AT&T Inc (T) 2015 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to AT&T first-quarter 2015 earnings conference call.

At this time, all participants are in a listen-only mode.

Later, we will conduct a question-and-answer session.

Instructions will be given at that time.

(Operator Instructions)

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

Please go ahead, Sir.

Okay, thanks, Tony, and good afternoon, everyone.

Welcome to our first-quarter conference call.

Thanks for joining us.

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

John will provide an update with a perspective on the quarter, and then we'll follow that with Q's & A's.

One reminder, our earnings material is available on the Investor Relations page of AT&T's website, and that's ATT.com/investor.relations.

Before we begin, let me call your attention to our Safe Harbor statement.

The Safe Harbor statement says that some of our comments today may be forward-looking.

As such, they are subject to risks, uncertainties; results may differ materially, and additional information is available on the Investor Relations page of AT&T's website.

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

John?

Thanks, Mike.

And hello, everyone.

Thank you for joining us today and thank you for your interest in AT&T.

We are very excited about the progress we've seen in our business the last three years.

We've set some ambitious goals to transform our business -- every part of our business -- to lay a new foundation for the future and for growth.

The first quarter was another significant step in that transformation.

To put it simply, we are executing very well.

We have completed or are near completion with all of our project VIP network initiatives.

We are also ahead of plans with many of the transformational customer and operational initiatives that we now have underway.

The results are impressive.

You know the story.

Our 4G LTE network now covers 308 million people, with ultrafast speeds.

We also deployed new Spectrum, densified the network, and added DAS and Wi-Fi capabilities to improve the quality and reach of our best-in-class network.

Our expanded wireline, IP broadband footprint reaches 57 million customer locations, and we now are offering 75 megabit speeds in 90 cities.

We've also deployed fiber to nearly 800,000 additional business locations with our 1 million goal in sight, enabling strategic services growth and Network On Demand possibilities.

While transforming these networks, we've also invested heavily to transition our customer base.

Many of those transitions are nearing completion as well.

Several years ago, we started to move our postpaid base to smartphones and usage-based pricing.

Today, 84% of our postpaid phone base use smartphones, and almost 90% are on usage-based plans.

And just one year ago, we accelerated the shift to the no-device subsidy model for smartphones when we launched Mobile Share Value plans.

Customer response to these plans has been tremendous.

About 60% of our postpaid smartphone subscribers already are on no-device subsidy plans.

The surge of customers coming to value plans provides for some expected tough comparisons when looking at year-over-year financial results, but our record-breaking churn demonstrates that we made the right move in introducing these plans.

We also move to strengthen our position in new growth areas.

In prepaid, we acquired Cricket and paired it with our LTE network to provide a premium prepaid experience.

We also saw the future of the Internet of Things, and developed platforms, such as the connected car and home automation.

We now have more than 20 million connected devices on our network, and the future is very bright for additional growth.

In wireline, the transformation IP broadband is nearing completion.

That means most of the costs associated with this transformation are also behind us.

Today, nearly 80% of our broadband base is on IP, and about 90% of the customers with access to IP broadband already have it.

And more than 30% of our business wireline revenues come from our strategic IP services.

And finally, we have been laser-focused on improving our operations, driving efficiencies across the board.

We are seeing good traction with several Project Agile cost savings initiatives, including Digital First, which is our companywide effort to make it easy for customers to do business online.

The number of digital transactions with our customers has increased by the tens of millions the last two years, and we expect to see that increase by millions more in this coming year.

We also have been reducing cycle times in provisioning new services.

This improves our competitiveness, our revenue opportunities, and the customer experience, while reducing expenses as well.

And we took a giant step with our leading software-defined network initiative when we launched Network On Demand capabilities for business customers in 100 cities.

We continue to take steps to make our capital structure more efficient, including monetization of assets, reducing borrowing costs, and implementing working capital improvements.

This has contributed to our strong balance sheet, and given us the financial strength we need to continue to invest and diversify our business.

The moves to diversify our business also continue on track in the first quarter.

Those details are on slide 4.

We've executed Project VIP in our transformation well, doing the hard work necessary to enable the Company to move forward.

This puts us in a great position to achieve the vision we laid out for you last quarter -- a vision of a new AT&T, a diversified integrated wireless and wireline company for both business and consumers, uniquely positioned in a world of high-speed mobile connectivity and video.

We expect the DirecTV transaction will close this quarter.

We have done a lot of work identifying opportunities for additional cost synergies between these two great companies.

This includes savings from supply chain, installation, customer care, and even sending just one bill.

This has increased our confidence that we can significantly exceed the original $1.6 billion expected in cost synergies.

In fact, we now believe cost synergies alone will exceed a $2.5 billion run rate by year-three.

In wireless, we closed on IUSACELL, the first of our Mexico wireless acquisitions.

And we expect to close the Nextel Mexico deal shortly.

Together, these properties will give us a leading Spectrum position in a dynamic wireless market that is just beginning its transformation to the mobile Internet.

We plan to deploy near-nationwide 4G LTE network, something we know how to do very well.

It will be covering about 100 million people in a country that borders the United States.

The cross-border opportunities that this opens up are exciting from both a consumer and a business standpoint.

We've also significantly improved our Spectrum position here in the United States.

Our LEAP acquisition brought with it an average of 10 megahertz of Spectrum in the top 100 markets, covering 137 million people.

Some of it was unused Spectrum.

We've already put much of that unused Spectrum to work in more than 200 markets.

And we've begun shutting down the legacy CDMA networks.

We expect that process to be complete by the end of the year, and we will quickly redeploy that Spectrum as well.

We also made a major investment earlier this year when we acquired licenses for near-nationwide contiguous 2 by 10 megahertz block of high-quality AWS-3 Spectrum.

Needless to say, we feel good about our Spectrum position.

This takes a lot of uncertainty out of the process with our ability to add capacity and maintain quality in a cost-efficient manner.

We know what we have, and we know what we need to do.

And we have a clear path to delivering a network that customers want, that customers expect, and that customers will use.

With that as background, let's take a look at our consolidated financial summary on slide 5.

Adjusted consolidated revenues grew to more than $32.6 billion, and that's up about $375 million when you adjust for the sale of our Connecticut wireline properties.

This growth was driven by continued success in wireless, as we repositioned our business model; strong demand for strategic business services; and adjusted wireline consumer revenue growth.

Adjusted wireline revenues were down about 1%, but revenues were essentially flat year-over-year, if you adjust for the impact of foreign exchange and discontinued businesses.

Adjusted EPS for the quarter was $0.63.

That includes adjustments for LEAP integration expenses as well as costs associated with the voluntary employee retirement plan.

It also excludes a one-time $0.05 benefit from a tax planning-related matter.

And while we don't show this on an adjusted basis, first-quarter 2014 earnings also include the income we received from our previous equity ownership at America Movil, as well as net income from our divested Connecticut wireline operations.

Those two provided about $0.03 of EPS in the first quarter of the last year that we don't have this year.

Our business also continues to generate solid cash flows, with free cash flow of $2.8 billion.

Cash from operations totaled $6.7 billion, and that includes an additional $500 million investment in our next customer base.

And capital expenditures were $4 billion.

At the end of the quarter, our cash balance was $4.4 billion.

And in terms of uses of cash, dividend payouts totaled $2.4 billion.

At the same time, we maintained a solid balance sheet while continuing to invest in the business.

During the quarter, we funded investments in AWS Spectrum and IUSACELL, and we're also well-positioned for our planned investments in DirecTV and Nextel Mexico.

Net debt to adjusted EBITDA at the end of the quarter was 2.19.

And as we said before, with our transformational investments in DirecTV, Mexico, and Spectrum, we will go above our normal net debt to EBITDA target.

But after we close the DirecTV transaction, our focus with free cash flow after dividends will be on paying down debt and getting back to our target range.

Now, let's turn to our operational highlights starting with wireless on slide 6. Our wireless results this quarter only include our domestic operations.

Information on our IUSACELL operations is included under the International segment in our financial statements and is separately broken out.

The repositioning of our smartphone base by giving customers the choice of lower-priced service with no-device subsidy plans continues to show positive results.

Postpaid churn was 1.02%, the best first-quarter that we have ever had and the best in the industry this quarter.

This continues the positive trend we saw last year, and comes in a very noisy and competitive marketplace.

And prepaid churn also showed strong continued signs of improvement, thanks to the strength of our Cricket operations.

Total net adds came in strong at 1.2 million.

That was led by gains in postpaid and connected devices.

We added more than 440,000 postpaid subscribers in what is traditionally a slow net add quarter, thanks to strength in tablets.

These tablet gains more than offset a decline of feature phone subscribers.

We also grew our high-quality postpaid smartphone base by another 500,000 in the quarter.

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

And when you look at total branded smartphones, which includes both postpaid and prepaid, we added about 1.2 million smartphones to our base during the quarter.

We also added about 1 million connected devices, thanks to a continued strong showing by connected cars.

Connected device net adds were impacted by a change in how we report our session-based tablets.

Previously, we included them as part of our prepaid base.

Now they are reported as connected device subscribers.

This gives us and you a better view of phone growth in prepaids, which now essentially includes only phone activity.

You see that this quarter, thanks to strong results from our Cricket offering, we had positive growth in prepaid.

Cricket is just the latest example of our ability to integrate new businesses.

The team has done a very good job of transforming this business.

Retention is at a schedule, churn is less than expected and certainly much less than historical levels prior to our ownership.

And we're doing a great job of moving customers off the legacy CDMA network.

More than 90% of Cricket customers already are on the GSM platform.

However, we do expect to see some pressure over the next quarters as we complete the transition to GSM and shut down the legacy CDMA networks.

Overall, postpaid gross adds and upgrades continue at a solid pace.

We had about 6.2 million smartphone sales in the quarter, slightly higher than last year's total.

Our postpaid upgrade rate was 6.6%.

Smartphones were 94% of all phone sales and now make up about 84% of our postpaid phone base.

We still have about 16% of our phone base to transition to smartphones, but the bulk of the smartphone transformation has been completed.

Transforming our phone base to LTE smartphones and moving those customers to no-subsidy and usage-based pricing has been a big investment for us.

But once again, we made these investments, executed our plan, and are now in a strong position to move forward.

Now let's look at the progress we're making with shifting our customers to AT&T Next and Mobile Share.

That information and revenue are on slide 7.

AT&T Next sales reached record levels -- nearly two-thirds of smartphone sales.

Another 5% brought their own devices to our network.

That means 70% of phone sales in the quarter didn't carry a subsidy.

Total wireless revenue was up about 2%, driven by 36% growth in equipment revenue.

The customers who choose to bring their own devices don't increase equipment expense for us, so the no-device subsidy model works for our customers and us, whether it's with Next or with bring your own device.

As expected, service revenues this quarter were impacted by Mobile Share Value Plans.

But because we have now passed the anniversary of the introduction of these plans, we expect the year-over-year comparisons will improve in the coming quarters.

At the end of the first quarter, more than 70% of our postpaid base is on Mobile Share Plans, with more than 60% of the postpaid smartphone base on no-device subsidy pricing.

This means our first-quarter Next flow share percentage has exceeded the percentage of smartphone subs on no-device subsidy pricing.

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

About half of all accounts are on plans 10 gigabytes or larger.

And about 20% are on plans of 15 gigabytes or more.

That's more than twice as many as a year ago.

This helped drive a 14% increase in data billings.

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

The metric gives you a more accurate idea of what an average customer pays us each month.

Phone-only ARPU with Next was more than $66 in the quarter, with the average monthly Next billings about $6.00 and growing.

That strong sequential increase comes even when you factor in the impact of our new data rollover plan, which generated about $0.25 of ARPU pressure in the quarter.

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

More than 30% of our smartphone base is now on AT&T Next, but 65% of our sales were on Next.

So our ARPU with Next is expected to continue to grow.

Now let's move to our wireline operations on slide 8. Our focus on profitability and transforming to IP technologies can be seen in our wireline results.

On the business side, strategic business services are now close to one-third of the business wireline revenues.

And we continue to see strong demand for those services.

Adjusted strategic business service revenues improved by more than 15% in the quarter.

And when you adjust for FX, growth was more than 17%.

Adjusted wireline business revenues were down 3.3%.

However, about half of that decline comes from the impact of FX and our discontinued low-margin businesses, such as global hubbing.

If you consider those items, the decline would've been 1.7%.

And if you look at our combined business, wireline and wireless operations, revenue actually increased year-over-year.

While overall wireline business operations saw pressure, it was most pronounced in wholesale, in part due to our focus on profitable sales and the continued impacts of network grooming.

Enterprise revenue was down less than 1% when you adjust for Connecticut and FX.

Small business revenues were also down.

However, there are some positive signs with new business starts and growing sales from our fiber build.

We also took a significant step recently in our transition to software-defined networks.

We introduced Network On Demand for business customers in more than 100 cities.

This allows businesses to easily order, add, or change network services on their own in real-time.

In consumer, viewer services now make up about 70% of consumer revenues and help drive adjusted consumer revenue growth of more than 2%.

U-verse started the year with solid subscriber gains, increasing penetration and strong revenue growth, including adding more than 400,000 IP broadband subscribers.

That helped drive a net gain of almost 70,000 new subscribers to our overall broadband base.

We are nearing the completion of our broadband conversion to IP.

About 80% of our broadband base is now on IP.

That's 90% of our IP-eligible customers.

So we expect the number of migrations to ease throughout the year, as well as the costs associated with those conversions.

At the same time, we continue to increase broadband speeds.

We expanded our 75 megabits services to nearly 90 cities, and we offer GigaPower in 10 markets, including a just-announced deployment in Chicago.

We also hit a milestone with our Voice over IP services in the quarter.

We now have more than 5 million VoIP subscribers.

All this helped drive an increase in adjusted U-verse consumer revenues of almost 20%.

Now let's move to margins, starting with wireless margins on slide 9. Wireless service margins were essentially stable year-over-year.

There was pressure from customers on no-device subsidy pricing in advance of upgrades and from the full quarter of inclusion of Cricket operations.

And our new data rollover plan also had about a 20 basis point impact on margins.

This was offset by the impact of AT&T Next and cost-saving initiatives in the quarter.

Wireline margins continue to stabilize, and operating margins were flat year-over-year.

There was pressure from non-cash benefit expenses and TV content costs, but this was offset by growth in consumer and strategic business service revenues and solid execution on our cost initiatives.

For the quarter, our adjusted consolidated operating margin was 18.5% compared to 19.6% in the year-ago quarter and 18.9% two years ago.

But most of the year-over-year difference is due to our strategic investments in Mexico and Cricket.

Cost efficiencies continue to be a priority with us.

We discussed the success of our digital first initiative earlier.

We also have made headway in cutting cycle times to provision new business services.

We are seeing up to a 40% reduction in cycle times on some IP products, with more than a 50% reduction in the fiber-ready buildings.

Our software-defined network initiatives will help even more.

Before we open up the call for your questions, let me do a quick recap of the quarter on slide 10.

The first quarter was another big step in the transformation and diversification of our Company.

Customers are moving to Mobile Share Value Plans and AT&T Next in increasing numbers.

This helped drive industry-leading postpaid churn and more than 1.2 million wireless net adds.

The success of the migration to IP technologies can clearly be seen in our wireline revenue numbers.

IP services now make up 70% of our consumer revenues.

And our migration to IP broadband is near complete.

In business, strategic business services, which include our IP services, is close to one-third of the wireline business revenues.

Strong demand has revenue growing at more than 15%.

At the same time, the moves we are making to diversify our business through video and international operations are on track.

We are confident the DirecTV and Nextel Mexico deals will close this quarter.

And we are taking steps to get all plans in place to close these transactions quickly.

Our solid balance sheet and cash flows provide the financial strength to invest and to make these transformative moves.

We feel very confident with our standalone guidance for the year.

We are on track and on plan.

In fact, we are at actually ahead of plan in many of the areas, including free cash flow.

That gives us even greater confidence that we can hit our growth targets for the year, while also being prepared for the DirecTV and Nextel Mexico acquisitions.

We are on the starting blocks for a very exciting year for AT&T.

We have made the investments and done the hard work necessary to position us to be a very different company.

And we are ready for the opportunity ahead of us.

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

(Operator Instructions) Simon Flannery, Morgan Stanley.

John, thanks for the update on DirecTV.

Can you just go into the merger synergy guidance a little bit more?

Just what are the main buckets there?

And help us think about how it phases with year-one, two, three.

And then you sound confident on the closing this quarter.

Given all the headlines we have out there, just can you just give us some more sense of what makes you so confident?

Thanks.

Thank you, Simon.

Real quickly, Simon, the base of most of our savings that we previously announced was going to content contracts as we understood them to be standard in the industry.

And that was the basis for a large part of our $1.6 billion original target.

That, along with some of the normal synergies associated with bringing two public companies together.

The additional ones are the opportunities we now see in going to, for example, one single truck roll to install products.

So combining the installation of both our broadband capabilities and our video capabilities into one truck roll, or giving the customers on one single bill, one single customer care operation, the ability to go to our supply chain to get better pricing with regard to our equipment, because specifically, one of us was buying set-top boxes and other equipment at lower numbers than the other one was.

And so when you combine those, we are confident that we can get some more supply chain savings.

There is also the standard cost of things like combined advertising, combined customer care, combined activities.

But that's what we've built up to this $2.5 billion.

They are cost savings.

But we believe that they are very much real, very achievable, and we believe that they will grow -- certainly, in that third year is when they get to that 2.5 level, but they are significant during the 2017 third-year timeframe.

They will build starting in 2015, but build really in 2016, and really move towards significant amounts in 2017.

With regard to our confidence in the transaction closing, it really comes down to what that -- what the transactional value, and that is bringing customers greater choice, bringing more competition to the marketplace, bringing expanded opportunities for customers to get bundled services, services that they want, and really to improve the broadband capacity that's out there for customers through our additional investments of some of these savings.

So as we continue to go through the process, we continue to feel good about where we are at.

And we are optimistic and continue to believe we'll close it this quarter.

Great, thank you.

Thank you.

Phil Cusick, JPMorgan.

Hey, John, thanks.

Quick follow-up on Simon's question.

Have you had any indication from the DOJ or FCC either way in terms of approval?

And then second, if you can talk about the Mexican business, sort of the same thing.

What barriers remain to closing Nextel?

And how do you think about integrating those businesses from here and the need to ramp up CapEx to do that?

Thanks.

Yes.

So, as would be normal in a transaction like the merger of DTV and AT&T, our legal representatives are having the normal process and context with parties within the rules and the normal course.

I won't go into those details.

But I will tell you, Phil, if you look at what's on the record out there and the benefits this brings, I think there's an easy path to see why this deal would get approved, and the benefits it will bring to consumers.

So I will leave it at that -- just we continue to feel good about it.

With regard to Mexico, the process for Nextel first had to go through the US bankruptcy process and the opportunity for other bidders to come in.

That process has all been completed.

The U.S. Bankruptcy Court has approved the sale, so we are now just left with getting the regulatory authorities in Mexico with Nextel to approve it.

We are in, as you might expect, normal contact and that would be normal in a deal, respectful contact, and working through issues with them.

Our experience with them on IUSACELL, our experience with them on the regulatory framework that they've set up, and the economic environment they set up, gives us confidence that that deal could close shortly.

And in terms of integrating those two mobile businesses once you have them?

Yes.

So we will operate as one business.

We will get significant benefits from the two networks.

And so we will be able to utilize the infrastructure of both companies to really help us manage and really prioritize capital investments.

So it really will allow us, on a combined basis, to ramp up the networks much more quickly.

As we mentioned in my prepared remarks, when you combine the two companies, they clearly have a leading Spectrum position in Mexico, which also gives us an opportunity to very efficiently ramp up.

Your comment or question, Phil, with regard to will we need to spend capital on that asset?

Absolutely.

We intend to get the network quality up to our standards in as quickly, as prudently possible.

We're working through those plans.

And once we get the Nextel Mexico merger completed, we'll have all the information at our disposal to finalize those plans.

And then we'll come back to The Street at the same time we do with the DirecTV merger, and update you on those plans.

But it will take some additional capital.

But, quite frankly in the Company, the size that we will become once the DirecTV and Nextel Mexico deal are closed, it will be a very manageable level of additional capital.

Okay.

Thanks, John.

Thank you.

Mike McCormack, Jefferies.

Just a couple of things.

I guess first on the wireless side.

I think your comment is sort of, the way we would read it is, that phone-only ARPU and service revenue from a year-over-year growth perspective, have we sort of bottomed out and hit the tipping point there?

And then secondly, on wireless, what is the experience that you're having with customers that are on the Mobile Share Value when they go to upgrade?

Are you seeing any unusual churn activities around those guys?

Mike, we're not -- quite frankly, we're not seeing any unusual trend activities, really.

And I don't mean to be inappropriate, but the 1.02% postpaid churn is the best we've ever had.

So -- and if you go beyond our -- if you subdivide our post-paid base into postpaid smartphones, as you can imagine, the churn is even lower.

So, we feel very good about that.

With your comments with regard to service revenues, when you look at our service revenues this quarter, clearly was impacted by, so to speak, a full year of opportunity for customers to transition to Mobile Share.

And really not only about a month -- no time prior to the first-quarter 2014, and only about a month of 2014 first-quarter for customers to transition.

So, this is going to be the starkest comparison or the most significant comparison time.

We expect that those comparisons to get easier or to be less challenging as we go through the year, because we've established much more of a stable Mobile Share Value base, as of the end of the first-quarter compared to where we were at the end of the first quarter last year.

Okay, John, if I can just sneak one in on just thinking about the cash flow.

Any thoughts on plans for factoring in 2015 sort of a magnitude question?

And then CapEx run rate a little lower than we anticipated?

Is that just ahead of the deals closing?

CapEx is just what we needed.

It is lower than run rate.

We're not changing any guidance on CapEx.

It's just more of a philosophy of spend it as you need it, don't spend it early.

With regard to factoring, you can expect us to factor every quarter this year.

Part of that process is to get an established track record on that.

We've -- we did do it in the quarter.

Even with the factoring we did in the first quarter, we added to -- as I mentioned in the prepared remarks, we added to our total investment in our next customer base by about $500 million.

But I think we'll -- we expect to continue to use that securitization process in an effort to eventually get to a point where we'll have another option for financing our business, whether we choose to use it or not.

Great.

Thanks, John.

Thank you.

John Hodulik, UBS.

Hey, John, just a couple of questions.

First -- actually can you give us a number of how much factoring was done in the quarter?

And then a couple of follow-ups to previous questions.

The 70% of adds coming on no-subsidized plans is a big number.

Is that the sort of top that we can expect?

Or can you push that still higher?

And then lastly, I think switching gears over to wireline, margins were off -- EBITDA margins were off a little bit on a year-over-year basis.

Can you give us a sense for maybe what's driving that, and how that should trend on a year-over-year basis?

Should we continue to see declines?

Or with some of the costs coming out of the Connecticut properties, do you expect that to be bottoming around here?

Thanks.

So, listen, John.

Let me try to make sure I hit all these, and ask me -- challenge me, if I skip one, let me know.

Sure.

First, I think we mentioned that we had about 65% take rate on Next on about a 0.2 million net adds upgrade sales.

So around 4 million Next sales.

You guys can do the math on an average price of a phone to get kind of the gross receivable.

We mentioned that we increased our receivables, net increase in our investment in our customers by about $500 million.

The offset to the rest of the purchase price was about $1.5 billion of factoring.

And then some collections from customers for previously sold Next phones in early 2014, or even a few that we sold in 2013, that are now paying us monthly fees that we are collecting and keeping at the Company, but were not subject to prior monetizations or securitizations.

On the net adds, at 70%, I think the key assumption there is, we've seen this 60%, 65% Next take rate before, and we've seen it again in this quarter.

The one thing I will tell you is that to get it to 70%, we had about 5% or about 300,000 -- a little over 300,000 BYOD devices.

Those are great net adds for us.

While they don't bring in any equipment revenue, they do -- they don't bring any equipment expense.

And so that's a good deal for us.

And they often join Mobile Share Value Plans, so they are sticky customers.

That is the unknown, if you will, that 300,000 is a little bit below what it was running on a quarterly basis the last three quarters of last year.

But this is typically a slower -- first quarter is typically a slower quarter.

We are still encouraged by the level of that.

That will be the determinant of where we come out, whether we come out in that 60% to 65% range or if we get higher than that.

We'll just have to wait and see.

But I do feel very good about the fact that, in total, that no-device subsidy is at 70%.

And quite frankly, the overall base on Mobile Share Value for smartphones is at 62%, so we are running hotter than that.

And then, third, the amount of those customers that are actually paying us monthly for Next today is down in the 32% range.

So I'm very optimistic that the monthly Next ARPU piece, the monthly billings piece, is going to pick up from that $6.00 level.

EBITDA margins, we are going to continue to focus on, particularly on wireline, on cost savings.

I think you are aware that we did an early -- a voluntary early retirement program.

I think our take rates were on that were in the [3,300] range.

So we'll see some savings from that going forward.

Additionally, we did see some pressure in the first quarter as we converted some of our former backhaul or interconnection and Connecticut from company-owned to leased arrangements.

So they moved out of depreciation and some of those characteristics into COE.

And we'll manage through that and manage the efficiencies of our operations will overcome that during the year.

And those of the things we're working on to improve those margins.

And as I said, we're still confident with our guidance.

And that guidance included improving margins in wireline, wireless and overall.

Okay, great.

Thanks, John.

Brett Feldman, Goldman Sachs.

And just to follow up a bit on churn, if I listen to some of the things you were saying, you've got a growing share of your base on Mobile Share Value Plans, and there's obviously a lot more value in those plans because they are more attractive.

You have a growing percentage of your base on smartphones, which you said have a lower churn profile.

And you keep selling tablets, meaning your average customer probably has multiple devices, and usually that means lower churn.

So, is it reasonable to think you could actually continue to improve churn from here?

I know the second quarter of last year is a tough comp, so putting that aside, or are there mitigating factors, including the competitive environment, that might just create a little bit of a floor on where you can go right now?

Well, I'll say this.

We are very pleased with where we came in on churn in the first quarter, particularly with the noisy and competitive environment that we operate in.

But we are not giving into the fact that we can't do better from here on out.

We're not predicting that.

We're not guiding to that, but we're certainly striving to do that.

You are right, Brett, that the second quarter of last year is going to be a really tough comparison.

But with that being said, we still are striving to do better each and every quarter than we did the last quarter.

And we'll keep that effort up.

When you think about a Mobile Share Value account, there are just under about 20 million of those accounts.

And they average just under three devices per account.

I think -- we can get you the detailed numbers, but it's probably about 19.5 million accounts, and there's about 2.9 devices per account.

And yes, that really does help with churn.

Additionally, our smartphone churn is lower than our total postpaid; effectively our feature phone churn is higher.

And as we've reduced that base, down to 16% now of our base and of our postpaid base, and we are seeing flow share of only about 6%, we are optimistic that we can increase the smartphone base.

And that will give us another lever to really attempt to manage churn to a lower level.

With all that being said, it is a competitive environment.

And we have to be ready to handle whatever situation issues offers come out from others parties in this environment, regardless of the logic that may or may not be behind them.

Great.

And just a quick follow-up since you mentioned the feature phone base.

You know, as you sort of come towards the tail end of migrating them to smartphones, how do you think about that residual base?

Is there a proactive effort to get all of them into smartphones?

Or is there just an acknowledgment that some of those customers will probably eventually just come to end-of-life and you are going to let them go?

We don't want to necessarily lose any customers, but we want to keep -- and we've got a lot of really good ones that are still on feature phones.

But the issue is the functionality of our networks is so dramatically different when you're using a smartphone, and the value our customers can get out of our networks is so significantly -- so much greater with a smartphone, so we are certainly encouraging that.

What I will tell you that's encouraging to us, though, is that we're finding that we are having real success in the prepaid space, you know, kind of the traditional no-subsidy or low-subsidy model prepaid space, and still getting really good ARPUs, and still using a lot of maybe lower costs, but a lot of smartphones there.

We had a significant number of smartphones added to our prepaid base.

So I would tell you that a feature phone that may not want to go to the full postpaid smartphone relationship might stay with us in a prepaid relationship, and still get the benefits of some very good network and quality and phones, and yet do it in a different pricing and different subsidy mechanism.

Great.

Thank you for taking the question.

Sure.

Frank Louthan, Raymond James.

Can you give us a little more color on what we said about seeing some increased signs and some improvement SMB and patch comm to fiber, some additional business of the fiber build.

How many additional businesses have you built?

And what are some of the signs you are seeing a little bit of turn in that part of the business?

Yes.

So, Frank, we built 800,000 customer locations have been passed with fiber.

What we did is we built a significant amount of those to customer order with customers -- existing customers, new customers, order that and want us to build.

But we also built a measurable amount to, if you will, into areas where we were confident we could sell and to be effective.

In those areas that we built and spread the copper before we had a contract in place, we are now aggressively selling into those areas.

And we have been pleased about the ability to penetrate those buildings and to sell into those.

So that's the encouragement.

In many of those buildings, you've seen how it works.

You go into a building, it might have 20 potential customers in there and you have to sell to the first one.

And once you get the first one sold, you can come back and then have some credibility with selling to the second and the third one.

So we are making some significant progress in getting those first sales inside the building.

And the team is working hard under Ralph de la Vega's leadership to then go back and really maximize all the opportunities in those buildings.

People love the fiber and the high-speed that it provides, the quality of that service.

So this investment ahead of an order is starting to show signs of paying off.

That's what's encouraging.

Additionally, we are continuing to see interest from normal business, small business customers in some of our packaged deals with regard to a combination of our bundled mobility and wired IP services.

Don't want to suggest that we are seeing the small business market take off, but we are -- and our numbers will explain reasonably saying that -- but we are seeing continued strong demand for IP and strategic-based services, those ethernet-based services, those IP-based services.

And what should we expect going forward on a quarterly or annual basis for these types of businesses to pass?

How many more do you have?

Well, we are going to get to 1 million business customer locations passed.

If you think about the run rate we've been on, it's pretty easy to think that we can get to that 1 million by the end of the year.

And that would be a very reasonable process.

We've publicly stated that we could get there by the end of the year or shortly thereafter.

So that is what I think you can expect.

With regard to predicting growth rates or trends in the small business area, we haven't done that.

But I will tell you on the overall strategic business services, I am encouraged that we are at the 32% level of revenues.

I'm very encouraged that it's reached $2.6 billion.

I'm very encouraged that even in this tough environment, it grew 15% on a adjusted basis.

And when you take into account FX pressures, it would of grown 17%.

I think the team is doing very well.

And the network we've built is attracting customers for its quality, its security, and its speed.

Great, thank you.

Amir Rozwadowski, Barclays.

Just wanted to follow-up on the questions around the competitive landscape.

How do you think about the level of promotional activity for the course of this year versus last year?

And specifically, how should we think about your strategy going forward?

Last year, obviously, you made a concerted effort to adjust pricing in order to migrate more of your subscribers onto Next.

Do you foresee needing to have to do that again?

It doesn't seem like, based on the comments you made on ARPU trajectory, but just wanted to confirm.

And then I'd also be interested to hear your thoughts on the Google announcement today, and whether you view it as a possible new competitor over the mid to longer-term, even though it seems fairly limited in scope, based on what they announced today?

Good.

I think with your first question, Amir, I think you'll continue to see us taking actions on the strategy that we have laid out already, that we are going to continue to focus on profitable customers and providing smartphone growth, Mobile Share Value, getting customers on Next or BYOD, and continuing to migrate -- now we've got 90% migrated to usage-based plans -- and use the LTE deployment of phones and the, so to speak, year-over-year growth that we've -- data growth that we've seen on those phones of about 50% to then drive data growth, and then drive higher buckets.

So that's the strategy there.

Sure, I'm certain we'll have some promotional activity as we always do, but I wouldn't suggest to you that it would be out of the ordinary, out of the normal process.

I will also suggest to you that we are just in the beginning phases of the connected car, of the Internet of Things, and of the opportunities that that's going to provide us.

This really deep, high-quality 308 million people are covered with LTE, or have LTE available to them, is really a great thing for all of the Internet of Thing products and services, whether they be the connected cars or the other platforms we have out there.

And we believe that over terms, that we'll see really great growth there.

I think we added close to 700,000 connected cars in the quarter.

So, it still has a long way to go, but it's growing very quickly.

And remember, what we're seeing today is really just mostly the wholesale arrangement.

And here, as we mature through this process, we'll get that opportunity to get the retail arrangement.

With regard to Google, I would suggest to you I'm not an expert on the matter, so I don't mean to be, but I understand your commentary about it's very limited.

So I understand it's limited -- it's got a very limited number of devices.

That's not generally the way we like to present options to customers.

We like to provide a lot.

My understanding it's limited in this case.

My understanding also is that there's going to be very limited distribution and customer care.

And those things are items that we found our customers value.

So, we'll just have to wait and see.

But it's just another one of the plays in the environment that's out there.

Great.

Thank you very much for the color.

Take care.

David Barden, Bank of America Merrill Lynch.

Thanks for taking the questions.

Maybe two, if I could.

The first one, Verizon is getting a lot of attention on the OTT strategy, both skinny bundles and the wireless side.

But depending on how things shake out, AT&T could be the nation's largest video player.

Could you kind of give us a sense as to the timing and what we should be expecting coming from AT&T on this front?

Are you kind of working on this pro forma knowing that the DTV deal is behind do?

Or do you have to wait for the DTV deal?

I think people would love to know where you guys stand on that.

And then just second, I think, John, you've thrown out a deleveraging target at some of the conferences about like 1.8 times within a three-year timeframe post the deal.

Could you kind of divide -- kind of waterfall how you get there from a combination of operations and asset sales?

And then rumor has it you are running the Real Estate group at AT&T now.

Could you kind of map out where the buckets for asset sales inside AT&T are and kind of scope it for us?

That would be helpful.

Thanks.

Yes.

So let me get to a couple of things.

One, I won't get into any detailed plans about post-DTV AT&T.

I don't think that would be prudent at this time.

But what I will tell you is that over-the-top distribution of video on wireless, on broadband connections with or without linear subscription is something that I'm sure we'll see.

And it's something that we will see be a part of packages in the future.

My own experience is that I see it as an add-on to a subscription package.

And I think we believe that that will be the way a lot of the opportunities will go.

But we are certainly open to it.

And we are going to certainly be in a position to help develop that part of the process.

I won't go into the Verizon situation or any specific offers on our part.

With regard to deleveraging -- and I will go this way.

We are expecting free cash flow to exceed dividends, and provide cash not only in this year but in the future, to pay down debt.

That's one.

Two, we are expecting EBITDA to expand.

Not only just from the acquisition of DTV, but from the content savings -- or excuse me, from the cost savings that we've talked about even today.

And that will expand EBITDA even more, which will, by simple math, help the metrics of net debt to EBITDA.

Third, we'll continue to look at all aspects of our asset portfolio.

As I've mentioned before, we have about a $300 billion total asset portfolio today, and will only get larger with DTV and Nextel Mexico.

And so we will continue to look for opportunities.

I would suggest to you that if you look at our record over the last three years, we have a pretty reliable record of generating over $15 billion worth of cash from asset monetizations.

And we've done it very tax-efficiently, so we've netted a significant amount of that cash to be able to use.

And we'll just continue to do the same process that we've done.

I don't want to -- I wouldn't expect anyone to think that we are complete in that process, but I'm not going to get into listing any specific items.

Got it.

Thanks, John.

Sure.

Thanks, David.

Michael Rollins, Citigroup.

Thanks for taking my questions.

Two, if I could.

Just one, could you disclose what the postpaid revenues were in the quarter?

I think it's something that you've given out in the past.

I didn't see it in this quarter's release.

Then secondly, if we just take a step back on the wireline business, you talked about the investment you made, a lot of broadband for homes with the VIP project.

How should we be thinking about the impact that should have on broadband units over time being able to grow that residential broadband business?

Does it take a certain amount of time before you get some benefit for the sales?

Or is there something else that we should be looking out for in terms of impact there?

Thanks.

Yes.

Mike, I'll let Mike and the team follow-up with you on the details of the postpaid revenue details, you know, post -- and referred to what we put on the website, whatever we give you, but we'll make sure it's out there on the AT&T website.

I don't have those numbers right in front of me.

With regard to the wireline business and the VIP project, and specifically, I think, Mike, you are probably referring to the 57 million IP broadband locations, I'd suggest to you this -- what we really need to see is the DirecTV deal to close.

Because the transaction, the key to being successful in that area is that customers want a bundle.

And so, with the closing of that transaction, we'll be able to have a bundle not only of the video services that DTV provides, but of the broadband services that we can provide.

As I mentioned before, about 30 million of those 57 million broadband locations, a little bit under that number, don't currently have a video product.

Once we can do a real bundle with owner's economics and provide the efficiencies of one truck roll, the efficiencies of one service call, the efficiency of one troubleshooting call for the customers, one offer, one pricing structure, we believe that that will not only be good for our Company, but it will be very good for customers, that they will have a new competitive offer out in the marketplace.

And so, we think that the completion of our DirecTV/AT&T merger is a key factor in that process, and a key factor in bringing great quality services to customers.

And from our surveys and from the information I've seen, it's what customers want.

So, that will be the focus point.

I would suggest to you that we'll probably have more to say on that and give some insight to that when we have our Investor Day, which will likely be within about a month after the closing of DTV.

Thanks very much.

Sure.

Hey, Tony, we'll take one more question.

Thank you very much.

And that question will come from Colby Synesael with Cowen and Company.

Please go ahead.

I have two, if I may.

The first one, I was wondering if you can give us an update on your fixed wireless strategy?

I know that was part of VIP a while ago, but I was wondering if it's changed at all with what you received in the AWS-3 option?

And then the second question is, it's my understanding that for the AWS-3 debt that you raised to pay for those proceeds, that you are capitalizing that interest.

I was wondering if you could just talk about how much debt is actually being associated with the AWS-3 auction?

Thanks.

Yes.

So, first of all, your second question of AWS -- yes, we are capitalizing that.

And the amount of the debt that is being associated with that is a ratable share of our overall debt portfolio, that an overall interest cost has come down significantly over the last three years as we've refinanced debt.

But it is an allocated share based on the $18 billion -- approximately $18 billion purchase price.

So that is what is getting capitalized.

With regard to the fixed wireless local loop, Colby, I wouldn't suggest to you that anything's changed at this time.

We still have the commitments out there in the DTV transaction.

And we still stand ready to live up to those and to satisfy those in full.

We think that's a clear benefit for the consumer and the marketplace as a part of that transaction.

So we're -- but we are still confident that we can satisfy that.

And we'll see how that comes out.

That's probably -- the finalization of the DTV deal is probably going to have to come before we are going to go through, and I'd be ready to discuss any modifications, if any, to the fixed wireless local loop plans.

Okay, thank you.

Thank you.

With that, I want to thank all of you for being on the call today.

Our work the last few years sets us up for a transformative 2015.

We are ready to move quickly once the DirecTV and Nextel Mexico deals close.

Our networks are in place, our customer transformation is on track, and we are seeing tangible results in our Digital First and software-defined network initiatives.

Our performance in the first quarter adds to that confidence.

Wireless turned into another solid performance in a competitive environment.

Wireline's focus on profitability and strong demand for IP services brought margin stability and growing IP revenues.

We are ready for our next transformative steps, and we are excited about the opportunity we have before us.

One last thing before we go.

As a good friend of ours, Kathy, would tell you -- on your way home tonight, don't text and drive.

It can wait.

Thanks again for being on the call.

And, as always, thank you for your interest in AT&T.

Have a good evening.

Thank you very much.

And 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.