AT&T Inc (T) 2012 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the AT&T fourth-quarter earnings release 2012 conference call.

At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions). Also, as a reminder, today's teleconference is being recorded.

At this time, I will turn the conference call over to your host, Ms. Susan Johnson. Please go ahead.

Thank you Tony. Good afternoon everyone, and welcome to our fourth-quarter conference call. It's great to have you with us today. I'm Susan Johnson, the 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 opening comments and then close with 2013 guidance. And John will cover our results. Then we will follow with Qs&As.

Let me remind you our earnings material is available on the Investor Relations page of the AT&T website. That's www.ATT.com/investor.relations.

Of course, I also need to cover our Safe Harbor statement, which is on Slide 3. This presentation and comments may contain forward-looking statements that are subject to risks. Results may differ materially. Details in our SEC filings and on AT&T's website.

With that, I will now turn the call over to AT&T's Chairman and CEO, Randall Stephenson.

Thanks Susan and good afternoon everyone. I have -- I'm just going to make a couple of comments before we let John take you through the results.

But many of you were on the call a year ago, and you probably recall me talking candidly with you about what we had to get done in 2012. And our number one priority was Spectrum. And I also said we needed to accelerate our shift into our growth businesses. And I also made it clear that we are going to be very aggressive in returning value to our owners, and this is where we focused our efforts during the year.

And on the Spectrum front, we have signed nearly 50 deals. And those include introducing WCS Spectrum into the mobile ecosystem for the very first time. And actually just kind of fresh off the wire, today we formally closed the NextWave acquisitions which was the property that included the largest block of that Spectrum. So that transaction has closed today. And you put all these deals together and they increase our average national spectrum by a third.

And while everybody in the industry is always going to be looking for more spectrum, at this stage I like our position. This spectrum is obviously an important piece of the puzzle for Project VIP, and we outlined Project VIP for you in the November. And this is without a doubt the most comprehensive organic growth initiative for us in several decades. And it includes expansion in both wireless and wireline. And most of you are familiar with the plan. It includes LTE covering 300 million people by year-end 2014 with an extensive network densification aspect to it.

IP broadband is 75% of our wireline customer locations, fiber into 1 million additional business locations, and we plan to execute a full transition of our network to wireless plus IP. Then once Project VIP is complete, nearly all of our customers will have access to high-speed broadband through wireless, wired, or some combination of both. So this is going to give us a much larger platform for new services. It will improve our revenue mix. It is going to improve our cost structure for many years to come. Most important, it will let us layer on services that we believe are going to change every aspect of our customers' lives -- how they buy things, how they manage and secure their homes, how they access entertainment; their experience behind the car wheel is going to change. There's going to be a whole healthcare ecosystem change, and I could go on. But it's clear the industry is moving beyond the device and into a new era of solutions and services.

We also delivered solid financial results. For the year, we had on an apples-to-apples basis revenue growth of 2.4%, and adjusted EPS up 8.5%. Our cash from operations came in over $39 billion. We invested $20.5 billion in capital at Spectrum. We paid out $10 billion in dividends and increased our dividend for the 29th consecutive year. We bought back 6% of our shares, which will reduce dividends by about $700 million per year. And if you combine the buybacks and dividends, we returned $23 billion to our owners last year. And we did this with a very small increase in debt. And we refinanced $12 billion of our debt to take advantage of the low rates. And then on top of that, we began the process to solidify our pension plan and we are contributing a preferred equity interest in AT&T Mobility, which is our best asset, into the plan. And we're working with the Department of Labor to complete that this year. All this gives us a really good starting point for 2013.

And here's what you ought to expect from us -- an aggressive rollout of Project VIP. You'll see us scale several new businesses this year, including Digital Life, our Mobile Wallet JV, Connected Cars and a number of others. And over the next few years, these represent billions of dollars of new revenue opportunity for us. And of course you should expect us to maintain a strong balance sheet and continue returning value to our owners.

So I think we are executing well. I like how we're set up for 2013.

And so with that, I'm going to turn it over to John Stephens to take you through the quarter and then I'll be back to walk you through more details on our 2013 outlook. So John?

Thanks Randall. Good afternoon everyone and thank you for joining us today. Let me begin by providing a consolidated financial summary which is on Slide 6.

When you look at 2012, our adjusted financial results were strong across the board -- revenues, margins, and earnings per share. When you exclude our divested Ad Solution business and adjust for the Superstorm Sandy impacts, revenues were up 2.4% for the year and 2.8% in the fourth quarter. Operating income increased 4.8%. Consolidated margins improved, even with record smartphones sales. And as a result, we grew adjusted earnings per share 8.5% for the year, and we had our strongest ever annual cash flows.

Cash from operating activities totaled $39.2 billion in 2012, and free cash flows were $19.4 billion. That strong free cash flow allowed us to be aggressive with our share buybacks. We repurchased more than 370 million shares during the year.

Looking at the fourth quarter, we had reported earnings per share of a negative $0.68, but excluding $1.12 in the adjustments, earnings per share was $0.44, a 10% year-over-year increase. These adjustments included $1.10 of non-cash pressure from the year-end mark-to-market change for our benefit plans. This actuarial loss on the benefit plans was driven solely by the reduction of the discount rate from 5.3% at the end of last year to 4.3% at the end of this year and $0.02 of pressure due to storm impacts from Superstorm Sandy.

Now let's look at revenue growth and revenue mix. Details are on Slide 7. Fourth-quarter consolidated revenues totaled $32.6 billion. That's up 2.8% year-over-year when you exclude Ad Solutions and the storm impacts. Driving this growth was strong mobile Internet results, excellent U-verse gains, and continued strength in strategic business services.

On the left side of the slide, you can see how our growth drivers -- wireless, wireline data and managed services -- have become a larger and larger part of our business. In the fourth quarter, 81% of our revenues came from these areas. That's up from 69% just three years ago. And revenues from these areas were up $1.4 billion in the quarter, or almost a 6% growth rate. We expect this mix shift to continue. And by 2016, we expect these growth drivers to represent close to 90% of our total revenue.

Now, let's move to our operations results, starting with wireless, revenue and ARPU on Slide 8. Wireless data continues to drive solid revenue results. Data revenues were up more than 14% in the quarter. That helped drive 4.2% service revenue growth. And total wireless revenues were up over 5.5% in the quarter. Data revenues were impacted somewhat by the growth of Mobile Share plans with unlimited text messaging and voice are standard for those plans. And we booked messaging revenues in our Wireless Voice category while Mobile Share data revenues go to data.

You can also see the impact of data growth when you look at ARPU. Postpaid data ARPU grew at nearly 12% and total postpaid ARPU, which includes postpaid devices such as tablets, was up 1.9%. And phone-only ARPU was up 2.5%, growing off a much higher ARPU base than anyone else.

Postpaid ARPU was impacted somewhat by Superstorm Sandy. In an effort to help those in the storm's path, we waived all overages, both voice and data. Without that revenue loss, total postpaid ARPU growth for the quarter would have been about 2.1%.

One of the highlights of the quarter was our strong postpaid growth where we had our largest gains in three years. Details are on Slide 9. We added almost 800,000 postpaid subscribers in the quarter with strong gains in smartphones, tablets, and mobile premise solutions. Overall, we added 1.1 million new subscribers with additional gains in connected devices and reseller. Prepaid net adds were impacted by declines of both session-based tablets and GoPhone. Branded computing subscribers are up 26% year-over-year, driven by strong tablet sales.

Postpaid churn also had another strong quarter, down from the year-ago fourth quarter, and smartphone churn was even lower. The growing number of subscribers on family, business, or Mobile Share plans also helped reduce churn. Subscribers on these plans tend to be stickier with lower churn.

Let's now move to smartphones sales and our usage-based data plans on Slide 10. Mobile Share growth was dramatic, especially when you consider that we give customers a choice with taking those plans or keeping what they already have. These plans were first introduced late in the third quarter of 2012. By the end of the fourth quarter, 6.6 million subscribers were on Mobile Share plans, or about 10% of our postpaid base. And these subscribers were on 2.2 million accounts, which gives us an average of about three devices per account.

Take rates on the higher data plans continue to run above expectations. More than a quarter of Mobile Share accounts have a 10 gigabit or larger plans. And we continue to see a steady move of subscribers on unlimited plans taking advantage of Mobile Share. More than 15% of our subscribers are moving from unlimited plans to Mobile Share.

Overall, more than two-thirds our smartphone base has moved to usage-based plans in the last 2.5 years. And we expect that trend to continue.

We also had another record quarter for smartphones sales. Our wireless team sold 10.2 million smartphones, the most smartphones ever sold by any US carrier. Those sales accounted for 86% of all postpaid sales and 89% of postpaid phone sales in the quarter. Smartphone subscribers now account for almost 70% of our postpaid phone base.

When looking at the full year, our smartphone base grew by almost 8 million. These are the premium subscribers in our business. ARPU is twice that of non-smartphone subscribers and they have much lower churn.

We also saw our best ever Android and Apple device sales in the quarter. More customers continue to choose the iPhone on AT&T's network. We activated 8.6 million iPhones in the fourth quarter with about 16% new to AT&T for about the same percentage of new subscribers as last year.

Now, let's take a look at margins and operating income growth on Slide 11. As you know, the investments we've made to drive record smartphone sales impacted margins. While we continue to make progress in improving our margins, we also are more than willing to invest in smartphones because of the benefits they bring. Those include higher ARPU, lower churn, strong data growth, and with that, growing operating income, which was up more than 6% for the year.

In the fourth quarter, wireless EBITDA service margin was 29.1%, about the same as last year's fourth quarter, and it was nearly 30%, taking into account the impacts of Superstorm Sandy. For the full year, our EBITDA service margin was 39.6% and it was 39.9% when adjusting for storm impacts. So even though we sold 1.5 million more smartphones in 2012 than we did in 2011, our wireless EBITDA service margins for the year improved almost 100 basis points, and improved even more when you account for the storms.

And the number of upgrades was down for the year, about 5%, which provided further margin support. We are making progress with margins, and we expect that progress to continue going forward.

Now, let's look at our wireline operations, starting with consumer, which you can see on Slide 12. A quick look at our U-verse results helps explain our confidence as we expand these services to 75% of our wireline base through Project VIP. We continue to see strong subscriber growth, both video and high-speed broadband. This in turn has accelerated customer revenue growth to 3% in the fourth quarter, our best performance in more than four years.

We continue to hit new and higher benchmarks with U-verse, including 8 million total U-verse subscribers, 4.5 million U-verse video customers with 192,000 net adds in the quarter, and 7.7 million high-speed IP broadband subscribers. That's nearly a 50% increase for the year with more than 600,000 added in the fourth quarter. And for the first time, our consumer high-speed IP broadband subscribers outnumber our legacy broadband customers. And while overall broadband subscribers remained steady in the quarter, total broadband ARPU was up more than 10% year-over-year.

U-verse is now a $10 billion annualized revenue stream, growing at 38% for the full year. And IP data revenues, driven by U-verse, now represent 61% of consumer revenues, up from 53% just a year ago. But we believe the best is yet to come. We think there is a lot of room for growth here. Penetration rates are just starting to climb, so the runway is long. And with our Project VIP expansion, that opportunity will only grow as we bring U-verse video and high-speed IP wired broadband to 1 million more customer locations.

Now, let's move to Business which you can see on Slide 13. The story in the fourth quarter is similar to what we have seen all through 2012. Customers delayed some buying decisions due to concerns with the economy. The fiscal cliff uncertainty lasted the entire quarter. And small business starts continued to lag last year's level.

But the silver lining in the fourth quarter was some small signs of revenue stability. On a sequential basis, revenues were up due to growth in enterprise. Service revenues were up slightly versus the third quarter, and wholesale revenues also showed signs of stability.

Overall, business and wireline revenue was down 2.1% in the fourth quarter, slightly better than the 2.6% drop in the third quarter. So it's been another challenging year, but through it all, we have been able to continue to hold margins steady while transitioning legacy products to IP data services.

Our strategic business services also continue to grow. That includes products such as Ethernet, VPNs and application services, which were up 10.5% for the quarter and up 13.5% for the full year. And data revenues continue to grow, even in this challenging environment, with IP data revenues up 2.4% year-over-year. It's still a weak market, but we are cautiously optimistic that this business is showing some signs of stability and we are hopeful that an improving economy will get this part of the Company growing again.

Now, let's look at margins and cash flow. Consolidated margin comparisons are on Slide 14. Even with strong postpaid net adds and record-breaking smartphones sales, consolidated margins improved. For the year, our adjusted consolidated margin was 18.2%. That compares to 17.8% in 2011. Wireline operating income margin also expanded during the year as wireline continues its transformation from voice to IP data. This helped offset declines in legacy services and a sluggish economy thanks to improving revenue trends in consumer, scaling IP, and solid execution of AT&T cost initiatives. We continue to keep a sharp eye on cost efficiencies and we see more opportunity to reduce expenses as we move ahead.

Now, let's move to cash flow, which continues to be outstanding. Our summary is on Slide 15. Cash from operations was a record $39.2 billion, and we had record free cash flow as well. Free cash flow before dividends was $19.4 billion, up more than 34% from a year ago. Strong cash flows give us the flexibility to invest in the business and return value to shareholders through dividends and share buybacks. We were able to do all of these in 2012.

Capital expenditures were $19.7 billion with more than half of that invested in our wireless business. Dividend payments for the year totaled $10.2 billion, and we repurchased more than 370 million shares, or about 6% of outstanding shares with about $13 billion. We completed our initial $300 million share buyback authorization in the fourth quarter and began buying back shares under our second $300 million share authorization. When you look at both dividends and buybacks, we returned $23 billion to our shareholders during the year.

In terms of uses of cash, our net debt to adjusted EBITDA ratio increased only slightly to 1.58, and net debt edged up as we took advantage of historically low interest rates with a net debt to capital ratio of 43%.

As we begin our Project VIP investments, our balance sheet is sound, our debt metrics solid. Our strong cash flows give us the flexibility to invest in growth while returning value to shareholders.

Now, before I hand it back to Randall for our 2013 outlook, let's take a quick look on how we delivered on 2012 guidance. I'd ask you to look at Slide 16.

On an adjusted basis, we expected consolidated revenue, margin, and EPS growth, and that's what we delivered. That includes hitting on the high end of our EPS range. We also expected the mobile Internet to drive wireless growth, and we saw subscriber gains, postpaid ARPU growth, and expanding wireless service margins during the year. We over-delivered on wireline margins and consumer wireline growth, thanks to the increasing strength of our U-verse services. We bumped up our free cash flow estimates during the year but finished the year even stronger than expected. And CapEx ended the year in the range we expected. We also were aggressive with our share buybacks, adding a second $300 million repurchase authorization during the year. And as Randall said earlier, we knocked it out of the park in executing our strategies in 2012. Altogether, an excellent performance in a challenging economy and a performance that gives us confidence as we head into 2013.

With more details on that, let me hand it back over to Randall.

Thanks John. I'm going to be real quick because we want to get to questions here, but just a couple of comments on what you can expect from us in 2013. And what you're going to see is a very aggressive execution on Project VIP, and we are actually off to a very strong start there. And as part of that, we expect to take our LTE build to 250 million or more POPS by year-end. You're going to see us launch several of our new growth businesses. I discussed those earlier. And we are looking at CapEx in 2013 in the $21 billion range. And obviously, there'll be an emphasis on wireless and Project VIP.

In terms of financials, we expect to deliver EPS growth in the upper single digits or higher. Consolidated revenue growth should exceed 2%. Consolidated operating margins should be stable, and wireless margins should expand.

We expect cash generation to be strong. In fact, free cash flow after CapEx will exceed $14 billion. This gives us room for continuing share repurchases. And actually, we expect to complete our current buyback authorization as early as mid-year. So I would characterize this as a very achievable outlook. You know our history. We tend to be conservative. And this assumes no lift from the economy.

So, to close, I like how we are executing. We have a really strong financial position which gives us the opportunity to invest aggressively and continue returning value to our owners. And I like the moves we are making to expand our growth platforms.

So Susan, with that, I think we'll get ready for questions.

Thank you Randall. Tony, I think we are now ready to open it up for our first question.

(Operator Instructions). Phil Cusick, JPMorgan.

Hey guys, thanks. I guess two quick ones. First, Randall, you were quoted recently as -- I don't know if this is right or not -- but saying that international or European acquisitions may be inevitable to continue growth. Can you address that for us?

And then second, for John, blowing through this buyback by midyear, that's great. What do you think about the potential to reauthorize and how does the Board think about that so far? Thank you.

Sure. As it relates to international, I was asked about consolidation. I said some level of consolidation was inevitable. And obviously we don't comment on M&A rumors, but here's what I would ask you to think about. As you consider what's happened in the last five years in the US, it has been impressive what's transpired in the mobile Internet revolution. And the US has been outpacing the rest of the globe fairly considerably. And I think most people expect the rest of the world will catch up.

And so the question you have to ask is are there opportunities for us to participate in that growth outside the US? And we look at this from a lot of different ways. As more and more people around the world begin to deploy LTE, there are probably some opportunities to create some unique roaming arrangements where we can roam on each other's networks at different cost structures, which may change that dynamic somewhat, the opportunities to partner -- like you've seen us partnering in China, our China Telecom deal that we did, and you'll probably see those kind of deals more and more in the mobility side. Do you invest at the infrastructure level is a big question.

And there's really another aspect to it, and that is can you participate in this growth outside the US at the application level? And this year is going to be very instructive in that regard to us because services like Digital Life, which is really -- I mean it's an over-the-top application for home security and monitoring and so forth. And is it possible to carry those platforms outside the US? We are already licensing that platform to companies in Europe. So, can those platforms be extended in an over-the-top model outside the US? So as we kind of look at this, we do believe the US experience will be replicated outside the US, and we are just trying to decide how is it we would participate in that? And there are a lot of avenues for that.

That sounds like acquiring something is less on your minds than other opportunities.

There's just a lot of different ways to think about it, and that's all I'm trying to characterize here. There's a lot of options.

Thank you. John?

With regard to your question, first and foremost it's a board decision on the authorization, so we are going to work within the authorizations we have currently.

Secondly, in evaluating and in providing information with regard to share buyback, first and foremost it's a question of the valuation of your shares compared to the market price that is out there. And we look at what analysts say. We look at our own internal valuations of a share price, and we look at what the market is trading the stock at.

But before you get to a further authorization, you need to make sure that, one, your cash flows from your business, which we have had really very solid cash flow performance, is enough to make sure you can continue to reinvest first, you can continue to pay your dividend first, and you have enough cash flow leftover to be able to take advantages of opportunities, like Randall mentioned today, an opportunity to get some more spectrum in the NextWave transaction that we closed today. And if you're comfortable with that, then you go into the decision of what you do with that extra capital. That's a process we go through on a regular basis, and we'll continue to do that.

This is a unique time from a market perspective in that the cash costs of our equity are high compared to traditional interest rate and borrowing capacity that's out there. And that's the reason why we've incurred slightly more debt than we've usually carried.

Got it. Thanks guys.

Simon Flannery, Morgan Stanley.

Thanks a lot. I wonder if we could talk about the CapEx side of the equation. You were talking about a $21 million(sic-see press release "$21 billion") just a mid single-digit increase year-over-year. How should we think about that in the context of the analyst meeting and the sort of up to sort of $22 billion? What's the delta there, and are we still looking at $22 billion possibly over the next couple of years, or do you think you're going to be more efficient in achieving some of the goals? And could you be a bit more specific about what you're going to see with Project VIP in '13? You've talked about the LTE rollout, but perhaps, on the wireline side, should we be sort of hitting a third of the three-year targets over the next 12 months or any other color on that would be great. Thanks.

Let me try to answer a couple of your questions. First and foremost, the $22 billion we gave in November was that information related to a three-year plan. Since that time, we've really been able to put pencil to paper from an engineering perspective and really work specific business cases at a more detailed level. That's providing some of our opportunities. Quite frankly, we had more efficiency in our capital program last year, and finished this -- for example, we mentioned today we are at about 174 million POPS covered with LTE. Our commitment for the year had been about 150, so we are ahead of our achievement and spent some money efficiently. We are taking that into account.

And then lastly, we've been able to identify some, if you will, shared savings where the overlap between our wired and our wireless projects in VIP are going to allow for some more efficiency. All of those pieces go into the guidance that's $21 billion. And we are comfortable with that $21 billion range.

Specifically with regard to achievements, we are expecting 250 million POPS covered with LTE by the end of this year. We will also make -- we are not disclosing specific levels of fiber-to-the-building or expansion of U-verse footprint at this time, but you can think about it as kind of a ratable build schedule as we go forward. And we are moving forward today with some of the fiber--o-the building efforts and moving forward, immediately hit 13 on very many of those velocity projects. It's not a question of moving capital or cost into later years. With our financial flexibility, we will do as much as we can as early as possible.

That's helpful. Thanks.

John Hodulik, UBS.

Great, thanks. Maybe a question on the wireless side. During the year, you guys changed eligibility requirements and instituted some fees. Do you think there's still some other levers you can pull that can be used to enhance profitability?

And then Randall, maybe as you look out over the year, there's been some significant changes in the wireless industry. Do you expect to see any change in the real level of competitive intensity as we move through the year?

Good question John. Certainly, we do believe that there are additional opportunities for us to focus on our cost structure and improve profitability in specifically wireless. If you look at the changes to our upgrade cycle policies, they reduced our upgrades by about 5% this year. If you guys do the math, you'll find it's in the $1 million -- or excuse me, in the million phone reduction, or million upgrade reduction range, so it did have a significant impact. And some of the other steps we took generated benefits for us.

We are going through a continual process of evaluating those on that side as well as evaluating cost structure opportunities and one AT&T type opportunities for additional efficiency. So those are ongoing. We are optimistic that those exist. And that is part and parcel of our guidance when we say that we expect wireless margins to continue to expand in '13.

In terms of the industry dynamics, it should be an interesting year. There's a lot of talk and a lot of press out on the different industry players, and it's kind of hard to estimate what's going to happen. I think the way we are considering it internally it is it will probably be a little bit of open field running this year as T-Mobile and MetroPCS come together. I don't know what the timing is on that. I don't expect that to be a significant impact on 2013, but when they get that transaction closed, we expect there to be some dynamics in the marketplace that perhaps will have to respond to. Some of it we find interesting, like the handset financing that they are doing. That's something we've looked at on several occasions. I kind of like the idea. I commend them for trying it. It will be something we're going to be watching, how it is received in the marketplace.

And in terms of other players, it's just hard to say what the dynamics will be, but I think it will be just a little bit of open field running this year.

Michael Rollins, Citi.

Thanks for taking the question. I was wondering if you could talk a little bit more about the enterprise in the business environment. Exiting last year and early this year, are you seeing any changes in the sales cycle, or the competitive intensity? And can you talk about what's built into the plan for this year in terms of are you expecting it to get a little bit better, stay the same as the back half of '12? Just some added color would be helpful. Thanks.

I'll start and let John chime in with some details. But we are seeing a little glimmer of hope on the enterprise side. It's really hard to predict this segment right now when you have continuing resolutions and you have fiscal cliffs and you have debt ceilings and you have sequesters. And people are a little bit stuck right now, and it's been this way for about six months. But when you kind of look at them mid-level market and above, we actually saw positive growth in the first quarter. We have not seen that in quite some time.

The pressure on the Enterprise segment is coming from small business and particularly state and federal governments. And there the spending cycle is really slow and obviously the spending is down considerably. And so if we get through a lot of the budget situation, perhaps you can expect to see some lift, but our current expectation is we've built a plan around economic growth that's sub 2% right now. In fact, it's a very low assumption.

Business fixed investment -- we are not anticipating any great lift from fixed investment increases or hiring. And so we've built our expectations in this guidance we gave you around some rather slow economic indicators. And our hope is, at this mid-level Enterprise business and above, that they will continue investing in productivity efforts, because productivity efforts tend to require the types of solutions that we bring to bear, particularly in mobility. But it's a little uncertain right now.

The only thing I would add to that is we are continuing to see some investment in strategic business services and people willing to invest in growth. It is slow.

And secondly, with our Project VIP investments, we hope to self-generate some changes in the small business by providing some additional broadband services and capabilities as we do some of our fiber-to-the-building, some of our expansion our U-verse footprint and give us some opportunities on a self-action -- self-led action to help increase our performance in small business. But it's just, as Randall said, we did not bake into our expectations for '13 any form of significant economic lift or significant recovery.

What's kind of interesting, Michael, and it gets a little bit obscured in how the industry reports numbers, but we talk about enterprise being in decline on the fixed line side. When you look at the spend on the wireless side though, enterprise spending in total is actually rather healthy, but it's just the spend is really being directed towards mobility. The world of tablets and the world smartphones is really driving significant spend in enterprise business. So in total, it is growing. The fixed line side is a little pressured for the reasons we talked about.

Just to follow up briefly, is there a way investors should think about how much of your sales on enterprise are now tied to wireless? Is there a metric that you want us to keep in mind in terms of the demand from your customers to bundle the bill together and work with you on the combination of the two?

I think the best indication of what's going on there is what we are seeing in some of the VPN and cloud hosting services, which are really part and parcel generated by a lot of the employee mobility issues that the large corporations are facing. But we don't have a direct breakout either on the mobility or on the wireline side that ties those two back and forth. And we have chosen not to do that for clarity of information as opposed to we think we can draw some challenges. We'll rethink that and continue to view that, but right now I think the way we give the information is the clearest picture for you.

Thank you.

Michael McCormack, Nomura Securities.

Thanks. John, just looking at the wireless margins as they progress into 2013 and I think John's comment -- John Hodulik's comments sort of hits on it as well, thinking up impact on subsidies and what we can change there. But I'm assuming we'll have a decent snapback as we go into Q1. Any color on that?

And then secondly, also with regard to smartphones, is there going to be an issue eventually where we have smartphone penetration reaching heights that, when we start talking record activations of smartphones, it becomes sort of a bad word, meaning we are seeing more smart-to-smart? Is there still ARPU opportunity to gain from the subsidy from that?

And then lastly, again, John, thinking about the targeted leverage and the dividend payout, when you think about how many shares you're thinking about repurchasing over a period of time, are you targeting an absolute reduction in dividend payment itself?

Let me kind of go through this. There's a lot of questions. Let me go through them (inaudible). First and foremost is certainly the dividend reduction that results from the buybacks -- and as Randall mentioned, I think this year we're going to stay close to $700 million in that because of the share buyback process. It is an important piece of it. But quite frankly, it's not the controlling piece. Certainly it's taken into consideration but that's not what we are targeting. It has more to do with balancing the capital structure in today's environment with some certainty for a longer term while protecting our ability to invest a dividend and keep flexibility for things like we mentioned, whether it be NextWave or the Atlantic Tele-Network acquisition that we've recently announced. That's the balance that we have to have. The cash cost of debt today is much lower than the cash cost of our equity, and so that gives us that opportunity. We're just trying to do a balance while retaining flexibility, protecting the dividend. That's it.

Secondly, with regard to smartphones, once again, whether we're talking about percentage of sales of smartphones as a percentage of phones sold, which was about 89% this quarter, or smartphones as a percentage of total postpaid devices, which was about 86%, either one of those is well above our smartphone penetration of about two-thirds today. So, we have a natural -- with the existing base, we have a natural growth opportunity just by converting those to smartphones. And we have been growing that percentage of our postpaid base of smartphones 2% to 3% a quarter, so that's going to continue for some time.

Two, as we are seeing, we added 400,000 tablets, or nearly 400,000 tablets this quarter, so we are seeing the data-only devices, data-centric devices like tablets draw -- generating a lot of growth. We believe that will continue.

Our LTE rollout at 174 million POPS and moving to 250 million POPS is going to generate speeds which we think will generate usage, which we think gives us the opportunity, because of our new usage and tiered data plans and the movement of our customer base to that, will allow us to grow revenues. So we are optimistic about our position.

And then when you add on Digital Life, when you add on Connected Cars, when you had on the healthcare infrastructure that our analysts talk about, when you add on the mobile premise solution, or the home-based mobile phone, all of those opportunities, along with our Mobile Wallet, are going to give us real chances to continue to grow revenue and at a scaled base when you're a player of our size. So we are optimistic about that.

With regard to the wireless margins and consistent with what John was asking earlier, we're just looking at every aspect of our arrangements with our customers, of our service, trying to make our service effortless but very efficient. And so we're looking at all those and believe there are still opportunities to improve margins through making things easier on our customers while we are reducing costs on ourselves. So --.

That's great. And on the margin side, you are obviously anticipating an improvement in '13 versus '12. I'm assuming you don't want to try to put any parameters around that.

No, we're going to stick with, very simply put, we're going to represent to you, like we did in 2012, what we can achieve, and we're going to take that same approach this year. And I'm sorry Mike. We are going to have improvement in margins. We are not going to disclose quarterly margin analysis. And yes, as you well know, there is going to be seasonality with regard to it based on a whole number of items that we go through. So, I think you are well aware of those items.

Great, I appreciate it guys.

Jason Armstrong, Goldman Sachs.

Thanks. A couple of questions, I guess first for Randall. Realizing you obviously just did WCS and QUALCOMM, when do you envision the next opportunity to look for meaningful additions to your Spectrum portfolio? If you look at the FCC I guess and the current attempt sort of better define the rules for you around Spectrum ownership and potential caps, how does that influence your view on timing?

And then second question for John, at the analyst day, you guys obviously had pretty extensive detail and commitment on potential decommissioning of copper plan. As you start to get into those efforts from an engineering perspective and really gauge the response from regulators on the feasibility of this, how quickly do you think those efforts can progress and really translate into changes to the cost structure? Thanks.

On the Spectrum, you'll see, in all likelihood, some additional purchases of Spectrum this year filling in some holes. And so you'll see us continue to do some of that during the course of 2013. But in terms of when the next meaningful block of Spectrum will come on the market, that's obviously the government's next option, and they have talked about a 2014 date. I hope that's accurate. I would be impressed and surprised if it were. Our expectation is that hopefully they can get into the market in the 2015, 2016 timeframe.

And when you think about Spectrum caps, Jason, it's interesting. What's happened over the last year is the industry dynamic has kind of I think made the Spectrum cap issue I think far more interesting. It looks like Sprint is about to secure a significant amount of Spectrum. T-Mobile combining with MetroPCS, obviously their Spectrum depth and position is radically different.

And so our view and our expectation is, as we get closer to a government auction, that the need to do a lot of evaluation on Spectrum caps seems less and less relevant, and it seems like there's going to have to play into this an equation of how much Spectrum does an entity whole versus how much Spectrum are they using. And we continue to reinforce that Spectrum caps is the wrong way to think about this. The right way to think about this is ensuring that the Spectrum markets are fluid and liquid and that there are aggressive build requirements on Spectrum. You put those two things in place and you ensure kind of a market-based economic allocation of Spectrum. And so that's what we continue to push for and we are actually not anticipating any significant Spectrum caps being placed that would inhibit any of the players from engaging in an auction in the future. And when you consider the situation that the federal government has right now in terms of the fiscal problems that we're facing, I would expect that our Congress would be most interested in having an auction that would yield the greatest benefits. And the greatest benefits in Spectrum caps do not go hand-in-hand.

With regard to the decommissioning copper plan issue, we continue to work that issue not only on network engineering and our IT guys with regard to products and services, and all the issues related to the transitioning to an all-IP service base provider, but we are also working it from an external affairs on the regulatory side.

I will tell you from the cost savings perspective that there are not significant cost savings expected in this guidance that we gave you for 2013. And I would suggest to you that it is a number of years out. It's not that it will not be achieved, but it's a number of years out in the sense of this is a longer process to work with all the interested parties and make sure we do it right, do it effectively, and do it successfully. So we're working it, a lot of activity on it, but I wouldn't suggest to you that there is a significant improvement in cost structure in '13 because of it.

Thanks guys.

David Barden, Bank of America.

Thanks guys, appreciate taking the questions. I guess two. First, John, could you, on the guidance change, the increase in earnings per share growth expectations from mid-single digits at the analyst day to now high single digits, could you clarify if that's more about the timing and pacing of buybacks, or is there something fundamental that's improved relative to your view that you gave I guess in October, and if you could kind of elaborate a little bit on what that is?

And then I guess second, I don't know if Ralph is on the call, but maybe Randall, just as you look at your wireless business, I think you've got a lot of advantages relative to, as you mentioned, some of the interesting events that are going to take place this year. But if you look at yourself relative to Verizon, they are taking three times the net adds that you took in the quarter, including tablets, maybe four times if you exclude tablets. They're guiding to 10% higher margins in 2013 versus what AT&T got in 2012. LTE is about a year ahead. How do you think about trying to close the distance with respect to Verizon? Do you care? And what are you prepared to do in terms of margin, market share promotions, to really address that gap that's emerged? Thanks.

Let me take increase in EPS first. First, at the analyst conference, we were talking about a three-year cycle, the three-year term. And so that was the information we are providing there. And I think we told that we would update specific guidance on 2013 on this call. So there are different time frames, different patterns, just from the get-go.

I will tell you we are taking into account some of the really solid results that we had in the fourth quarter, specifically with regard to tremendous wireless sales and postpaid net adds, great performance on broadband and our consumer U-verse business, great performance on TV, so -- and quite frankly some really good news from our enterprise business side. So we update that. We take that into account, and of course we take into account our recent share repurchase. But really the answer to your question I think is more about we were talking about two different sets of time periods. One was a three-year general information. Today, it's a commitment on guidance that we expect to meet or exceed.

Got it.

In terms of the comparison versus our competitors, I think you asked the question, do we care or think about it? You probably know us better than to ask that question. Of course we care. We think about it a lot and we focus on it. And our objective is to not lose share throughout the course of this year and to actually get to a point where we are gaining share vis-a-vis our competitors. And so we focus on it. We're doing a lot of work in terms of just margin expansion. And as we commented earlier on our guidance, we expect to expand our margins again this year. So our objective is to get our margins comparable to our competitors and also equalize share. So, it's a competitive dynamics in a competitive marketplace, and that's the fun part of this industry.

Thanks Randall.

Timothy Horan, Oppenheimer.

Thanks guys, and two for Randall while I have you. With the reelected Obama administration, maybe just some thoughts on what you think they might focus on. Are you optimistic or concerned about any issues they might focus on? The only thing I've really seen is they seem to want to have much faster broadband speeds. Do you think there's anything they can do to really help that deployment in?

Secondly, Randall, while we have you, Apple is still a very large percentage of your iPhone sales, and it doesn't seem like the subsidies have really declined in that for the last six years. With Android catching up in terms of quality with a lot more global consolidation, do you see a point where those subsidies start to decline? And if so, when? Thanks.

Sure. In terms of the administration's view on our industry and what we might expect, the current chairman has expressed obviously an interest in having broader broadband deployment. We are actually very supportive. We would like to see the administration come out with a position that is very, very supportive of broad-based broadband deployment. And our VIP announcement fits perfectly in line with that. In fact, the administration has expressed appreciation for our commitment to investment in extending the broadband. So I don't see any big issues coming out of the administration that are going to change our plans or change how we view the industry right now.

I think the biggest issues that could impact our industry and our company tend to be more macro policies in nature, tax policy for example. Do we get a big budget deal done? And if we do get a big budget deal done, is there an appetite and an interest in doing tax reform? And we would obviously be very, very significant supporters of tax reform. We would really love to see the effective rate on profits come down, and understanding that means some of the preferences like bonus depreciation may have to be compromised, but we think that's a good thing. It's good for our industry and we think it's healthy for the US economy. So those are the issues that are probably most impacting to us.

I think other policy issues that are kind of unknown that could affect the industry or us specifically are the Affordable Care Act, as those regulations are published, what kind of impact will that have because that's just a big uncertainty that we are all waiting, trying to understand exactly how that's going to affect all of us. And so the macro will be probably more important and more relevant to us in 2013 than industry-specific issues.

As you think about subsidies, we are very encouraged by the new device lineups we are seeing come into the marketplace. And we had a record quarter in terms of selling Android devices. I am very enthusiastic about the Windows 8 devices that are coming into the marketplace. And in 2013, we're going to see more and more of those. We think a good, vibrant, healthy set of options for our customers in the whole ecosystem is really, really good for our customers, and it's a good, healthy environment for competition among all of the players which, from our standpoint, would probably be good for us as well. So we are optimistic about what we see coming into the lineup in 2013 in a good healthy competitive set of handsets across different OSs, actually very optimistic about BlackBerry 10, hope that it proves to be as good as it appears to be. So anyway --

Thank you.

I think we've got time for just one more question.

Brett Feldman, Deutsche Bank.

Thanks for getting me in. During the quarter, I believe you were running a promo on your tablets. I think it was a $100 rebate, which kind of looks like an experiment with subsidies on tablets. I'm curious. What was your experience with that? Did you find that it ended up having a meaningfully positive effect on people buying tablets and attaching them to their data plans, or are you finding that the tethering option is accomplishing that without the cost?

That's a good question. I guess I to answer your question this way. If you looked at our results, you'll see that we added just under 400,000 tablets for the quarter, which is a significant number for us, in the postpaid space. And we do believe that the $100 promotion was part of that; it was part of that success. When we looked at what those customers bought and what they added to in their Mobile Share or on their separate plans, we were pleased with the ARPUs that we got out of it. And so we viewed it as a positive and think of it as a tool that could be real beneficial to help us grow the business from a data-centric device.

Do you think you're going to make it a little more of a permanent feature in the way you price tablets or just use it as a one-off promotional from time to time?

I think we are going to look at that on a regular basis and decide as we go forward with it. In the fourth quarter, the results were positive not only on the sales activity but on the revenue commitments that we got out of that from a monthly basis. So the ARPU aspects of it were also more than satisfactory to us. So, we felt like it was a very successful strategy.

Thanks for taking the question.

Thank you. With that, I want to thank all of you for being on the call with us this afternoon. We've closed the year with another strong quarter and delivered on the expectations that we laid out for you at the beginning of 2012. And as Randall mentioned, we are positioned well for 2013. We're focused on growth, have a solid, achievable plan that will help us get there.

Thanks again for being on the call. And as always, thank you for your interest in AT&T. Have a good evening.

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.