us other opportunities to expand the wireless business going forward.

So we're very confident in the future trajectory of the business there. And obviously, as we think about 3 to 5-year view, the overall GDP is going to play into that.

But as I think about 5G and what it's going to do for the business going forward, and then as I think about the new businesses coming in and contributing as we expand those and then continuing to work on the cost side of the business, as Lowell described last month, I don't think you're going to recognize the business five years from now versus where it is today.

Mike Rollins -- Citigroup -- Analyst

I can just follow up on that point. You know the wireline businesses, you know something where you have greatest significant mount to fiber, but you also have some copper, you're competing for a full triple play bundle in a lot of your markets. But you're smaller relative to some of your video competitors.

Have you thought about doing something different in the wireline business in terms of the way the footprint work, whether it's to five G. or other investments in the wireline business or other strategic options for that asset?

Matt Ellis -- Chief Financial Officer and Executive Vice President

Yes. So there's a lot in that question, Mike. So look, fundamentally, as you think about the wireline business, you're thinking about -- it's really 2 assets there. You've got the legacy copper business, which continues to have secular declines across our set of customers, whether that be consumer, enterprise, small business, whatever.

And then you have the fiber side of that business, where we see continued growth in demand, and that's just not within the ILEC footprint. It's more on a national scale.

So if you think around, we've had the ultra long-haul backbone for a number of years now. Earlier this year, we expanded that with the XO acquisition, which added fiber metro rings in 45 of the top 50 markets. We obviously have significant fiber in the northeast corridor as we've been building Fios over the last 10 years.

So I should -- you should expect to see the fiber side of the wireline business continue to grow and become more relevant. And then as part of that, you've got the convergence of the networks between the fiber network and the wireless network as we densify in 4G and preposition for 5G. So as we go forward here, we think that the combination of those networks is incredibly important. Thank you. Next question, please.


Thank you. Your next question comes from Craig Moffett of MoffettNathanson. Please go ahead with your question.

Craig Moffett -- MoffettNathanson -- Analyst

Hi, thanks. First, Mike, congratulations career in IR, and thank you in behalf of all of us for all the help you've given us. And Brady, congratulations on your new position as well.

Michael Stefanski -- Senior Vice President, Investor Relations

Thanks, Craig.

Craig Moffett -- MoffettNathanson -- Analyst

I wanted to ask about consolidation because it's obviously so top of -- and from Sprint and T-Mobile said, we can see an early announcement as early as next week. Can you talk about how you think a Sprint-T-Mobile merger will change the competitive landscape? And would you argue to the SEC and DOJ in favor of approving a transaction like that?

Matt Ellis -- Chief Financial Officer and Executive Vice President

Yes, Craig, look, I'd tell you, there's a lot of various rumors and so on around the industry all the time around various M&A activity, and I'm not going to comment on other people's businesses.

I would tell you we have the right set of assets to compete irrespective of the industry structure, and that's what we're focused on. And I'm very confident in our ability to be successful however things play out with other people.

Craig Moffett -- MoffettNathanson -- Analyst

Thanks. Could I-could I ask, I think there's not much to say on that topic one, one separate question there.

Matt Ellis -- Chief Financial Officer and Executive Vice President


Craig Moffett -- MoffettNathanson -- Analyst

Could you update us on the 5G fixed wireless broadband trials, what you're seeing and how that informs your expectations for what you're going to do in 2018?

Matt Ellis -- Chief Financial Officer and Executive Vice President

Absolutely. So look, we'll have more specifics on that later in the quarter, and we'll get the right folks talking about that. But I can tell you the trials are going very well, and we're getting a lot of good experience using the millimeter wave spectrum. And some of the things we're seeing, whether it's the fact that we could deliver service without needing line of sight.

Whether as I think about MD use and the number of floors we can deliver service to being more than we expected. We've experienced delivering service and MD use above 20 floors, which is more than we thought it would be going into the trial.

So a number of good things coming into the trials. We'll get back to all of you later in the quarter with more specific details on the results of the trials and what that means for 2018, but nothing's changed about our intent to launch the fixed wireless broadband offering during the course of 2018.

Craig Moffett -- MoffettNathanson -- Analyst

Thank you.

Matt Ellis -- Chief Financial Officer and Executive Vice President

Next question please use.


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

Mike McCormack -- Jeffries -- Analyst

Matt, in the prepared remarks, you talked about over-the-top and some of the video pressure that we've all been hearing about a lot more recently. How do you guys look at that? When you look at the customers leading you, is it leaving just a video piece of it and maintaining the broadband connection? Or are you seeing a shift to different providers generally?

And then secondly, that spread between those making device payments and wireless versus those that are on unsubsidized plans, how many of those, in your best estimate, are people that actually were making a payment plan to you guys, pay out the phone and are opting into sort of a lower price point instead of upgrading the phone?

Matt Ellis -- Chief Financial Officer and Executive Vice President

Yes. Thanks, Mike. So look, on your first question, there's really nothing new here to us in terms of the trends we've been seeing over the past few years around whether its cord cutting or cord -- or whatever else.

And in fact, we've spoken in the past 2 or 3 years ago, we've really started speaking about this and the fact we said the traditional linear TV bundle is not long-term sustainable. And you saw our reaction to that when we launched some of the different plans that we launched at that point in time.

But so we're not surprised on what we're seeing around the TV now. But I'll tell you what's important. When you move to over-the-top for your video entertainment, the quality of that broadband connection becomes more important than ever.

And if you want a quality broadband connection, Fios and a fiber-to-the-home connection is the best option out there. And we continue to see strong numbers on the broadband side of the business as a result of that. And we're very confident that the Fios Internet offering will continue to be very strong in the marketplace.

As I think about the spread between the unsubsidized and the subsidized payments, look, what you have your is you do have customers who were on subsidized pricing get to the end of their 2-year contract, and they then moved to unsubsidized pricing and not necessarily getting there through upgrading to a new device and doing that on-device payment plan.

But that migration, as we say, is largely complete. We now have 78% of the base, which means virtually all of the consumer base is now on unsubsidized pricing. So as we go forward here, that gap between this year and the last year number will get narrower and narrower, and that's what's going to help drive the service revenue trajectory improvement as we go forward here.

Mike McCormack -- Jeffries -- Analyst

Matt, I'm sorry. Just quickly on the hurricane issue. You guys called out the $0.01 impact, but anything with respect to volumes in wireless that may have been even better have the hurricanes not hit?

Matt Ellis -- Chief Financial Officer and Executive Vice President

Certainly, we had in both Houston and Florida, we had periods of times when our stores were closed. And certainly, that's an impact. But we also saw good volumes as soon as those stores reopened.

Customers realizing in times like that you want to be in the best network. And so we saw an uptick as soon as those stores reopened. And I have to give credit to our team, whether it be in the network side and all the things they did and also our teams in the distribution side of the business, getting those stores open incredibly quickly after those storms. They did a fantastic job.

Mike McCormack -- Jeffries -- Analyst

Great and congratulations, Mike and Brady.

Matt Ellis -- Chief Financial Officer and Executive Vice President

Thank you, Mike. Eunice, next question, please.


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

Jennifer Fritzsche -- Wells Fargo -- Analyst

Great, thank you for taking the question. Matt, if I may, I just wanted to ask on fiber because we've all been brought up to believe fiber is really expensive to deploy. And yet, we see you coming into the lower end of your CapEx range.

Not asking you for guidance on '18, but are you seeing some savings with these XO properties? Are you pulling those laterals yet? Or is that going to be more kind of an '18 event?

And then if I also just could ask on the other element of 5G spectrum. I think Lowell has been on record saying you feel comfortable with spectrum, may not even sit in next spectrum auction. Can you talk a little bit of -- how you as you look at your inventory, are you feeling comfortable still with what you have?

Matt Ellis -- Chief Financial Officer and Executive Vice President

Yes. So I'll answer the spectrum question first. We're in -- we believe that we have a great portfolio of spectrum. As you look at the 4G network, only approximately 50%, just over 50% of our spectrum portfolio is served in that network today.

We've got additional spectrum assets that will serve that network in 2018, whether that be -- in the 8 50 and PCS or whether it be put in the AWS 3 to work. And additionally, as you move into a 5G world, we look forward to closing the Straight Path transactions and the XO spectrum transaction as we head into 2018.

So we're confident with our spectrum positions as we think about future auctions, we'll wait to see what's in there and make assessments at that time. But very comfortable with the portfolio we have today.

And obviously, as we think about adding capacity to do network, we have more than spectrum as the tools available to us as we go forward, and we've talked about the different technology and architecture tools with LTE Advanced and all the different pieces in there. We continue to be able to add capacity as we move to more software-defined networking and those type of tools.

And then obviously, densification. And that densification is based off having more fiber available in the network. Just to get your first question, we continue to deploy fiber, and we will continue to do that as we head into 2018.

As you say, I'm not going to talk to 2018 CapEx at this time, but you should expect to see us continue to be deploying fiber around the country as we go forward to service both wireless, but also customers across the rest of our businesses and getting into IoT applications as well. Jennifer, thank you and Eunice. Next question, please.


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

Amir Rozwadowski -- Barclays -- Analyst

I was wondering if I could build upon the prior questions around your spending trajectory. If we think about this lower-end CapEx target for the year, how should we consider the outlook against that backdrop of investment?

Clearly, focusing on network quality is focus for you folks. I'm just trying to unpack the commentary, whether it's a shift in some of the spending priorities that's taking place that's enabling you to get lower end. Are we seeing inflection with the benefits from software-defined networks flowing through the business at this point or anything to that effect?

Matt Ellis -- Chief Financial Officer and Executive Vice President

Yes, good question. Thank you, Amir. So as I think about the CapEx for the year and where it's coming in toward the lower end of the range, that's still going to be around $17 billion of spent. So certainly, not an insignificant number.

Some of this is just the timing of the activity with the network teams between 2017 and 2018. But look, I'll tell you, the key thing here -- and you talked about how it would also be a key shift in priorities, and I would say absolutely not.

The priority to continue to invest in the network, whether that's adding capacity for the networks today or prepositioning the network and being at the leading edge of building the future network technologies, that priority is unchanged.

And as we head into '18, you'll see that we continue to spend -- to continue to do exactly those things. So no major change there. You -- we will -- as we head into '18, more spending on fiber as we preposition for 5G and continue to make sure we have the leading network.

Amir Rozwadowski -- Barclays -- Analyst

Excellent and one follow-up, if I may. In touching upon that 5G commentary, in recent weeks, we have seen some notable developments around the broader ecosystem. In particular, the announcement with QUALCOMM to accelerate the global 5G standard and millimeter wave spectrum.

It seems like mobile 5G in terms of its availability is now being pulled forward. Is that going to affect the type of services that you plan to offer? Could we see mobile 5G earlier than anticipated here? Any color to that effect would be great.

Matt Ellis -- Chief Financial Officer and Executive Vice President

Yes. So I think we are very proud to be part of that announcement with QUALCOMM earlier this week. And really, what you're seeing there is, as we've talked about now for the past 2 to 3 years, we said if we put our shoulder behind 5G development, we think we can accelerate versus some of the timing that was taking place.

And in fact, there were some people who are saying they didn't even think 5G was going to be real, and you'll be able to use millimeter wave spectrum. So we've demonstrated that, by our efforts so far.

We've brought the ecosystem together. We pushed forward the timing of standards coming forward and not surprised by any of that at all. It's exactly as we expected.

In terms of the timing of mobile 5G, it's certainly not a 2018 activity. But you talked about does it change our view on the types of services we'll be able to offer. Absolutely not. We've seen a wide range of services that we'll be able to offer on 5G as being -- why we're being so excited about it, quite frankly, and why we put our shoulder behind getting the ecosystem to move faster than it otherwise would have been. And we look forward to being in a position to offer those services in the years ahead.

Amir Rozwadowski -- Barclays -- Analyst

Thanks very much for the input.

Matt Ellis -- Chief Financial Officer and Executive Vice President

Eunice, we have time for one last question.


Thank you. Your last question comes from Tim Horan of Oppenheimer. Please go ahead. Go ahead with your question.

Tim Horan -- Oppenheimer -- Analyst

Thanks, guys. Just to pound the CapEx again. Matt, you seeing any benefits from in terms of the -- in terms of pricing equipment? And can you just talk about, as you move to 5G, should we think about CapEx stepping up a couple of billion dollars a year?

There's a lot of articles in the press over the last couple of years that it might cost $20 billion, $50 billion to build out a nationwide 5G network. Any color around that would be great.

Matt Ellis -- Chief Financial Officer and Executive Vice President

Yes. So thanks, Tim. So in terms of benefits from -- and so on, sure, but not just FDN, but also network function virtualization, it does allow the value of some of the hardware you put in the network to change over time. And the -- how you operate the network the underlying software there. So I think you're seeing those trends as we continue to expand the network.

In terms of deployment of 5G, I think some of the people who are estimating those numbers are getting ahead of themselves. It's just too early to tell. As we have more visibility into the timing of spend around 5G, we'll share that with you, but it's way too early at this point, and I'm not going to comment on those estimates.

Tim Horan -- Oppenheimer -- Analyst

And then just lastly, on the $10 billion of expense reduction, how much of that do you think you'll reinvest in maybe growth in the business? I guess how should we be thinking about the longer-term margin trend over 3 to 5-year period?

Matt Ellis -- Chief Financial Officer and Executive Vice President

Yes. So as you think about that money, really, once we generate those savings, it becomes part of the overall pool. But I'm excited about the opportunities that the teams are developing to grow the business going forward.

And it's important that we make sure we have the resources in the business to invest in those things. And we can't be investing in those things if we have inefficiencies in the core business at that point in time.

So we just think it's a responsible thing to do to make sure that we constantly look at the efficiency of the business and look forward to generating those savings and discussing that with you in the future.

Michael Stefanski -- Senior Vice President, Investor Relations

Tim, thank you. And before we end the call, I'd like to turn it back to Matt for a few closing comments.

Matt Ellis -- Chief Financial Officer and Executive Vice President

Thanks, Mike. I'd like to close the call with a few key points. We remain focused on our strategy to invest in our networks while expanding our high-quality customer base and developing new platforms and solutions.

We are well positioned to compete in the current environment while leading the industry into the next generation of technology with our strong network assets. We are confident in our ability to execute our strategy and to generate long-term shareholder value.

Finally, before I close the call today, I want to personally thank Mike for his commitment and the support he has given to me and many others throughout his career at Verizon, and we wish him all the best in the future.

Also, I'd like to welcome Brady Connor to the IR team. I've known Brady for several years, and he'll be a great successor to Mike and addition to the IR team.


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.

Duration: 55 minutes

Call participants:

Michael Stefanski -- Senior Vice President, Investor Relations

Matt Ellis -- Chief Financial Officer and Executive Vice President

Simon Flannery -- Morgan Stanley -- Analyst

John Hodulik -- UBS -- Analyst

Brett Feldman -- Goldman Sachs -- Analyst

David Barden -- Bank of America / Merrill Lynch -- Analyst

Mike Rollins -- Citigroup -- Analyst

Craig Moffett -- MoffettNathanson -- Analyst

Mike McCormack -- Jeffries -- Analyst

Jennifer Fritzsche -- Wells Fargo -- Analyst

Amir Rozwadowski -- Barclays -- Analyst

Tim Horan -- Oppenheimer -- Analyst

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