AT&T Inc (T) 2014 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the AT&T third-quarter earnings release 2014 conference call.

(Operator Instructions).

At this time, I will turn the conference call over to your host, Senior Vice President of Investor Relations for AT&T, Mr. Michael Viola.

Please go ahead, sir.

Thank you, Tony, and good afternoon, everyone.

Welcome to our third-quarter conference call.

It's great to have you with us today.

I am Mike Viola, head of Investor Relations for AT&T.

Joining me on the call today is John Stephens, AT&T's Chief Financial Officer.

John will provide an update with perspective on the quarter and then we will follow that with the Q&A session.

Let me remind you our earnings material is available on the investor relations page of AT&T's website, and that's att.com/investor.relations.

I need to call your attention to our Safe Harbor statement before we begin.

It says that some of our comments today may be forward looking.

As such, they are subject to risks and uncertainties.

Results may differ materially and additional information is available on the investor relations page of AT&T's website.

I also want to remind you that we are in the quiet period for FCC spectrum auction 97 and the AWS-3 auction, so we cannot address any questions about spectrum today.

So with that overview, I now turn the call over to AT&T's Chief Financial Officer John Stephens.

John?

Thank you, Mike, and hello, everyone.

Thank you for joining us today and we always appreciate your interest in AT&T.

Before we report out on our quarterly results, I'd like to update you on Project VIP and the longer-term view of our business transformation.

We have been focused on building ultrafast video-centric networks and providing mobile connectivity to any device anywhere our customers needed.

I am pleased to say we've made great progress.

It has been nearly two years since we first announced our VIP initiatives and our plans to transition to IP networks.

Basically, we are doing everything we said we were going to do and more.

We reached our 4G LTE build target in the third quarter, four months ahead of schedule.

The nation's most reliable LTE network now covers more than 300 million people.

We continue to improve our cell site density and add capacity to help keep our network best in class.

We're also on pace with our wireline network goals.

Our high-speed IP broadband network now reaches 57 million customer locations.

About two-thirds of our U-verse video footprint now has access to 45 megabit per second speeds.

We also continue to make progress on expanding our U-verse video footprint and we committed to deploy ultrafast AT&T GigaPower service in 17 markets.

Our fiber to the business expansion also is going strong.

We now pass more than 600,000 new business customer locations with fiber, well on our way to our 1 million goal.

The transformation of our customer base also continued in the quarter.

Two years ago when we first introduced Project VIP, less than half of our broadband customers had high-speed IP broadband.

Now a significant part of that transition is complete, with nearly three-quarters of our base on high-speed U-verse broadband, and our strategic business services are on track to be nearly 30% total wireline business revenues by the end of this year.

The transition in wireless is just as dramatic.

There has been a steady shift of our subscribers to usage-based plans.

More than 80% of our smartphone base is now on usage-based plans.

At the same time, Mobile Share Value has helped move customers off the traditional subsidy model.

We also have launched new business opportunities that will leverage our investment in our high-speed networks.

The Connected Car is ready to take off.

In the third quarter alone, we added more than 500,000 Connected Cars, as the 2015 models start to roll off the assembly lines.

Digital Life, the first all-digital, all-IP home security and automation platform, has launched in 82 markets and has about 140,000 subscribers.

And AT&T has completed a Network On Demand trial in Austin that will enable companies to easily order, add, or change services on their own in near-real time.

A commercial rollout of Network On Demand-enabled Ethernet services is expected in Austin by the end of this year.

Our financial strength allows us to invest while still returning substantial value to shareholders.

In fact, since 2012, we have returned more than $50 billion to shareholders through dividends and share buybacks.

Our cash flows are strong and we have been aggressive in monetizing nonstrategic assets.

Including the sale of our Connecticut wireline property, we have generated about $16 billion in cash proceeds from asset sales.

This has helped us average nearly $20 billion a year in free cash flow and asset sales over the last two years, and we expect to do the same this year, 2014.

At the same time, we have kept our financial house in order by funding our pension plan, making significant working capital improvements, and taking advantage of historically low interest rates.

This is the heavy lifting our employees are doing every day that you don't always notice in the quarterly numbers.

We aren't just managing for the short term; we're managing and investing for the long term.

Now with that view, let's take a look at third-quarter results, starting with our financial summary on slide 4. Consolidated revenue grew to $33 billion, up $800 million or 2.5% year over year.

This was driven by continued wireless growth, as we reposition our business model; solid consumer wireline growth, once again led by U-verse; and continued growth in strategic business services.

Reported EPS for the quarter was $0.58.

In the quarter, we had $0.03 of costs associated with merger and integration-related expenses.

We also redeemed some debt early in the quarter to take advantage of low interest rates.

Those redemption costs had a $0.02 impact on the quarter.

When you exclude these items, earnings per share were $0.63, compared to an adjusted $0.66 a year earlier.

Cash from operations continued at a strong rate and we also continue to find ways to monetize assets.

Together, that has generated $32 billion in cash year to date, with year-to-date capital spending of $17 billion and about $7 billion paid in dividends so far this year.

With all of that, our cash position remains strong, even as we continue to return substantial value to shareholders.

Now let's turn to our operational highlights on slide 5. The third quarter was another solid step forward in the transformation of our business.

This included strong subscriber metrics in both wireless and wireline and continued growth in strategic business services.

In wireless, we saw good -- in fact, great trends in a challenging environment, including more than 2 million net adds.

That included adding twice as many postpaid subscribers as we did in the year-ago third quarter, record low third-quarter postpaid churn, solid wireless revenue growth, and improving adjusted service margins, even with record third-quarter smartphone gross adds and upgrades.

We also saw the continued transition of our customer base to AT&T Next and Mobile Share Value plans, while also realizing sequential ARPU phone growth.

In wireline, U-verse hit some important subscriber milestones.

We now have more than 12 million high-speed broadband subscribers.

The transition phase of moving our broadband base to IP is nearing completion, with about 75% of our total broadband base on our higher-speed service.

We also reached more than 6 million U-verse video subs.

That helped drive strong U-verse revenue growth and continued wireline consumer gains.

U-verse is now a $15 billion annualized revenue stream, growing at nearly 24%.

In wireline business, strategic services growth continues at a strong pace.

It's now a $10 billion annualized revenue stream, growing at more than 14%.

With those highlights, let's now drill down and take a look at our operating results, starting with wireless.

We had a great net add quarter.

That's a trend we have been seeing throughout the year.

Overall, we added more than 2 million total subscribers, led by postpaid and connected devices.

We added nearly 800,000 new postpaid subscribers.

That's twice as many as the year-ago quarter.

About 450,000 of those were tablets and computing devices, with the remaining net adds phones and some Digital Life.

And year to date, we have added more than 2.4 million postpaid subscribers, which also doubles last year's pace.

Another key point with our postpaid net adds is that we are adding these customers while maintaining high credit standards.

These are rock-solid, high-quality new subscribers.

These net adds exclude any migrations from our prepaid segment.

Connected devices also had a strong quarter as we started to see significant impact to the Connected Car.

Nearly 1.3 million connected devices were added in the quarter, including more than 0.5 million cars.

Churn turned in another strong quarter.

In fact, it was our best-ever third-quarter postpaid churn.

That follows our best-ever churn in the second quarter, and churn for Mobile Share Value and AT&T Next customers is even lower.

Total churn for the quarter was up slightly to 1.3% -- 1.36%, reflecting a larger prepaid base with the March acquisition of Cricket.

These are solid results in a challenging environment.

We saw competitive intensity pick up in an iPhone launch quarter, with all major carriers now offering the iPhone.

We expect that to continue as we move into the holiday sales period in the fourth quarter.

We believe strongly in the quality of our network, our award-winning customer service, and the value proposition we offer customers.

Our results so far this year show we are on the right track and we are looking to finish the year strong.

Now let's look at revenue and ARPU on slide 7. We continue to see a shift in wireless revenues as customers sign up for Mobile Share Value plans and away from the traditional subsidy model.

Total wireless revenues for the quarter were up nearly 5%, service revenues were stable year over year, and equipment revenues were up more than 40%.

The take rate for AT&T Next was about the same as last quarter, about half of gross adds and upgrades.

We also saw an increasing number of subscribers bringing their own device to our network, about 460,000 or 7% of smartphone gross adds were bring your own device, or BYOD.

That's more than four times what we saw in the year-ago third quarter and more than 1 million BYOD customers year to date.

We continue to have a large base of customers on discounted Mobile Share Value plans who have yet to migrate to Next.

About 20% of our smartphone base is on Next, but about 52% of smartphone subscribers are on the non-subsidy pricing.

This means that there are about 20 million potential Next customers we expect to upgrade.

That's up from 17 million at the end of the second quarter.

Next take rates continue to be strong in Company-owned stores.

Nearly all or more than 90% of our Mobile Share Value customers with pre-Next pricing are choosing AT&T Next when they upgrade in Company-owned stores.

It all comes down to customer choice.

Customers can choose the plan that is best for them and that's great for us, and right now, most customers are choosing to go off the subsidy model when they upgrade or add a new line.

Also in the quarter, we continued to see customers buy up to larger data plans and more are interested in device insurance.

This is helping drive revenue.

Now let's look at postpaid ARPUs.

The expected trends we talked about last quarter are happening as more customers take AT&T Next.

Phone-only service ARPU is down year over year, but up sequentially.

When you add in Next billings, you get a better view of what an average customer pays us each month.

Phone-only ARPU with Next billings improved sequentially by 2%.

The average monthly Next billings are about $29 per month, driving our ARPU with Next higher.

As the Next base grows, so does the impact on billings.

We also continue to see strong growth in data billings.

Those details are on slide 8. Wireless data billings increased by nearly 24% in the quarter.

This was due to the increasing number of devices on the network and customers choosing 10-gigabit plans or larger.

More than half of all Mobile Share accounts are on these plans.

During the quarter, we added more than 2 million Mobile Share accounts, giving us 16.7 million in total.

That's three times as many as we had a year ago.

We averaged about three connections per Mobile Share account, or nearly 47 million connections in total.

That's roughly 60% of our overall postpaid base.

Smartphone sales continue to be strong.

In fact, we had 6.8 million smartphone gross adds and upgrades.

That's a third-quarter record.

It would have been even higher without inventory constraints.

We added 1.2 million subscribers to our smartphone base, including about 500,000 smartphone net adds.

Most of our sales continue to be smartphones, about 91% of the flow share.

About two-thirds of our postpaid smartphone base used LTE phones.

As you know, LTE devices provide the best customer experience, while also being the most efficient on our networks.

Let's now look at our wireline results, starting with consumer on slide 9. U-verse hit two subscriber milestones in the quarter.

First, we now have more than 12 million high-speed broadband subscribers, after adding more than 600,000 in the quarter.

U-verse broadband is now 73% of our total broadband base and 75% in the consumer broadband base.

That's up 70% in the last two years.

That has helped drive total postpaid -- to help drive total positive broadband net adds in the quarter.

We also continue to deploy our ultrahigh-speed GigaPower service.

We now offer 1-gigabit speeds in Austin and have turned up the service in Dallas and Fort Worth.

We have also committed to deploy GigaPower in 14 additional markets, including Houston, Miami, and Atlanta.

We also passed the 6 million mark with U-verse TV subscribers, adding 216,000 in the quarter.

Bundles continue to play a big role in our growth.

More than 97% or virtually all of our video customers have some kind of bundle with us, most often broadband and video.

Nearly two-thirds of our U-verse TV subscribers take three or four services with us.

ARPU for U-verse triple-play customers continues to be more than $170.

That helps drive revenue growth, while reducing churn.

In fact, triple-play bundled customers have significantly lower churn than standalone customers.

All this helped drive 3% revenue growth in consumer.

Total U-verse revenues are now more than a $15 billion annualized revenue stream and are continuing to grow at nearly 24% year over year.

U-verse now represents 64%, or nearly two-thirds, of our consumer revenues.

That compares to 54% just a year ago.

Now let me take you to our wireline business results on slide 10.

We also reached another significant milestone in the wireline business.

Strategic business services -- those are growth services, such as VPN, Ethernet, hosting, and other advanced IP services -- are nearly a $10 billion annualized revenue stream for us now.

These services make up more than 28% of business wireline revenue and grew by more than 14% in the third quarter.

At our current growth rate, strategic business services should be about 30% of business wireline revenues by the end of the year.

Overall, business revenues declined by 2% in the quarter.

Service revenues were also down 2% year over year.

The shift to IP data and away from legacy services, as well as the economy, is the story in wireline business.

But within the business, there are some differences.

Our retail service revenues actually grew year over year.

Those are service revenues from enterprise and small business.

Enterprise revenues were up 1.7%.

That's its best performance in years and the sixth consecutive quarter of service revenue growth.

Small business trends also improved.

That's even with a lack of new business formations.

On the other hand, wholesale was again challenged by network grooming issues.

We also made a strategic decision to refocus the wholesale business.

That reduced wholesale revenues about $50 million in the quarter and we expect that amount to increase in the fourth quarter and thereafter.

The positive trends in retail service revenues are encouraging, as is the transition to IP services from legacy products.

But the economy and fewer business starts continue to make for a challenging environment and clearly call for the government to move towards tax reform legislation.

Now let's look at consolidated and wireline margins on slide 11.

For the quarter, our adjusted consolidated margin was 17.2%, compared to 18.5% in the year-ago quarter.

Wireless margins were pressured by strong adoption of Mobile Share Value plans, solid customer growth, promotional activities, and the Leap acquisition.

However, when compared to the year-ago third quarter, adjusted wireless EBITDA service margins actually expanded to 43.1%.

That's a solid performance, given our very strong postpaid and smartphone net adds, as well as record third-quarter gross adds and upgrades.

Wireline margins were pressured by increasing content costs and transformation expenses.

Lower legacy revenues also contributed to pressure.

But this pressure was partially offset by growth in consumer revenues, gains in strategic business services, and solid execution on cost initiatives.

Now, let's move to cash flow.

Our summary is on slide 12.

In the first nine months of the year, cash from operations totaled $25.6 billion and $8.7 billion for the quarter.

Capital expenditures were $17 billion and $5.2 billion for the quarter.

And free cash flow before dividends is $8.6 billion and $3.5 billion for the quarter.

We did monetize about $500 million of Next receivables in the quarter, as there continues to be great interest from financial institutions, and additional tranches in the future are possible.

Net debt to adjusted EBITDA was 1.7 and our credit rating continues to be among the best in the industry.

In terms of uses of cash, dividend payments year to date totaled $7.2 billion and we continue to be opportunistic with our share buyback program.

Our asset sales strengthen our balance sheet and cash position.

When you include the $1.9 billion in short-term investments, we had $4.3 billion of cash at the end of the third quarter.

We also expect to close the sale of our wireline assets in Connecticut with Frontier this Friday, which will enhance our cash position with $2 billion in proceeds.

Let me close with a quick summary of the quarter on slide 13.

We continue to make progress with our business transformation in this quarter and throughout this year.

That includes the repositioning of our postpaid base off the subsidy model.

Mobile Share counts continue to grow, and about 57% of our gross adds and upgrades in the quarter were either AT&T Next or BYOD.

At the same time, we continue to see strong total and postpaid net adds with low postpaid churn in a very challenging environment.

We also continue to rationalize our business portfolio.

This includes completing the sale of the America Movil equity interest, closing Connecticut wireline property transaction two months earlier than we had expected, and exiting select low-margin wireline wholesale businesses.

This rationalization, as well the impact of more BYOD devices than we had expected, and fewer Next -- AT&T net gross adds and upgrades, will impact revenues.

The Company now expects full-year consolidated revenue growth in the 3% to 4% range.

Even with this change, we expect that Next rates will increase for the rest of the year, and continued strong BYOD will help with margins, even with traditional fourth-quarter holiday pressure.

Overall, we continue to have confidence in our strategy and our ability to compete in this challenging environment.

With that, Tony, let's go ahead and take some questions.

(Operator Instructions).

Mike McCormack, Jefferies.

John, you have made a lot of protective moves this year, obviously, and we are seeing phone-only ARPU stabilizing, but EBITDA has gone ex-growth.

I guess just trying to think into 4Q, I'm assuming that the expectation clearly without subsidies is to see a decent number in year-over-year growth and EBITDA.

Then just, as part of that, if you could identify what you are seeing out there with respect to recent data points from the iPhone with respect to sticker shock on this whole issue of people being concerned about layering EIP payments on top of the existing plan.

Thanks.

Thanks, Mike, I appreciate your question.

First of all, on the sticker shock issue itself, quite frankly with 90%-plus of the people coming into our stores, we are not seeing -- I won't say we haven't seen one or two, but we are not seeing any strong number at all of sticker shock.

The reality of it is is for a person to come in and go to a subsidized model, they have got to come up with $240, plus whatever taxes they have to pay, and if they stay on the Next model, they not only get the cheaper service on a monthly basis, but the upfront costs are really only about $50.

From a sticker shock, it's much more positive to go on Next than it is to come up with that down payment for the subsidized phone.

So we -- and we really aren't seeing that at all.

On the expectations for the fourth quarter, won't go into details, but as we have said before, we expect a significant improvement in margins, EBITDA service margins in the fourth quarter, compared to prior years, and we're still working towards achieving what we've said in the past and that is all four quarters this year to be 40% EBITDA service margins or better.

Okay, thanks, John.

John Hodulik, UBS.

My question is on the improvement on the ARPU side.

John, could you just talk a little bit about what the drivers are of the sequential improvement we saw in phone ARPU and the improvement we saw in the postpaid ARPU?

And then, as it relates to the pre-Next program, it looks like you went from 17 to 20 in the quarter.

That's a real slowdown.

Have you guys repositioned the basis as much as you think is necessary or are we going to see that reaccelerate in the fourth quarter?

Thanks.

Great, so on the ARPU story, I think the biggest issue with the improvement is really the people buying the bigger buckets and buying -- upping plans, as we've mentioned.

We got over 50% of the customer base at the 10-gig or bigger plans and we believe that is really helping on the ARPU side.

We still have -- we still expect more customers to migrate to the Mobile Share Value plans, so we may still see some more pressure from existing customers on that ARPU side, but buying the bigger buckets is definitely helping.

Secondly, on the Next take rates, the two uniqueness of this quarter -- two items that are unique to this quarter were, one, the significant BYOD, and while those 400,000-plus BYOD devices really don't bring us much, if anything, in revenue and caused an adjustment in our thoughts on revenue, they don't bring any expense, either.

So, we will take those every time we can get them.

That seemed to have an impact on the Next take rate.

The other issue is where inventory was available in the launch month, which was September, where customers have a much higher experience -- a better experience going to Next in our Company-owned stores.

But in the launch cycle, sometimes inventory was constrained, so people would go to different locations where our experience level in Next hasn't been as high, particularly in some of the new channels, like some of the big-box stores or some of the manufacturer stores.

So we would expect that to get to those higher levels over time, so we do expect the rate to increase.

It's just going to take a longer time than we had expected.

Got it, thanks.

Joe Mastrogiovanni, Credit Suisse.

Thanks for taking the question.

John, I just wanted to clarify the postpaid net add estimate did not include internal migrations from prepaid.

And then, to what extent did you see prepaid migrations to postpaid maybe coming from your peers and have you made any changes to your credit standards?

So a couple things, so we haven't made any changes to our credit standards in any way, shape, or form that would be significant or any change that would change any traffic.

Secondly, we do not count any migrations from, for example, our Cricket product into our AT&T product.

Those would be excluded not only for phones, but for tablets.

That's not how we count or have ever counted that information.

I can't comment, necessarily give you a lot of a significant information with regard to any change in the migration from the customers that are porting into us, whether they were previously prepaid or postpaid customers of the other carriers.

I can't -- what I mean to say by that is I can't -- I don't want to indicate that there is any significant change in that.

I'm not aware of that, so I'll leave it at that.

Got it, thanks.

Simon Flannery, Morgan Stanley.

John, are you still committed to the $21 billion capital spending guidance?

You imply just a $4 billion number for the fourth quarter, and how are we thinking about that for -- is $21 billion still a good number for 2015 under VIP?

And then on wireline margins, you talked about some of the content costs, some of the transformation costs.

When do we see those margins start to stabilize?

Thanks.

Great.

Simon, we are still committed to the $21 billion range for 2014, which is the guidance we have been giving, so that gives us some room, possibly $21.5 billion down to $20.5 billion, somewhere in that, so that's what I would suggest as a range.

But yes, we're still committed to that.

Yes, we expect that to be a further step down in capital spending in the fourth quarter; that was planned.

If people are wondering how that might be accomplished, I will tell you that if you look at what the network team has accomplished with regard to getting 300 million POPs with LTE coverage, we are getting 600 million business locations passed with fiber, getting 57 million customer locations passed with IP broadband capabilities, we are ahead of the game, so to speak, in what we laid out and so there is a real opportunity to manage capital that way and still continue to meet our targets.

It's a benefit of being ahead of the game on some of the build.

With regard to 2015, I won't give any additional guidance.

I will specifically -- give any additional guidance.

We will give that in January and update our guidance like we normally do.

I will suggest to you this, though.

We still expect tax extenders to get past in the post-election session of Congress and those to get signed.

If that doesn't get signed, I would suggest to you that companies, all companies, will have to take into account that change in their ability to invest, because it's a financial change in their balance sheet and their cash flow statements.

That would be -- for us, it would definitely be taken into account in what we decide on our investments next year.

But quite frankly, I think many companies, it would have an immediate impact if it's not passed on their March or their first-quarter tax return payments for this year, and that might add a little more immediate impact on capital spending by other parties.

My point here is that I think tax reform, specifically tax extenders, needs to be completed.

With regard to wireline margins, two pieces to that story.

There certainly is the content piece and we have got a strategic resolution or opportunity to make improvements on that.

But secondly on our transformation piece, as you heard in our presentation, 75% of our DSL customers have converted to high-speed broadband products and we have converted a significant number of feature phones to smartphones.

All of this conversion going on.

In the wireline space, that conversion has had a lot of costs.

Those costs are getting behind us now.

When you have 75% of the base on high speed, you have incurred those costs, so that gives us an opportunity to improve margins going forward.

I will tell you there is a second transformation going on and that's how we serve our customers, how we take orders, how we provision -- how we validate those orders, how we provision them, how we activate service.

We're actively working on mechanizing that ordering process, mechanizing that validation, that provisioning planning process.

Those -- that work is not yet completed.

We have made a lot of great traction, but that work will certainly continue on into next year, and once we have that complete, those two pieces of our transition costs will be behind us and that will give us the opportunity to really grow margins.

That's what we are looking forward to.

Thank you.

Brett Feldman, Goldman Sachs.

Just a follow-up here.

You talk about an expectation that your Next take rate is likely to increase into the fourth quarter, after stabilizing in 3Q.

I just want to clarify.

Is that because you are putting more emphasis on that in the channel or are you seeing something else that is driving it?

Then just in terms of other margin drivers into the fourth quarter, can you give us some thoughts on where you think we're going to see the upgrade rate come out?

Brett, let me give you the simplest answer I can with regard to the Next rate improving.

Our stores in September had some shortages on inventory where customers went -- our customers went and bought inventory from other channels.

Our stores, our Company-owned stores, had the highest performance of Next take rate, so now that those inventory constraints we are expecting to get behind us.

They're not quite there yet, but we expect them to get behind us, we will get back to a more normal sharing of that.

That's the first reason.

The second reason is as we rolled out the Next program in the manufacturer stores and in the national retailer stores, there is a learning curve, and we are going through that, and as we go through the learning curve, the Next take rate for those operations has been improving.

Those are the two reasons why we think that the overall take rate can improve.

Any time you have a launch of a new device in a month, it challenges a lot of pieces of your operations.

In this case, it challenged our Next take rates.

With regard to margins activities, we're going to have all the -- we continue to have the focus on expense management and (technical difficulty) across the enterprise.

But I think you probably know that.

With regard to percentages on upgrade rates, we are not going to give any guidance on that and I wouldn't suggest there would be any differences one way or the other than you would have in a fourth-quarter holiday season with a new product launch out there.

Great.

Thanks for taking the question.

Phil Cusick, JPMorgan.

I guess a couple of housekeeping things.

One, can you reiterate or not the $11 billion in free cash flow and your EPS guidance that you'd given earlier in the year?

And then, second, just following up on Brett's question on the Next mix, given the -- what I think is a tougher credit requirement and the limits on distribution, how big of a mix on gross adds could this be, do you think?

Is there an upper limit around 75 or 80 that this doesn't go above?

Thanks.

So let me say this.

We are not changing guidance with regard to EPS or free cash flow.

We're still in that $11 billion range.

We're still at I think what I've said before is the low end of the mid single-digit EPS range.

The only caveat I will give to that is if we continue to have quarters where we can add 2 million customers, we're not going to turn down the opportunity to add 2 million postpaid customers or the kind of wireline growth we've had in our strategic services.

We are not going to turn that down just to make a goal that the finance guys may have set.

We are going to do what's right for the business, but sticking by what we've said before.

With regard to the Next take rates, I think you hit on the right point in the sense of there is always going to be a credit scoring impact on the availability or the qualification of all customers, so there will always be some customers who would be better suited for one of our other arrangements or one of our other products.

We welcome them.

We would love to have them, but we are not likely to go with the Next program for them.

Secondly, and I think as importantly, is customers just want to have choice, and so we will look to make sure that they have a choice.

If they don't want to use the Next program, that's fine.

We will have another opportunity for them.

With that being said, we certainly expect that with this Mobile Share Value pricing going to two-thirds of our base by the end of the year that there is a significant step-up in the number of Next customers compared to what we have today.

Whether that all occurs in the fourth quarter or some of it occurs in 2015, we will have to wait and see, but either way, it's still a good long-term investment for us and we believe a good long-term situation for our customers.

Got it.

Thanks, John.

Jennifer Fritzsche, Wells Fargo.

Thank you for taking the question.

John, I just wanted to explore the SMB.

You realized some significant bucking of what I would think would be a different trend, just because all our checks show that the cable guys have been nothing short of aggressive.

Can you talk a little bit of what you are seeing or what you're doing differently there to -- or is it just macro?

Are you leading on wireless, et cetera?

All of the above, Jennifer.

I am glad to take the call.

A couple things, one, we are putting a lot of fiber out there and our fiber, whether -- when you think about U-verse fiber and that U-verse fiber, what many people think is consumer, it also can be available for business, but also the fiber that is passing those business locations.

We are finding that fiber is enabling us to really go in and not only reinforce our customer position with existing customers, but be very competitive in offering services to new customers.

Secondly, our strategic services piece in the small business is growing healthfully.

It is not a big base as of today, but it is growing well, and the customers seem to like those services and are willing to take them.

So the investments we have made in VIP are starting to pay off.

Lastly, you hit the nail on the head and this is what we have done on an organizational perspective.

It works for small business, as well as large business, but the ability to be agnostic with regard to the services of whether it's wired or wireless, or, more importantly, the ability to combine wired and wireless services for your customers through one organization, has proven to be really powerful, even in small business.

That's how we think we are bucking the trend of no business starts, but we have got a long way to go and we need to keep -- the team's performing well, but we need to keep it up and keep it moving forward.

We are not making any declarations now, but we do have a better feel for the situation than we did a few quarters ago.

Great, thank you.

David Barden, Bank of America.

I appreciate letting me ask some questions.

So the first question would be on the enterprise side.

Your biggest competitor talked about what sounded like were some structural things going on in the industry on private line pricing, core connectivity pricing, and it doesn't seem to have been an issue for you guys in the quarter.

So I was wondering if you guys could give us a sense as to your comfort level on the enterprise positive trajectory.

Then the second was obviously the payoff from the forward pricing initiative has been the lower churn that you have been posting up.

Are you comfortable letting people look at kind of a 10 to 15 basis point year-over-year churn improvement be the new run rate baseline expectation on a go-forward basis?

Thanks.

Thanks, David.

A couple of things.

One, I got to tell you the performance enterprise has to do with our people.

It has to do with our enterprise sales team, both on the wired and the wireless side, and the performance of our network provides our largest customers.

I had the opportunity to meet with 10 of our largest customers a few weeks ago in New York and I can tell you that they are satisfied with the kind of service, the quality, the security offerings, those strategic services.

So we are hard at work to continue the good progress we have made and not lose sight of it.

It is a tough environment, but we are working very hard to continue it.

Our advantage is our wired network and capabilities, as well as the ability to combine it with wireless.

On the payoff in lower churn, we have certainly seen that payoff in lower churn.

We are not ready to establish a standard for that.

We need to get through a full year of this process before we even start formulating those numbers.

But, if you will, two quarters in a row of best-ever churn and year-to-date best-ever churn, and those churn numbers on the postpaid side all below all the two-digit range, is very encouraging.

But we are going to be careful to continue to work hard and move this Company forward.

It's a long process of transformation that we're going through and we are nearing completion, but we want to make sure we finish it very strong.

So I will leave off any predictions on rates.

Okay, thanks, John.

Amir Rozwadowski, Barclays.

Seems to be some interesting buzz among the supplier community around the supplier Domain 2.0 initiative.

Wanted to see if there was any updates from you folks on this front in terms of developments.

And also, timing to some of your earlier commentary on CapEx trajectory.

In other words, what you have seen so far, does that solidify some of your thoughts on the ability to drive down CapEx intensity in terms of your expenditures in some of the out years, John?

Continue to be optimistic on our software-directed networks.

Our Network On Demand trial in Austin just this last few months has proved positive.

We are excited about the opportunity to get a launch in Austin of a product on an Ethernet basis that is what we call our Network On Demand.

So those things are real.

They take time to implement and to do right and the team is striving to do it right, but we remain optimistic.

With regard to the software-directed networks and the ability to use that to manage and harness in our capital costs, continue to remain positive.

We take that into account in our spending projections and our estimates.

I would suggest to you, though, it is not a short road, but a long road, when you have a company that has $100 billion of net property, plant, and equipment that you are managing.

And networks that have a significant history to them, it's going to take some time, but we remain positive and optimistic.

Yes, we are receiving savings or achieving value from those software-directed networks and we hope to increase those amounts over time.

Great, thank you very much for the additional color.

Jonathan Chaplin, New Street Research.

Thanks for taking the question.

John, two quick ones, if I may.

So the bring your own device trend seems very positive.

I'm just wondering, how do you deal with bring your own device customers coming over from CDMA?

Do you give them a new handset or are all those coming from just T-Mobile?

Then, secondly, I didn't quite understand your comment on the impact of bring your own device customers on the Next take rate.

I would have assumed all of those customers would take Next -- would take the Next pricing.

That would be what would be most attractive to them.

If that's not the case, then I'm not sure why it would have impacted your revenue growth for the year.

Thanks.

Okay, so quickly speaking on the BYOD device, these devices are coming not only from competitors who operate similar networks or whose devices will operate on our networks, which may be more than one competitor whose devices may actually work on our networks, but they also come from devices that previously went into the drawer and were left at home, and these were handed down either to family or friends, neighbors, whatever the case may be.

People may buy them over eBay and bring them in and have already paid for them.

So they come from a variety of sources.

They could be reusing devices that had previously flown through our networks.

That's the first case.

The second case is if those phones would have been sold by us, we would have had -- depending upon what the device costs, a $500 cost -- $500 of revenue and $500 of cost.

It wouldn't have provided any margin and it wouldn't have provided any contribution, but it would have provided revenue.

So we still are getting our customer adds and we are getting efficiency with the reuse of devices; we're just not getting any revenue out of them and that is, quite frankly, a big piece when we are talking about over 1 million devices so far and choose your number on how much revenue we would have gotten out of each one those devices.

You can understand the impact it could have even on a company of our size's revenue.

That is the point there.

We would have assumed that those kinds of devices, people would have come in and gotten Next.

Secondly, I will tell you -- make a distinction here.

These BYOD devices are getting the Mobile Share Value plans and, generally speaking, they are getting the lower-priced service because they are bringing their device.

They are just not getting Next because they don't have to pay for a phone.

Got it.

Okay, thanks, John.

I appreciate it.

Tony, this will be our last question.

Michael Rollins, Citi.

Thanks for taking the questions.

Two, if I could.

First, as we think about your move to consumption-based pricing and we also think about some of the changes in the sizes of the buckets for data, can you give us a sense of what's happening as you increase the data buckets, you try to encourage customers to spend more on data?

Are you getting more in data revenue relative to those that might have started at a higher plan and can use the same amount, but moved to a cheaper bucket?

Then the second question is if you just had an update on the regulatory process with the DIRECTV deal.

I think the FCC put out an update on their clock today, and I am just curious if you could talk about the implications of that and any update from your perspective.

Thanks.

Sure.

On the data buckets, I would refer you back to the slide that we showed with regard to data billings, in that they were up about, I think, 24% year over year.

So what we're seeing in this opportunity is this.

People are buying up, particularly with the Mobile Share Value plan, they're required to get the 10-meg bucket so -- or the 10-gig bucket, excuse me, but they are buying up anyway.

Then it does have some impact, in some cases, on average rates and so forth, but, quite frankly, a better customer experience comes out of having these bigger buckets, also.

Additionally, and probably as important as anything, when they buy those bigger buckets, they are adding things.

They're going to add tablets.

They're going to add wearables.

They're going to add other devices, soon to be adding Connected Cars, and so -- they add other family phones or other members of the family's tablets.

What you see is they buy up these buckets and then they start using them and getting more functionality, and then they are more tied to us.

If you look at our Mobile Share Value accounts, I think we have about 16.5 million, almost 17 million, and we have about 47 million or 48 million devices or connections on them.

So these bigger buckets, that's what's happening.

It is helping us get pretty sticky with our customers, and that's how we feel.

The data billings increase of almost -- of over 20% is clearly what we'd point to to say what's going on with the data side.

With regard to the DIRECTV, the FCC did make a decision today to stop the clock.

That decision has nothing to do with the merits of our deal or any of the information that we have provided.

The FCC's order made it clear that there was concern about the confidentiality of the information that some content companies provide the FCC and they're trying to deal with those issues.

We are confident in the FCC's rigorous procedures for keeping the information confidential and we are ready to provide them with information they have requested from us.

While the FCC stopping the clock on merger reviews is fairly common, today's decision doesn't change our view that we will be able to get the deal approved and closed by the first half -- in the first half of 2015.

That's the color I would give you around that.

We're still optimistic about a transaction.

The stopping of the clock is not an uncommon or rare experience, and it has something to do with other issues than the benefits of our deal or the merits of our deal.

So we will continue to support the process and look forward to getting the transaction closed within that originally announced one-year kind of timeframe.

Thank you.

Before we close, I want to thank all of you for being with us this afternoon.

As you can tell, we have continued to make significant progress in transforming our business, not only in the third quarter but all year long.

That not only includes repositioning our postpaid base off the subsidy model, but we also did that while having strong net adds, strong postpaid gains, and record levels of churn.

We also had a strong performance in wireline, with continued strong performance in U-verse and strategic business services and our ability to combine our wired and wireless services for our customers' benefit.

We look to continue that solid momentum into the fourth quarter and finish the year strong.

Once again, thank you for being on the call.

As always, we thank you for your interest in AT&T and have a great evening.

Take care.

Ladies and gentlemen, that does conclude your conference call for today.

We do thank you for your participation and for using AT&T's Executive Teleconference.

You may now disconnect.