AT&T Inc (T) 2014 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the AT&T fourth-quarter 2014 earnings conference call.

(Operator Instructions).

I would now like to turn the conference over to our host, Senior Vice President of Investor Relations for AT&T, Mr. Mike Viola.

Please go ahead, sir.

Thank you, Lori.

Good afternoon, everybody.

Welcome to our fourth-quarter conference call.

It's great to have you with us today.

Like Lori said, I'm Mike Viola, head of Investor Relations for AT&T.

Joining me on the call today is Randall Stephenson, AT&T's Chairman and Chief Executive Officer; and John Stephens, AT&T's Chief Financial Officer.

Randall will provide some opening comments, and then close with 2015 guidance.

John will cover our results, and then we'll follow it with Q&A.

Let me remind you, our earnings material is available on the Investor Relations page of the AT&T website.

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.

Actual results may differ materially.

And additional information is available on our Forms 8-K, other SEC filings, and on the Investor Relations page of AT&T's website.

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

So with that overview, I'll now turn the call over to AT&T's Chairman and Chief Executive Officer, Randall Stephenson.

Randall?

Okay, Mike.

Thanks and good afternoon.

We are all fighting colds around here.

Lori may end up having to handle this call for us.

Before John takes you through the results, I want to take just a couple of minutes and frame where we are.

2012 to 2014 was really a period of unprecedented investment for AT&T, and for the industry, for that matter.

During this period, we built our LTE network to cover more than 300 million people.

We expanded our U-verse broadband footprint to 57 million customer locations.

And we deployed fiber to 725,000 business locations.

At the same time, we reengineered our mobile network, and we now deliver the strongest LTE signal in the US.

Now, at the same time, we have been aggressively repositioning our wireless customer base.

We are giving our customers now a choice of moving way from heavy handset subsidies in exchange for lower monthly prices.

And as a result, our customer satisfaction continues to climb, and defections continue to fall.

And you can see that by our record low annual postpaid churn rate.

And we also delivered our best-ever full-year adjusted EBITDA service margins.

We've also made a significant investment to migrate our wireline customer bases to the new platforms.

At the end of 2014, 76% of our broadband customers were on our fastest IP-based platforms.

And our strategic IP-based business services now represent a $10 billion annualized revenue stream, and it's growing 14% when you adjust it for the Connecticut sale.

And that brings us to 2015.

Because with these foundational investments largely behind us, and several strategic investments announced to date, the groundwork has now been laid for 2015 and beyond.

And today our customers are expecting us to deliver video across all of our platforms, whether it's traditional linear video, or over-the-top on U-verse broadband, or video to the mobile device.

So we've been assembling the pieces that we need to do exactly that.

DIRECTV quickly and significantly shores up the economics of our U-verse video product, and it brings us the best content relationships in the industry.

Our fixed broadband footprint will quickly begin expanding to 70 million customer locations in the US when we complete the DIRECTV transaction.

And then the Cricket acquisition -- it is proving to be a cost-effective way to strengthen our spectrum portfolio, which is a prerequisite for being in the mobile video delivery business.

We also lay the groundwork for expanding these capabilities outside the US.

We've always believed that demand for the mobile Internet and economic benefits experienced in the US would be repeated throughout the world.

And so with that, we've been looking for opportunities to gain a wireless foothold in key markets for the regulatory; and the investment climate is right.

And Iusacell and Nextel International's Mexico assets gives us this opportunity.

The changes in the Mexican legal and regulatory framework make it attractive for a new entrant to invest.

And we've closed on Iusacell.

And then once we complete Nextel, we will have a very deep spectrum portfolio, and this is the first element needed for a robust mobile Internet offering.

We will now have the ability to extend our US network directly into Mexico, building one seamless network that's spanning 400 million people.

And whether it's cross-border businesses, Latino customers of either Cricket or AT&T or Mexican consumers, we will be the only company with mobile Internet capabilities spanning both countries.

And don't forget, DIRECTV brings the premier video business in Latin America.

So the byproduct of this is represented on slide 5. You go 12 months from now, AT&T's revenue mix is going to look very different.

It will be much more diversified.

The way we integrate our products and services will be different.

And when we end 2015, post-DIRECTV, our revenues will come from four areas.

Our largest will be business solutions.

That includes both fixed and wireless services, and it's growing nicely.

In fact, in the fourth quarter, that area is growing nearly 6%.

The next area will be our consumer TV and broadband business.

Then, third, will be our consumer mobility business.

Then, obviously, our Latin American businesses, with satellite TV and then the Mexican mobility businesses, will be our fastest-growing area.

And we like this mix a lot.

And by the end of the year, we are going to be uniquely positioned in a world of high-speed connectivity dominated by video.

And it's going to be a very different business.

So with that, I'm going to turn it over to you, John, to go through 2014.

Thank you, Randall, and hello, everyone.

Let me start with our consolidated financial summary, which is on slide 6. We finished the year strong, with solid revenue and EPS growth in the fourth quarter.

Consolidated revenues grew to more than $34 billion, up 4.5% when you adjust for the sale of our Connecticut properties.

This was driven by strong wireless growth as we continue to reposition our business model, and adjusted revenue growth in wireline, thanks to gains in the strategic business services and U-verse.

For the full year, we saw adjusted consolidated revenue grow by more than 3%.

This helped drive strong EPS growth.

Reported EPS for the quarter was a loss of $0.77; however, when you exclude the significant items we disclosed in the last weeks, earnings per share was $0.55.

That's up nearly 4% from a year ago.

And if you consider that last year included about $0.02 of equity income from our divested America Movil interest, that percentage would have been closer to 8%.

Adjusted EPS was up slightly for the year, even after a $0.06 impact from the sale of our America Movil investment.

These adjustments include $0.94 of non-cash pressure from the year-end mark-to-market charge for our benefit plans.

This was almost the reverse of last year, when we had a strong mark-to-market gain.

The actuarial loss was largely driven by a decrease in the discount rate, but was partially offset by strong performance of our benefit plan investments.

We also had a $0.25 non-cash pressure from the write-off of certain network assets which we told you about earlier this month.

And we had $0.13 of costs associated with wireless integration, DIRECTV transaction costs, and a loss on the sale of the Connecticut properties.

Now let's turn to our operational highlights, starting with wireless on slide 7. Before I get to the quarter, it's important to take a look back at the full year, and see how far we've come with repositioning our wireless business.

It's been almost a year since we first introduced our Mobile Share Value plans, and began to accelerate the move of our smartphone base off the subsidy model to AT&T Next.

Since that time, the result has been dramatic.

First, we have nearly 3.3 million postpaid net adds, thanks to strong growth of phones and tablets.

That's our best full-year gain in five years, and this includes more than 700,000 postpaid phone net adds during the year.

These postpaid gains, along with an end-of-year surge of connected device subscribers, thanks mainly to the connected car, helped drive 5.6 million total net adds, our strongest growth in three years.

Just as impressive, we added nearly 5 million new smartphone subscribers during the year.

These high-value, high-quality customers have an ARPU of about twice that of non-smartphone subscribers.

At the same time, we had our best-ever full-year postpaid churn.

That's a remarkable achievement any time, but even more so when you consider the intense competitive environment we faced during the year.

We also had our best-ever full-year adjusted EBITDA service margins.

We achieved that even with record full-year smartphone sales.

This is the impact of AT&T Next.

Already more than one-quarter of our postpaid smartphone base are on equipment installment plans.

And more than half of our smartphone base has moved off the subsidy model pricing.

These are the long-term results we have talked with you about throughout 2014.

A repositioning of the smartphone base is working, with nearly 70% of our postpaid base now on Mobile Share plans.

Now let's look at fourth-quarter results, starting on Slide 8. Let's begin with net adds, where we had another strong quarter.

We added nearly 2 million total subscribers, led by postpaid and connected devices.

We added more than 850,000 postpaid subscribers, thanks to strong growth of tablets.

These tablets gains more than offset a slight decline of feature phone subscribers, but we also grew high-quality, postpaid smartphone base by another 1 million in the quarter.

This includes upgrades and migrations, which we don't include in our net add number.

Connected devices also continue their strong growth, as the Internet of Things begins to evolve.

Nearly 1.3 million connected devices were added in the quarter, including 800,000 connected cars.

Prepaid showed a loss in the fourth quarter.

However, the Cricket brand is showing momentum, with positive net adds after losing customers in the pre-acquisition, year-ago fourth quarter.

The Cricket integration is going strong.

Distribution has been expanded.

Churn is improving.

And now, nearly 3/4 of the customer base has transitioned to the AT&T network.

The fourth quarter is traditionally a strong sales quarter, and you see that in our results.

We had record smartphone postpaid gross adds and upgrades, with more than 10 million smartphones sold in the quarter.

That includes record total upgrades, those customers choosing to stay with AT&T and commit to new device plans.

Our upgrade rate exceeded 11% in the quarter.

Smartphones were 94% of all postpaid phone sales, another record for us in the quarter.

As expected, postpaid churn was up in the quarter.

The fourth quarter traditionally sees increased levels of churn for all carriers.

And when you add in the intense competitive activity in the quarter, it's no surprise to see churn at these levels.

But even with all this noise in the market, postpaid churn levels were comparable to two years ago, the last time a fully refreshed iPhone hit the market.

And this was the first time that all major carriers were able to sell that phone during the busy fourth quarter.

Now let's look at revenue gains on Slide 9. Total wireless revenues grew nearly 8%, as the revenue mix shift we have seen throughout the year continued to play out in the fourth quarter.

Equipment revenue growth topped 70%, with strong AT&T Next sales.

Service revenues were pressured, as customers continue to sign up for Mobile Share Value plans and move away from the traditional subsidy model.

We now have more than 18 million Mobile Share accounts, covering nearly 70% of our postpaid subscribers.

And about 58% of our postpaid smartphone base is on no-subsidy pricing.

Mobile Share customers continue to buy up to larger buckets of data.

Half of our accounts are on the plans of 10 gigabits or larger.

That compares to 27% a year ago.

And we are seeing a move to even bigger, larger data plans.

Nearly 20% are on plans of 15 gigs or more.

That's three times more than a year ago.

This helped drive an 18% increase in data billings.

The take rate for AT&T Next increased to 58% in the fourth quarter, or about 5.9 million new Next customers.

This impacted cash flows, but we consider this an investment in a great customer base that we are more than willing to make.

We also had about 400,000 customers bring their own devices their devices on to our network.

The Next take rate was a step up from prior quarters.

While we continue to see strong customer response at our Company-owned stores and agents, with a Next take rate of about 90% of upgrades, the take rate for Next through our other retailers was much less.

The strong holiday sales played a role here.

We typically have a higher percentage of our sales with other retailers in the fourth quarter.

These stores are still becoming familiar with Next plans, and our sales show that.

Plus, with the rush of the holiday season, sales personnel with these retailers don't always have the time to take the steps necessary to close a Next transaction.

We'll continue to work with these stores, and expect the take rate at those locations to pick up in the future.

As expected, the strong Next take rate helped drive the second consecutive quarter of sequential ARPU growth, when you factor in Next billings.

When you add in Next billings, you get a more accurate idea of what an average customer pays us every month.

The average monthly Next billings were up about $28 per month, even with the introduction of the Next 24-month plan.

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

Nearly 27% of our smartphone base is now on AT&T Next.

Now let's move to our wireline operations on Slide 10.

The transformation of our wireline networks to IP technology has helped drive year-over-year wireline revenue growth.

Let me say that again.

It has helped drive year-over-year wireline revenue growth when you adjust for the sale of our Connecticut operations.

We are really seeing the overall revenue impact of the strategic business services and U-verse.

Total adjusted U-verse revenues increased by more than 20%, and are now about two-thirds of consumer revenues.

And strategic business services revenues grew by more than 14%, and are now 30% of total wireline business revenues.

Growth was even stronger when you adjust out the impacts of foreign exchange.

Overall, adjusted wireline consumer revenue increased 2.4%.

Adjusted wireline business revenues were down 1.8%.

However, if you adjust for the impact of discontinued global hubbing businesses and foreign exchange, that decline would have been just about 0.5%.

We are still dealing with the impacts of an uneven economy, but enterprise revenues were up slightly.

However, the lack of new business formations continue to pressure small businesses.

Wholesale also saw pressure in the quarter, in part due to our focus on profitable sales.

These results helped drive a sequential improvement in wireline margins, which were up 120 basis points over the third quarter of 2014.

That's a reversal of trends in recent years when we had seen sequential declines between third and fourth quarter.

U-verse subscribers also grew in the quarter.

We added more than 400,000 high-speed broadband subscribers, and now added 2.1 million for the full year.

We finished the year with 12.2 million high-speed broadband subscribers, or more than three-quarters of our broadband base.

The transformation to IP broadband is a remarkable accomplishment for our entire wireline team.

U-verse TV subscriber net adds came in at 73,000.

Net adds were impacted by a strategic move to improve the profitability of our wireline consumer business.

With our high content costs, we targeted profitable, long-term value subscribers with lower churn rates, while still taking market share.

Now let's take a look at margins on slide 11.

Let's start with our wireless margins.

Wireless margins were pressured by strong smartphone gross adds and upgrades, investment-related expenses, and wireless integration costs.

We mentioned earlier that we had our best-ever full-year adjusted service margins, even with record sales, thanks to AT&T Next.

We also see the impact of Next on our quarterly results.

While our wireless EBITDA service margin was down slightly when compared to a year ago, the fourth quarter of 2014 saw 2.6 million more smartphone sales than in the previous year.

And if you compare the results to two years ago when smartphone sales were comparable, service margins improved over 700 basis points.

Wireline margins improved from a year ago.

Wireline margins usually are flat or down between third and fourth quarter, but that trend changed last quarter.

There was pressure from investment expenses and content costs, but this was offset by growth in wireline revenues and solid execution on cost initiatives.

For the quarter, our adjusted consolidated margins were 14.2% compared to 15.5% in the year-ago quarter, and just under 13% two years ago.

Strong smartphone sales also pressured consolidated margins, but our continued efforts for cost efficiency helped to offset some of that pressure.

Now let's move to cash flow.

That summary is on slide 12.

For 2014, cash from operations totaled $31.3 billion, and $5.7 billion for the quarter.

Capital expenditures were $21.4 billion, and $4.4 billion for the quarter.

And free cash flow before dividends was $9.9 billion, and $1.3 billion for the quarter.

Free cash flow was impacted by the nearly 6 million AT&T Next sales in the fourth quarter.

We pay upfront for those devices, while our customers pay us back over time.

The record upgrades and strong iPhone sales with a higher sales price mix made an impact as well.

This speaks to our willingness to invest in our premium smartphone customer base.

We aren't going to turn away good business to manage to a cash flow number.

We have the financial strength to finance devices for our best customers who have the lowest churn and higher ARPU, and that is our focus.

At the same time, our Next receivables significantly increased, while our bad debt ratios stayed at traditionally low levels.

These are high-quality receivables.

We did monetize $1.2 billion of the Next receivables in the quarter, as there continues to be great interest from financial institutions, and we do expect future sales of those receivables.

Also in the fourth quarter, we sold our Connecticut wireline operations to Frontier for $2 billion.

Our asset sales strengthened our balance sheet and cash position.

In fact, we had more than $10 billion in cash and short-term investments on hand at the end of 2014.

We had more than $3 billion in combined free cash flow and asset sales during the fourth quarter, with $18 billion for the full year.

In terms of uses of cash, dividends totaled $9.6 billion for the year, and we continue to have one of the strongest yields around.

We also announced a dividend increase last month.

This is the 31st consecutive year that we have increased the dividend.

That puts us in a small and select group of companies.

That should give you a good idea of how we look at our dividend.

Saying the dividend is important to us is an understatement.

We consider it a very important aspect of our shareholder return, and are committed to it.

At the same time, we maintain the best credit ratings in the industry.

Net debt to adjusted EBITDA was at 1.75.

And as we told you at the end of last year, the Company will continue to focus on maintaining a strong balance sheet, but expects that with pending investments, in the near-term we may go over our 1.8 times net debt to EBITDA target.

Also, as we've told you earlier, after we closed the DIRECTV transaction, our focus with free cash flow after dividends will be on paying down debt.

That's a look at the fourth quarter, and at 2014.

I would now like to turn it back to Randall to talk about our 2015 outlook.

Okay.

Thanks, John.

We are going to provide more definitive 2015 guidance after we close the DIRECTV transaction, and we do expect that to happen in the first half of this year.

But let me frame for you what you can expect from us this year.

And I'm going to start by talking about AT&T on a stand-alone basis; that is, before our Mexico and DIRECTV acquisitions.

What we expect to deliver is continued consolidated revenue growth.

Our adjusted EPS growth will be in the low-single-digit range.

We will have expanding margins, consolidated wireless and wireline margins.

We will also have improving free cash flow and improving dividend coverage.

And then, capital expenditures will be in the $18 billion range, the same as we guided earlier, and that's thanks to the completion of a lot of the Project VIP initiatives.

Now, if we include Mexico and DIRECTV, the first thing I would want to note is that we now expect to achieve even higher multi-year synergies than we had communicated and anticipated when we announced the DIRECTV deal.

So when you add Mexico and DIRECTV, we anticipate no dilution to our adjusted EPS, meaning our adjusted EPS growth, including Mexico and DIRECTV, will be in the low-single-digit range.

We will exit 2015 a very different company.

We will be a company with the ability to deliver video to any device.

We'll have a unique capability to integrate solutions across a diversified base of customers and geographies and technology platforms that are mobile, fast, and highly secure.

And we will have a path to profitable TV growth.

And we will have a nice set of growing Latin American businesses, positioned well in video and the mobile Internet.

So that's where we are focused for 2015 and beyond.

We are very excited about the opportunities that are ahead here for us.

And so, with that, Lori, I think we are ready to take questions.

(Operator Instructions)

John Hodulik, UBS.

A couple of strategic questions for Randall, if I could.

First, Randall, you've been able to put together a Mexican strategy at a very reasonable cost.

Is that all we should expect in terms of Mexico, given the expectation that AMX is going to be spinning off a large piece of their business over the next year or so?

And then if we could expand that, you also have a large footprint now in South America, especially Brazil.

What are your thoughts on that market?

And then maybe the same for Canada.

You talked, at least in the release, about a North American calling market.

If you could comment on your view on the attractiveness of those markets, that would be great.

Sure, John, thanks.

I'll start with your question on Mexico.

The America Movil asset sale has been one of those things floating out there.

Nobody really yet knows what that's going to look like.

And for us, if we wanted to move into Mexico, there were a couple of really unique opportunities in front of us.

And to try to flush out what was going to be required by America Movil to sell their assets seemed like an uncertain process.

So we pursued Iusacell.

And then with the Nextel Mexico asset, what we have here is a set of assets -- a spectrum portfolio that is really a robust spectrum portfolio; a nice cell site grid that will be a very nice place to start, and a nice customer base.

So we have the makings for what we need for a very viable and strong Mexico strategy, whether America Movil sells assets or not.

And so that's what we tried to do, is chart a path that would get us into Mexico and get us a platform that would sustain itself.

And we like these assets.

We think these assets are more than sufficient to compete in Mexico, and to go in and compete aggressively and take share.

So feel good about the assets we've got.

On South America and Brazil, it's too early to say, John.

What we have down there is the best pay-TV business in Latin America, and it's a business that continues to grow.

It's got a great brand name down there.

DIRECTV has done a very nice job of assembling some nice spectrum in various Latin American markets where they are doing a fixed wireless-type solution brand for broadband.

So there are a number of markets where they have line of sight, and the ability to bundle broadband with the TV product.

And their brand is strong enough that where they do that, they have really, really good success.

So we are actually anxious to get the transaction closed, and leverage those assets in Latin America.

And it is -- it's a really good product, a really good footprint, a really good brand.

So we are excited about getting it.

On Canada, I think right now we have about as much as we as a Company can handle (laughter).

I'm not prepared to start talking about going north of the border right now.

We've got a lot to execute on: the DIRECTV, get the deal approved; and then we've got some serious integration efforts that we need to get busy on.

And then obviously building out Mexico is going to be a full-court press for the next couple of years.

So we've got more than we can chew, right -- we've bitten off more than we can chew right now, and you'll see us focus on what we have consummated to date.

Great.

Thanks, Randall.

Mike McCormack, Jefferies.

Randall, I guess just following on, you started off the conversation with the discussion around revenue diversification.

What is your thought, just as you look at the US wireless landscape into 2015, with respect to how bad can it get from here, with respect to pricing and promotion.

From AT&T's standpoint, is share loss okay?

Are you willing to accept sort of lower-end share loss?

And then maybe one for John, just thinking about free cash flow into 2015, if we ex-out DTV and the acquisitions, just if you could frame out the moving parts there to give us a little more comfort on the dividend payout.

And also maybe just a comment on whether or not you have talked to ratings agencies about the appetite for how high leverage could go?

Yes, Mike.

In terms of the wireless business, when you look at 2014, there was some aggressive pricing in the marketplace.

But, John, I thought, did a nice job of a giving good basis of compare to 2012.

So in the fourth quarter of 2012, there were three competitors with an iPhone in the marketplace.

That was the last time there was a major iPhone launch.

And our churn rate this quarter was very comparable to what it was in 2012.

In this quarter, everybody in the market had an iPhone.

And so the churn rates in the fourth quarter, relative to what we've seen in the past, were fairly consistent.

When you look at the churn rates for the year, in light of what I think was a very robust pricing environment, we had our lowest churn rates ever.

Now as we move forward, we what we are really going to be focused on is the smartphone base.

You are going to see us continue to penetrate our customer base with smartphones.

We added 1 million in the fourth quarter by itself.

And you are really going to see us focused more and more intently on the business side of the equation.

And you are seeing how we are laying out what our segmentation -- what our business segments will look like as we move into 2015.

And we've had a lot of success really focusing on the business segment with our wireless products, and bundling that with VPN solutions and security solutions.

And as I mentioned in the opening that when you put those two areas together -- or not put the two together -- but when we look at our enterprise business segment, both fixed line and wireless combined, it's growing 5.8% in the fourth quarter.

That business segment, that segment of customers, churns lower than any other segment of the marketplace.

It is price competitive.

But it's interesting, when you bundle it with VPN and other products sets, that you have a very, very nice business that grows very nicely.

And as John showed, we are expanding margins as well.

So we are really focused on the high-end customer base.

The area where we are seeing a lot more pressure in the market is in the feature phones.

We churn feature phones much higher than our traditional smartphone base.

So that's what Cricket serves the purpose to do is to help us address that end of the market with a very robust and aggressive prepaid product.

And as John pointed out in his comments, Cricket -- we are getting through the transition.

It is now growing; our prepaid base is growing.

That customer base is obviously a very nice complement to what we are doing in Mexico.

We are looking forward to taking advantage of the Mexico footprint with Cricket.

And as you noticed in the last week, we have announced that free unlimited calling from the US to Mexico.

And you will see more and more of those offers materialize, going the other way, as we build out the Mexican footprint and the Mexican network.

Mike, this is John.

With regard to free cash flow, let me frame it up this way.

As you know we've announced, we are committed to do about an $18 billion range for CapEx next year.

So that's about a $3.5 billion reduction in the CapEx, or improvement and free cash flow.

That's step one.

Step two is with all our free cash flow -- excuse me -- with all our CapEx spending and investment, there comes some trailing expense.

With a reduction in our CapEx, we will see a reduction in that trailing expense.

It will not only help us with margins, but it will also help us with free cash flow.

So those are two major steps.

The third one is we have invested significantly in our customer base with regard to Next.

High-quality receivables; the banks continue to be interested in them.

But we have a portfolio of those that we will be able to securitize this year, and we'll see some turnaround in payback of cash for those that we haven't securitized.

So we are optimistic about that.

That will be pressured -- those things will be pressured by the continued success of Next.

So we may re-invest some of those Next dollars that we have grown this year, we may reinvest it in our customer base.

We will make those judgments as we go.

And then we will see some increase in taxes, but not significant.

We will likely see some increases in taxes.

With all of that being said, feel very comfortable about the increasing free cash flow and improving dividend coverage guidance that Randall mentioned.

We constantly talk to the credit rating agencies; work with them on our plans, and trying to be transparent with what we have going on.

I would expect we will see some -- they have made some announcements on their own, and I'm sure they will make their decisions as we kind of go through the rest of this year.

And the final DTV integration plans that we have -- they will come out and make their viewpoints known.

But I would tell you that those conversations have been productive and constructive, but they are well understanding our strategies and our approach.

John, I guess without the crystal ball, but thinking about the phone on the ARPU level, is there a level of penetration -- the value plans inside your base where we should start to see that more stable?

I know in the past, you talked about maybe stability as we get into 2015 on various moving parts.

But I guess just isolating phone-only ARPU, getting a sense for when that might be more stable?

So, Mike, as you know, on the phone-only ARPU, when I think about that, I think of phone-only ARPU plus our Next billings.

And if you look at that sequentially, they grew.

And the difference between the historical service ARPUs and the service ARPUs, plus Next billings -- that gap has been closing.

You guys can figure out the math.

But, quite frankly, when you sell almost 6 million phones in the fourth quarter on Next, and you start billing those for the entire first quarter and throughout next year on a $28 or $30 a month basis, you can understand our optimism about improving ARPUs as we define those.

Remember, we define them that way because that's what the customer is paying us in cash every month, so we feel real good about where we are going and where the process is.

We are not predicting or giving a guidance with regard to when ARPU plus Next billings will be greater than they were in the prior-year quarter.

But we look forward to getting through this year and continuing the progress, especially after having a fourth quarter where the sales team just did an outstanding job of adding almost 6 million customers to the Next program.

Great.

Thanks, guys.

Phil Cusick, JPMorgan.

I guess the couple of things I want to hit -- one, if you could just clarify guidance.

Is guidance to revenue and EPS growth, really just if we pull Connecticut out 2014, and, if so, what are the base revenue and EPS numbers?

It is pulling out -- we will pull out Connecticut, as you say.

We are not giving detailed analysis of the product line or sub products.

But your assumption, Phil, that it is without Connecticut is correct -- that is the baseline.

Okay.

Thanks, John.

And then second, if you could talk about Next, 58% in the fourth quarter.

What's going on in distribution?

Are you going to expand that further?

And do you expect a working capital drag in 2015 to be larger or smaller than 2014?

Yes.

So the Next sales go like this: in our Company-owned stores and our authorized agents, great performance, more than 80%, nearly 90%, as we mentioned; great take rates in a busy fourth quarter.

Quite frankly, on the large national retailers and the manufacturer-owned retail stores, the take rates were smaller.

But in the fourth quarter, they have a lot of activity for us.

They sell a lot of our phones, a higher proportion in the fourth quarter because of the holiday season than any other quarter.

So we are optimistic about Next take rates increasing overall through the year.

And we are also optimistic about working with the national retailers and the other retailers to provide them additional support on how to sell Next, and how it works.

So we are still real positive about Next, and believe that we'll get the number of customers on the non-subsidy plans in line with the number of customers on Next, plus bring your own device.

So we are really moving directly out of the subsidy business.

That's a good thing, long-term and short-term.

With regard to the free cash flow impact, we will have the flexibility to monetize.

We expect to have the flexibility to continue to monetize large blocks of these securitizations.

It's worked very well.

The banks continue to have very much interest.

And as we've stated before, we want to continue a regular pattern of doing this, so that we build a history for this out of the -- to keep us with flexibility in financing, going forward.

I would suggest to you that the activities we have going on now are not intended to be looked at to generate cash flow, in and of themselves, to pump up cash flow in any way, shape, or form.

It's really more of just a prudent management process throughout the year.

We will have flexibility to push forward or pull back, depending on continued interest rates, continued attractiveness from the banks, and so forth.

But so far, the process has gone extremely well.

We've been very pleased with not only the demand, but also the financial terms.

We continue to be confident this Next take rate is going to move up.

As John said, in our retail channel we are now hitting 90% and it's a learning curve.

People are learning how to sell this, and the mechanics, and the process for doing a handset financing program.

We then moved it into our agent channel, which is a very extensive agent channel.

In the beginning it was not very impressive.

And the agent channel is now beginning to perform at levels that look like our retail channel.

So then you move into the big box retailers, it will follow a similar curve.

And we have come through the holiday season, and John mentioned it -- they are pushing volumes.

And this takes a little bit more time to sell a handset that is financed, rather than just one in a box.

So it's just going to be a learning curve, and we are going to stay patient.

But we actually feel very good that the numbers continue to move in a positive direction.

Good.

Thanks, Randall.

Simon Flannery, Morgan Stanley.

Randall, you talked a little bit about DIRECTV.

Could you just give us a little bit more insight into the deal process?

The 180-day clock expires in March.

I think you referred to a first-half close, so how that's going?

And any updates on the synergies?

I think you talked about higher numbers.

Is that content synergies?

Is that more bundling synergies?

Is that something that's going to come in early on, versus later?

And I think you also talked about video to any device.

I know Verizon has talked about an over-the-top rollout in mid-year.

So is this something that you are going to have a similar type offering this year?

And is that contingent on the DIRECTV close?

Thanks.

First of all, deal process -- you nailed when the 180-day clock is running again.

But obviously there is a legal challenge going on between the content providers and the FCC.

That's kind of the big unknown in our process right now.

We are hopeful that the two parties -- the FCC and the content folks -- can get that deal settled in short order.

I believe there's a court proceeding that's do here soon that will help determine the pace at which that progresses.

But even with that, Simon, we are still fairly confident that this thing gets done, first half of the year.

And so I can't get any more refined than that because of this issue.

So this issue would be the only issue that would cause a delay of the 180-day clock to our knowledge right now.

As it relates to the synergies, there's a fairly predictable formula with us when we do these large-scale deals.

When we are doing the deals, we tend to be fairly conservative.

And we have, obviously, have begun with the DIRECTV management team some parlor discussions, and getting to a level of detail that is appropriate within the confines of a DOJ review and so forth.

So we are starting to see details on channels and channel cost, and so forth.

And as a result, as you start drilling down through it, it's fairly much across the board, we are seeing better opportunities than what we baked into the original deal economics.

And so that's why we are feeling pretty confident that we will exceed the merger synergies that we announced at the time we did the deal.

Across the board, they are looking good.

There are even revenue synergies.

When you have 20 million DIRECTV customers that are very, very high-end customers, and seeing what the wireless penetration rate that we have in that customer base -- it looks really good, the opportunity to be able to sell mobility into those channels, and so forth.

So, across the board, cost synergies, a few revenue synergies; it's all looking better than what we had anticipated when we announced the deal.

And then in terms of video to any device, this is one of the key opportunities that we were pursuing when we did this deal.

Our customers are demanding video to be delivered across any device.

And so one of the primary objectives we will have coming out of the close of the deal is taking advantage of the content relationships that DIRECTV has in our wireless customer base.

We envision customers being able to walk out of our stores with content available to them on devices that they have purchased in our stores.

You are familiar with the Otter deal that we have done with the Chernin Group, where we are developing over-the-top content with them, and taking advantage of ways of delivering that to our customers as well.

So it's going to be a multi-faceted approach, in terms of how we bring video to our customers.

But we are looking at multiple channels and channel lineups that we would be able to accommodate into our wireless customers, both tablet as well as handsets, as well as our broadband customer base -- 16 million broadband customers.

So, stay tuned.

There will be more to come.

But this is a high priority for us is getting the content delivered to the mobile handsets and tablets.

Great.

Thanks for the color.

Joe Mastrogiovanni, Credit Suisse.

A couple follow-on questions, if I could.

John, if there was an attractive opportunity in Latin America, maybe something sizable like America Movil is expected to be, given your funding requirements over the next few years, do you think a transaction like that -- you could do a transaction like that and stay within a comfortable leverage range?

Or should we expect some equity component for a sizable transaction?

And then, Randall, part of the strategy of allowing the base to move to new pricing, with the help on the churn side, and while we saw the benefits of that over the prior two quarters, we did see churn return to a level similar to two years ago, as you pointed out.

Are you comfortable with the current pricing strategy in place right now?

And do you think this fourth quarter was more of a one-time-ish in nature, or should we expect churn to remain at elevated levels as we move throughout 2015?

Thank you.

I'll answer John's question on Latin America.

The America Movil thing is just too uncertain to even answer a question on it.

And I will say it again: we've got all we can handle right now in Mexico.

And we are going to be focused on getting Nextel international closed, integrating that network, integrating those customer channels, integrating the distribution channels, and getting ourselves scaled in Mexico.

So anything else is just kind of speculation, and probably isn't worth conversation at this point.

In terms of churn, I would tell you I am comfortable with the performance we had in the fourth quarter as it relates to churn.

I'll say it again: when you compare it to two years ago, which was the last major iPhone launch, and only three national carriers carrying the iPhone, to have a comparable level of churn with the kind of pricing moves we are seeing in the marketplace versus two years ago, I think that's pretty good performance.

And its performance for the quarter, we are comfortable with.

We are, as I mentioned before, really focused on that area of our customer base that tends to have lower churn.

And that is our business customer base and high-end consumer customer base where we are experiencing the churn, as John said, in the feature phone side of the house.

We will address that with our Cricket platform.

So right now, it's -- who can call where pricing goes in this industry?

I haven't the slightest idea.

It moves.

It's very volatile.

But right now, we like the value equation we have in the marketplace.

We have a customer base that demands reliability, that demands speed, and that demands quality.

They demand a very sophisticated consumer channel and business channel.

We have probably the most sophisticated business channel in the industry for B2B.

And we think it's very important.

And we think also that that B2B customer segment is more and more demanding security solutions, integrated all the way through the cloud with our NetBond strategy.

That's proving to be a very powerful combination in the marketplace.

So that's where you will see us focus.

And, like I said, I can't predict where pricing will go.

[That's it].

So, thank you.

David Barden, Bank of America Merrill Lynch.

Maybe first one, just Randall, obviously your views have been expressed on this Title II as a way to get to the net neutrality issue.

But I guess from the investment community standpoint, are you of the view that there is going to be really anything different about the business, in terms of the business you do, or how you do it?

Or are the investments you are making kind of on a middle- to long-term basis?

If you could kind of talk us through the investment side of that equation.

And then, John, just a question on the write-down of the copper plant.

Could you talk a little bit about what that was, where it was, and what kind of expectations we have for that going forward?

Thanks.

Sure, David.

Let me give Randall a break, and then I'll take the copper question first.

We went through a study.

And in our business, there is active pairs that are copper pairs that are connected to customers and serving customers.

There is spare pairs in our network that are available that are in great working conditions and available to be used if needed.

And then there are what we would consider dead pairs, or pairs that need significant repair work that are not connected to any customers, and need significant repair work and investment to make functional.

We did a detailed study across our network, by our network engineers, in conjunction with them; identified, marked, and made the decision to abandon those ineffective pairs, or what the engineers would call dead pairs.

We have plenty of capacity to serve our customers with our active pairs and spare pairs, so we don't expect any limitations on that.

That's how we went through the process.

It was a very extensive process.

It was a very unusual process to go through.

We don't expect any further write-offs like this.

We are not aware of any.

We just felt it was appropriate to recognize this fact.

Anybody that's followed our business has seen the change in our access line customer base over the last five or six years can understand that we would have pairs that would be inactive; and, in this case, ones that were not economical to activate, not to mention the fact there's not demand for us to make that investment.

So that's the background [on it].

It's across our traditional wireline footprint.

My favorite topic, Title II.

(laughter)

Sorry, Randall.

Look, I'll address it from a couple of perspectives.

First, net neutrality -- what this debate started out to be pursuing was, how do we protect net neutrality?

A neutral Internet.

And I would tell you, I don't know of anybody in the industry that really argues that we shouldn't have net neutrality.

Indeed, the President laid out four principles for what that meant.

And we look at that those four principles and said, you know, we are okay with those.

Those four principles, if what resulted from all of this was the FCC were given authority to enforce those four principles, it has no bearing or impact on our investment decisions; none whatsoever.

What causes us pause is if the way you effect those four principles is by categorizing the Internet and wireless services as Title II communications services, that's a different deal.

That's something we have to say, what does that mean?

And what are the implications of categorizing these services as Title II services to our industry?

The example I give is we are, right now, trying to obsolete our old legacy telephone services, moving to IP or to all wireless.

And there is a very specific process one has to go through to obsolete those services, and replace them with the new, advanced services.

And we are working through that with the FCC.

It's a very collaborative process.

It works, but it takes a lot of time to make that happen.

And we think that we might be able to get to a point where we can obsolete these services and begin replacing them with the new services by 2020.

That's an aggressive timeline.

The idea of beginning to put our wireless services and our broadband products under those categories, and subjecting ourselves to that kind of regulatory oversight is what causes us pause.

And when we say we are pausing investment until we understand where this is going -- that's what we are referring to.

Now, if Chairman Wheeler can find some creative solution of categorizing these as Title II, but doesn't cause the industry to slow down, doesn't cause investment cycles to slow down, does not cause innovation cycles to slow down -- then, you know, it will give us some confidence and relief to continue investing at the same pace we have.

But until we kind of have clarity -- and we are saying we are just, on any new investments, we are in a bit of a pause mode.

But it's really up in the air right now.

There are a lot of ways of getting at what the President has articulated he wanted to accomplish.

One of them is, Congress is working on it.

And that is that Congress would pass legislation that would give the FCC the authority to enforce the four principles that the President articulated were important.

That works, to us.

That puts us very similar to where we are today, and probably doesn't change our investment thesis for anything we are trying to do.

But, you know, these really strident, heavy-handed regulations on wireless and broadband, if we go down that path, that's what causes everybody some apprehension and uncertainty, and begins to change investment theses and so forth.

So it's up in the air.

Right now, we are just anxious to see where the FCC comes out so we can all begin to formulate our plans.

Thanks, Randall.

Amir Rozwadowski, Barclays.

I was wondering if we could chat briefly about your commentary that post the completion of some of your pending acquisitions, and some other initiatives that seem to be on the table, your debt coverage ratio may go over that sort of 1.8 times level.

Could you perhaps give us a sense on where that could go?

And, perhaps, what is your priority maintaining your near-term credit rating?

It sounds like discussions with credit rating agencies have been constructive.

But I was hoping to get some clarification, if possible.

I'll take that.

If you look at the DIRECTV transaction, based on some of their most recent published financials, you will know that there is a cash piece of the transaction that would approximate about $15 billion.

And I think if you go back to their last published financial statement, their gross debt level could be in that $18 billion to $20 billion level.

That would be the debt we would be adding on, as well as any impact from closing Nextel and Iusacell, as compared to our first quarter.

And then we've got some other -- as we mentioned, we can't talk about the spectrum auctions, and so we won't do that.

But we will have other impacts from matters ongoing that will impact our debt ratings.

With regard to that, it is very conceivable that our net debt to EBITDA ratio would go above 2 -- I think that's assumed -- and possibly in somewhere in between the 2 to 2.5 range.

And I know that's a wide range but that's where we feel comfortable right now stating it.

Those are the kinds of levels of debt that we would expect that could occur once we close all the transactions.

What we would then focus on doing is because we would have accretive free cash flow after the DTV transactions, we've said before we would take the excess cash flows after dividends and use that -- commit that to paying down debt as quickly as possible.

We've suggested that over the course of a three-year cycle, that ought to get us back to more what is traditional levels for us.

That's the 1.8 times net debt to EBITDA.

If you look at our current cost of borrowing, some of our recent transactions -- but, quite frankly, our entire portfolio today -- we have after-tax cost of debt well below 3%.

So it's producing interest expense at a very acceptable level at 1.8, where just a few years ago interest expense rates were higher.

You might have gotten a comparable answer with a 1.5 or a 1.6 net debt to EBITDA.

So that's where we are at.

We will let the debt rating agencies deal with it as they see fit.

But we are comfortable with where we are going, and we understand the implications.

The last thing I would say, Amir, as we announced last week, we have set up a facility with a collection of banks an 18-month, 3-year, and 5-year terms for over $11 billion.

The net after-tax cost of that debt averages less than 1%.

And we have been very transparent with our plans and activities, such that reasonable people, as the banks are in this process, are still very interested in providing a significant funding at very attractive rates, with an ability for us to prepay it without penalty, and an ability us to leave the, if you will, facility open until such time as we need it.

So we feel real good about where we stand in the credit markets.

We'll continue to work on it, but we continue to feel good about where we are at.

Thank you very much, John.

One additional follow-up, if I may.

In addition to your significant acquisition activity, you folks have also been successful at monetizing some non-core assets over the last 12 to 24 months.

I was wondering if we should consider this element of your strategy, and how it may fit into your priorities for 2015.

Amir, that's a great question.

I'm not going to comment on the specific items.

I think we started talking about monetization of assets, back three years ago.

I think our first major transaction we did was with the Yellow Pages transaction.

So if you think back from that timeframe to today, you clearly understand the multi-billion, tens of billions of dollars we generated.

I'll say this: we have a $300 billion of assets on our balance sheet.

And we have a history of being 10 -- in the Fortune 100-type publicly traded companies.

We are not done yet.

We have an opportunity to do more.

We will continue to evaluate.

And as management, we have an obligation to maximize returns on our assets.

So getting to high utilization and high results, that's part of our responsibility and we will continue to focus on it.

But with a balance sheet as large as ours, it would be inappropriate to claim that things are complete.

There's always opportunities.

Thank you very much for the color.

Lori, we'll take one more question.

Brett Feldman, Goldman Sachs.

So, earlier, Randall was talking about lessons learned as you move up the curve with Next.

One of your competitors, T-Mobile, has learned that they can change the way they provide credit to their customers.

They are placing a higher priority now on payment history than some of the traditional credit metrics.

Have you learned the same thing?

And is there any change in the way you are extending credit to your customers as they adopt Next?

Thanks.

I don't think there are lessons learned.

I think all of us, over the years in this industry, know that you know your customers better than anybody else does.

Customers that have been with you for a period of time, regardless of what their credit scores are, you tend to treat differently.

We have, for many years, done that; whether it be on the fixed line side for broadband, U-verse -- customers who pay us well that may have lower credit scores, we have actually gone ahead and extended them services like U-verse, which require significant upfront investments and so forth.

You do it on the business side of the house, too.

You know your customers well.

And so you are willing to invest in your customers that to know who may have credit scores that are weaker than what a new customer -- you would be willing to do with a new customer coming in with a low credit score.

So there are not any new games in this business.

We've all been playing this credit scoring game for a long time.

It is a fairly predictable process.

We know our customers well.

We know when we tweak credit policy, what to expect, and within what timeframe to expect bad debt reactions.

It's actually gotten fairly mechanical and arithmetic, to be quite honest with you.

So I don't think there's any new science out here on this.

And are you finding that the banks that you are working with are recognizing those lessons that you have learned in the way they finance your receivables?

Absolutely.

We've gotten very high -- it's one of the reasons why we have high demand in the securitization process, and we are able to get the pricing levels that we are able to get.

So they absolutely demand -- recognize that.

I think, quite frankly, all of you know, all you have to do is go to our financial statements [and our] provisions for bad debts to understand, with a company that has over $130 billion worth of revenues, you can clearly see just how effective we are at managing -- particularly in a difficult economy -- how effective we are at managing our receivables.

The team has done a very good job across the board -- business, consumer, through processes just like Randall described.

Thanks for taking the question.

You bet.

Thank you, Brett.

And thank everybody for joining us, and taking the time to listen in on the call.

As we articulated at the beginning, we feel very good about where we are going in 2015.

And as we get to the end of 2015, we are going to be talking about a very different business and a very different company.

And we are excited about it, and look forward to working with you over the course of this year.

So thanks again for joining us.

Thank you all very much.

Take care.

Ladies and gentlemen, this concludes our teleconference.

We thank you for using AT&T Executive Teleconference Service.

You may now disconnect.