AT&T Inc (T) 2013 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the AT&T second-quarter earnings release 2013 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, Senior Vice President of Investor Relations for AT&T, Ms. Susan Johnson. Please go ahead.

Thank you, Tony. Good afternoon, everyone, and welcome to our second-quarter conference call. It's great to have you with us today. I am Susan Johnson, Head of Investor Relations for AT&T. Joining me on the call today is John Stephens, AT&T's Chief Financial Officer; and Ralph de la Vega, AT&T's President and CEO for Mobility. John will cover our consolidated and Wireline results, and Ralph will give us an update on our wireless business; then we will follow up with questions and answers.

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

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

With that, I will now turn the call over to AT&T's Chief Financial Officer, John Stephens. John?

Thanks, Susan, and good afternoon, everyone. Thank you for being with us today and thank you for your interest in AT&T. Let me start with our consolidated financial summary, which is on slide 4.

Consolidated revenue was a solid $32.1 billion, up $500 million, or 1.6% on a reported basis and up an impressive $800 million, or 2.6% when you exclude the divested Advertising Solutions business. And, we were able to do this with no lift from the economy. These gains were due to solid revenue growth in Wireless, strong gains in U-verse services and with improving revenue from our Wireline business.

Reported EPS for the quarter was $0.71. That's up almost 8% over last year's second quarter. Our results this quarter include about a $0.04 lift from the sales of some of our American Movil shares. You may recall that America Movil has a share buyback program underway and we were selling shares to maintain our ownership closer to our historic level of about 9%.

When you exclude this help, earnings per share were $0.67. Our adjusted EPS is up about 5% for the year and up nearly 2% in the second quarter. Consolidated margins were down year-over-year, primarily due to success-based initiatives in both Wireless and Wireline.

Cash flow continues to be strong. Cash from operating activities for the quarter totaled $9.5 billion, which allowed us to have a strong capital investment in Project VIP and still have free cash flow of $4 billion. And in the second quarter we bought back about 90 million shares for $3.3 billion and, with our strong dividend, returned more than $5.7 billion to shareholders.

Now let me give you the highlights for the quarter on slide 5. As you can see, we continue to execute at a high level. Our network performance is nothing short of terrific. We have posted impressive metrics across our key growth drivers and, as a result, we have improved momentum heading into the second half of the year. And as I said, we see this across our most important growth areas. That includes about 20% growth in mobile data, strong postpaid net adds and record-setting smartphone sales.

Total U-verse subs reached 9.4 million while video subs topped 5 million customers for the first time. Total U-verse revenues grew 30% and U-verse now represents more than 50% of consumer revenues. And even with little help from the economy, business Wireline showed sequential revenue improvement as strategic business services grew by more than 15%.

All this resulted in improved revenue growth, continued EPS gains and strong free cash flow, even while investing more in our customers and in our Project VIP.

I now would like to turn the call over to Ralph de la Vega, who is going to update us on all the work going on in wireless. Ralph?

Thank you, John, and hello, everyone. It's great to be with you today. Before we get to the Wireless highlights for the quarter, I would like to take a moment to give you a quick update on our 4G LTE Wireless network, which is now the nation's fastest and most reliable 4G LT network. Details are on slide 6.

Our network team has done an incredible job with our LTE deployment. All LTE networks are not built the same. They all don't use the same network architecture. Not all have the same network reliability and density, and they all don't have the fastest speeds. Our goal was to build the best LTE experience from the very first market we deployed.

You can see by the high praise and recognition our network has received that the results speak for themselves. PC Magazine called our 4G LT network the nation's fastest. PC World said we have the fastest average download and upload speeds of any competitor in its test for the second year in a row. And, according to independent third-party data, we now have the most reliable 4G LTE network as well.

We already cover more than 225 million people with our 4G LTE network today and we are on track to reach nearly 270 million POPs by year end, covering 400 markets. We continue to move fast with our 4G LTE deployment. We now expect to substantially complete our 4G LTE network by the next summer.

Customers love our LTE experience. We already have more than 35% of our smartphone subscribers on LTE, and that number is accelerating quickly thanks to our impressive line of LTE devices. The recognition is great to see, but this network also provides a solid foundation for our Wireless growth platforms, and those details are on slide 7.

Having the nation's fastest and most reliable network gives us an advantage when it comes to data growth and the growth story is very powerful. Smartphone data usage is up 50% year over year, and more than 70% of those devices are on usage-based plans with most taking larger data plans. This growth, plus an increasing number of smartphone subscribers and new data devices being added to the network, drives a strong 20% mobile data growth that we are seeing.

We also rolled out our first Digital Life markets in the second quarter. We are now up and running in 33 markets and expect to be in 50 by year end. I already have Digital Life in my home; I let me tell you, it's really amazing what it can do. We believe home security and automation is a large untapped opportunity for us.

Another opportunity is the connected car. You already know our GM agreement to begin wireless connectivity for all GM vehicles in the US market beginning in 2014. We have also announced an agreement with Sirius XM satellite radio to provide mobile connectivity supporting a suite of security and services for Nissan Automobiles in North America. And, yesterday, we announced an agreement with Audiovox to provide network connectivity to Audiovox telematics and location-based service systems.

You also know about recent moves in the prepaid space. We recently introduced a new prepaid service, and the proposed Leap Wireless deal will accelerate our expansion in this segment. We believe we have the right strategies in place to make a stronger impact in the prepaid segment and think there is a strong growth opportunity there as well.

Finally, last week we announced AT&T Next, a program where customers can get a new smartphone or tablet every year with no down payment, no activation fee, no upgrade fee and no financing fees. This is a great program that provides great value and more choice for our customers. Many customers don't want to wait for the latest and greatest device, and with AT&T Next they don't have to.

Now let's move on to our second-quarter results, starting with a look at postpaid net adds on slide 8. Led by solid gains in tablets, we added more than 550,000 postpaid subscribers in the quarter, and that's a 72% increase from the year-ago quarter and our best second-quarter postpaid net add quarter in four years. We added about 400,000 postpaid tablets, which we expect to be the largest gain of any carrier in the second quarter. In addition, prepaid net adds increased as a result of solid GoPhone sales.

Total prepaid sales continued to be impacted by the migration of session-based tablets to postpaid plans, which is a transition that we are happy to see. Gains in connected devices more than offset losses in the reseller segment, where we saw subscriber losses primarily in low-revenue accounts. However, reseller revenue increased by almost 30% year-over-year.

Postpaid churn was up slightly year-over-year but down from the first quarter; and smartphone churn was even better, less than 1%.

Strong postpaid net adds helped drive solid revenue growth, and those details are on slide 9. Revenues continue to be led by data growth. We saw nearly 20% growth in data revenues in the quarter, and that helped to drive a 4.1% service revenue growth. Total Wireless revenues were up nearly 6%. The growth of smartphones, tablets and other data devices is fueling this data growth. Mobile data is now nearly a $22 billion annualized revenues stream for us.

This growth can also be seen in our expanding postpaid ARPUs. Total postpaid ARPU, which includes tablets, was up nearly 2% in the quarter, but phone-only ARPU was up 3%. Our phone-only ARPU includes smartphones but also includes our lower ARPU feature phones and wireless home phones as well, which make this growth even more impressive. And postpaid data ARPU grew at nearly 18%.

Smartphone sales were also strong this quarter, and those details on slide 10. A second-quarter record 88% of our postpaid phone sales were smartphones. Smartphone subscribers now make up 73% of our postpaid phone base, and that's an increase of more than 1.2 million new smartphone subscribers in the quarter. These are the premium subscribers in our business. They have twice the ARPU of non-smartphone subscribers and much lower churn. We also set another second-quarter smartphone sales record of 6.8 million, an excellent performance in a very competitive environment. This helped drive record Android smartphone sales both in total number of phones sold and in the highest percentage of total sales, and we did this while also selling more iPhones than we did a year ago.

Several promotions on our new low-cost trading program helped to fuel these strong sales, bringing in new customers while also keeping existing ones on two-year contracts. And it also increased the number of LTE devices on the network. More than 35% of smartphones now are on LTE.

The move to usage-based data plans also continued in the second quarter. Overall, more than 70% of our smartphone base has moved to usage-based plans, and data used on these smartphones is growing by about 50% year-over-year.

So we have more smartphones on usage-based plans, data growth is strong and a growing number of subscribers are taking bigger buckets of data from us. About 80% already take the larger data plans and we are seeing more than a quarter of mobile share accounts on data plans of 10 gigabytes or higher.

And speaking of Mobile Share, we now have about 4.3 million Mobile Share accounts, and those accounts include more than 13 million subscribers on devices such as smartphones and tablets. We continue to see a steady movement of subscribers on the limited plans to Mobile Share. More than 15% of subscribers to date moved over from unlimited plans. And remember that our customers have a choice; they can keep the plan they have or move to Mobile Share, whatever plan that works best for them.

Strong postpaid net adds, smartphone sales and upgrades impacted margins, and those details are on slide 11. Our Wireless EBITDA service margin was slightly below our first-quarter levels at 42.4%, but we sold 800,000 more smartphones in the second quarter than we did in the first. We made a strong effort to get people into our stores or on our website through promotions that allow customers to trade in their phones and sign new contracts with us, and that strategy worked extremely well. Upgrades were much stronger than a year ago and the first quarter, and we had a higher percentage of customers on contract at the end of the second quarter than we did at the end of the first quarter. The long-term value they bring is impressive -- higher ARPU, lower churn, strong data growth and greater network efficiencies from our new LTE devices.

The trade-in program also gave customers a chance to upgrade their phones before the upgrade period moved to 24 months. At the same time, our new AT&T Next program gives customers the best choice if they want a new device every year.

So as you can tell, we are very busy this quarter introducing new programs and delivering a strong second-quarter performance. You will continue to see us drive strategies to grow our business as we move throughout the year.

John, those are the highlights from Wireless, and with that I will turn it back to you to discuss Wireline results.

Thanks, Ralph, appreciate it. Now let's look at our Wireline operations, starting with consumer, which you can see on slide 12.

As I mentioned at the outset, we passed a crucial threshold with U-verse. It now accounts for more than half of all consumer revenues. Two years ago, U-verse was less than a third of consumer; now it's more than half and growing very fast. That's a remarkable benchmark as we transform our business. We now have 9.4 million total U-verse subscribers. That's more than double the number we had just two years ago. We added more than 640,000 U-verse high-speed broadband subs in the quarter and 233,000 new U-verse TV subscribers, topping 5 million video subscribers for the very first time.

U-verse broadband now makes up more than 50% of our total broadband base with total broadband ARPU growing at more than 9% year-over-year. These gains helped drive overall consumer revenue growth of 2.4%, with total U-verse revenues of nearly 30% in the quarter.

U-verse is now a nearly $12 billion annualized revenue stream, not bad for a business that was just started seven years ago. And, it also shows clearly that we know how to build and scale new businesses as we move forward with Project VIP.

Now let's move to Wireline business, which you can see on slide 13. The economy continues to be challenging and is not providing any assistance to our efforts here. But, on the bright side, we do see some signs of improvement from the first quarter. Business revenue was down 2.2% year-over-year but increased sequentially with both enterprise and small business showing sequential revenue growth. Small business also showed growing customer momentum with U-verse broadband net adds.

Part of the business continued to do very well. Growth continued to be strong in strategic business services. That's products such as VPN, Ethernet, hosting and other advanced IP services, which were up more than 15% in the quarter. These services represent a more than $8 billion annualized revenue stream and are approaching 25% of total business Wireline revenues. And we continue to do well with Wireless in the business space. We had our best-ever Wireless business adds in the quarter.

More and more businesses want solutions that include wireless. For example, earlier today we announced an agreement with Disney Parks that makes AT&T that official wireless provider for Walt Disney World Resort and Disneyland Resort. We've talked often about the transformation of Wireline from legacy products to advanced IP services, but we are also seeing businesses transform to mobility. AT&T is well positioned to deliver these types of solutions to the business market. Our full ownership of our global IP network and our leading 4G LTE wireless network are a powerful combination when it comes to meeting business customers' needs.

Before we get to cash flow, let me give you a quick update on some of our Project VIP initiatives. Details are on slide 14. Ralph told you about the incredible progress, both quality and coverage, that we are making Wireless. But we are also breaking ground on several Wireline projects as well. Our network upgrades are on track and we expect to boost top U-verse speeds up to 45 megs per second in the next few months, and we are moving toward speeds of 75 megs and 100 megs in the near future.

We have increased our U-verse video consumer locations by about 500,000 year to date. Those locations also include U-verse broadband. We have also added 1.3 million U-verse broadband-only customer locations so far this year. When you add both together, that's nearly 2 million U-verse broadband locations to serve customers. This gives us more than 50 million U-verse broadband customer locations across our Wireline footprint.

We are on track to hit our goal of reaching approximately 75% of our customer locations within our Wireline footprint with wired high-speed broadband by the end of 2015. Our fiber build to multitenant buildings is also underway. We expect to reach approximately 250,000 of our 1 million customer location targets by the end of 2013.

We're just six months into our plan, but as you can see, we're making progress and we are very excited about the growth potential Project VIP brings to AT&T.

Even with our progress on Project VIP plus success-based initiatives, margins continue to be solid. Details are on slide 15. For the second quarter, our consolidated operating margin was 19.1%, an increase from the first quarter but down year-over-year due largely to stronger, actually record, smartphone sales and a higher cost associated with U-verse adds. Wireline margins saw pressure from success-based initiatives in consumer and Project VIP investment costs. Wireline pressure was partially offset by growth in consumer revenues, operational improvements in the network, sales and support functions and solid execution of cost initiatives.

As Project VIP moves ahead, we will continue to look for more opportunity to reduce expenses.

Now let's move to cash flow, which continues to be a solid story for us even as we increase investment in our Project VIP. Our summary is on slide 16. In the first half of the year, cash from operations totaled $17.7 billion, which is up from last year's level. Capital expenditures were $9.8 billion as Project VIP investing starts to ramp, and free cash flow before dividends was $7.9 billion.

In terms of uses of cash, net debt was stable in the second quarter with a debt-to-capital ratio of 46.6% and a net-debt-to-EBITDA ratio of 1.6%, well below our guidance of net debt in the 1.8 range and actually slightly lower than our ratio of 1.68 in the first quarter.

We also completed our second 300 million share repurchase authorization and began buying shares back from the third authorization. However, the pace of buybacks slowed when compared to recent quarters. We repurchased about 89 million shares for $3.3 billion. With our dividend, this makes our total return to shareholders in the second quarter almost $6 billion.

Even with our progress on Project VIP, plus success-based initiatives, margins continue to be solid. Excuse me.

During the quarter, we also took several steps to strengthen our balance sheet. We continue working with the Department of Labor on a plan that would contribute a preferred equity interest at AT&T Mobility to fund our pension plan. We are optimistic on the strategy and expect approval of proposal later this year.

During the quarter, we monetized some of our shares of America Movil stock while keeping our ownership levels roughly the same, about 9%. We continue to keep our focus on a strong financial foundation. Our balance sheet's sound; our debt metrics are solid; our strong cash flow gives us the flexibility to invest in growth initiatives and make strategic investments such as Leap Wireless, while returning substantial value to shareholders through our strong dividends.

Before we take questions, let me close with a quick recap of the quarter on slide 17. The second quarter was a story of growing revenues and growing momentum. Our revenue gains were strong, our cash flows were solid and we continue to grow EPS. The mobile Internet drove strong Wireless results, including strong mobile data revenue growth, growing postpaid ARPUs and our best second-quarter postpaid growth in three years. Plus, our 4G LTE network has been winning praise and recognition for being the nation's fastest and most reliable.

During the quarter, U-verse hit an important milestone when it exceeded more than half of consumer revenues. And Project VIP, we feel the best is yet to come.

Our strong execution this quarter puts us on track to meet our full-year guidance, including revenue growth, EPS, free cash flow and margins, so a solid quarter with strong momentum heading into the back half of the year.

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

Thank you, John. Tony, we will turn it back over to you. We are ready now for questions.

(Operator instructions) Phil Cusick, JPMorgan.

Ralph, if we could start with the net add number, can you help us to break it down a little bit? 500 and something thousand, nearly 400,000 tablets -- if you take out the home phone fixed devices and Digital Life, was there growth in mobile voice postpaid? Thanks.

We had a really strong quarter in all aspects. And in fact, we ended up in June with significant gains in smartphone-only growth, not just wireless home phones. So we feel this is one of the best quarters we could have turned in, especially considering the fact that one of our competitors got the iPhone in the same quarter. To turn in the performance that we did when you consider all the factors was a remarkable accomplishment. And we are very pleased with the overall phone growth, not just on smartphones, but feature phones and wireless home phones.

And we shown in the ARPUs that we have given you the fact that, even when you include all those feature phones and wireless home phones, the ARPU is up in a very nice way. And the good thing about wireless home phones, by the way, is that soon there will be wireless home phones and Internet access. In the next few days, you will see us announce that we will be adding data capability, which will add substantial ARPU to wireless home phones. We think that's going to drive significant ARPU growth to the phone-only category in the future.

Okay, I guess second, if I may, can you just help us a little bit on Digital Life? Just round numbers for that, was that single-digit, double-digit thousands in the quarter? And how should we expect that to ramp through the rest of the year?

We are not providing that detailed information yet, Phil, but I can tell you that the early responses by customers has been very positive. The ARPU is higher than we had planned. They are adding a lot of video cameras to the services, and with every video camera there's an additional charge.

Customers love the product and net promoter scores are one of the highest that we have ever seen for any product that we have launched. We announced recently that we added six new markets. That brings the total to 33, going to 50 by year end. That platform is brand-new, but it's stable and it's taking all the load that we can give it. And so right now, we are cranking up the sales as we turn up markets by markets. And I'm very confident that our Company-owned retail employees are going to do a bang-up job selling this product. So far, what we have seen is a very nice lift and we are going to continue to increase our advertising spend to promote the product and continue to see it, I think, executed very well in the Company-owned retail stores.

All right, thanks, Ralph.

Mike McCormack, Nomura Securities.

Ralph or John, maybe just some thoughts on what your tolerance is for Wireless margin pain. We've seen a lot of announcements for competitors recently. I'm just trying to get a sense, because if you look at the current guidance, you guys are talking about Wireless margin expansion for the full year. Year to date, it's down about 110 basis points. Maybe the upgrade -- the change in upgrade policy could help the fourth quarter. But just trying to think towards the back half of the year, how we should think about the puts and takes.

Thanks, Michael, let me give it a shot and ask Ralph to join in. Let me give you a couple of push points here that -- reference points to start with.

First of all, the changing upgrade policy will certainly help in the second half of the year. Second, if you will, AT&T Next, our new offering for our customers to upgrade every year, will also help. Third, I think it's something we need to point out is that, as Ralph mentioned, our phone ARPU grew 3% this quarter -- actually, more than 3%. And we actually converted -- we added actually 1.2 million smartphones this quarter, many of those conversions from feature phones which bring higher ARPUs. So we've got a lot of revenue momentum going on in the business.

When you add that to the growth we are getting out of Digital Life, connecting cars, other things like that, one other thing that I will tell you that's really strong, and Ralph mentioned it in his remarks, data usage is growing on a per-device basis over 50%. And so, as that data usage goes up, we are seeing customers buy bigger buckets, bigger tiers of data.

And so all of those things added together give us comfort that we will be able to meet the guidance we gave in January. I think those are the points, if you will, to look to, to say how do we get from where we are at to where we expect to be by the end of the year.

Mike, there's one other point that I wanted to add, because I think it's important that you understand. I mentioned the advances that we have made with our LTE network deployment. What we are finding out is the more we deploy LTE, the lower it costs us to produce a megabyte of data. So the cost structure in the future is something that I think, as we produce more data, it will be cheaper to produce it. We have over 90% of our backbone now being enhanced backbone, which means we typically have Ethernet to the cell side. So it's fiber Ethernet to the cell side with LTE with a radio head on the top of the tower. It's a very, very good architecture, and when we execute it like we are executing it, it has a tendency to make it more efficient in terms of how you run the network, up to 50% more efficient on spectral efficiency as well.

And so we feel really good about the infrastructure costs. In addition to that, you have heard us mention that we started the process of turning down the subscribers on our 2G network in order that we can turn off that network completely by 1/1/17.

So lots of work going on at the infrastructure, some of it being short term, but also long-term as we turn down our 2G network. That will be another source of margin improvement.

And, John, sorry, you mentioned briefly regarding the third quarter initiative to increase U-verse broadband speeds. Is that something you are seeing? We have been hearing a lot about Wi-Fi offloading the home. Are you seeing a huge explosion of usage in the home right now that drives the need to accelerate that program?

No. The plan to implement that was really part of Project VIP, and really was just to give a higher quality, continuing to improve the quality of service to our customers. We are seeing continued demand for our U-verse product, and as we mentioned, the 640,000 sales in what is traditionally been a very slow quarter for us, a seasonally slow quarter, and we are over 1.3 million broadband U-verse net adds for the year. So we are continuing to see that demand. This just fits in with that program and with the overall Project VIP strategy.

Okay, makes sense, thanks guys.

John Hodulik, UBS.

Two questions, first for John -- the 1.67 leverage ratio plus the leap day, you are getting up closer to that 1.8 times target. Could you talk about whether that is set in stone or if that could potentially change going forward? And then maybe update us on any possibilities for asset sales going forward. And then I've got a question for Ralph.

Sure. We are not changing our guidance. We feel really comfortable with the net debt to EBITDA in the 1.8 range, and we're sticking with that. We believe that the cash flows we are generating from the business are going to be able to allow us to successfully manage to that, so we feel good about that.

I won't comment on any particular or specific asset sales, but I will tell you we do have a great collection of assets at the Company and we think it's our responsibility to manage those assets and manage the balance sheet. We believe that that management includes putting focus on working capital, which we've done; lowering our borrowing costs, which we've done; and monetizing the assets is appropriate when we can do that. I think you saw us do that in the second quarter with the cash proceeds we received for our Yellow Pages and for America Mobil shares. And in both cases, we effectively retained the same ownership we had before we generated that cash.

So we're going to continue that focus. But with that, and with that balance sheet that we have and the cash flows we have, we feel real good about sticking with our net debt to EBITDA in the 1.8 range.

Got it. And then, Ralph, while we have you, if you can talk a little bit about the Leap transaction, maybe the main drivers behind the transaction, and then if you could clarify the prepaid strategy. Now, it looks like you are going to have two brands going forward. How aggressive should we expect you to be in that market, and what the go-forward strategy is there?

John, the rationale behind the Leap transaction is basically to accelerate our entry into the prepaid segment, much more so than we would have been able to do by ourselves. We plan to keep the Cricket brand and the distribution, and I think that will ignite our growth into all aspects of the prepaid segment that I think has some really nice growth opportunities for us.

So that is our strategy. We will keep the prepaid branded that Leap brings with it, Cricket. We think it's a good brand and we will leverage the distribution, and that will fuel our entry into a nationwide prepaid offering.

John, I will tell you, let me add to what Ralph said is that I think what you will see is we are going to bring more competition and we are going to bring more choices to customers. And as a combination of Leap and our resources, we will bring an acceleration and a further deployment of that offering into that segment than either one of us could have done on a standalone basis.

So I think this will be very good for the competition in the prepaid segment, and we are really excited about the opportunity it provides us.

Great, thanks guys.

Simon Flannery, Morgan Stanley.

Good afternoon, a couple of questions, Ralph. First, the 50% usage per smartphone device -- that's pretty impressive. Can you decompose that into the change from people going to 3G to 4G? Is that a big part of the growth; and then what's the 3G-on-3G, or 4G-on-4G growth is?

And then, as you see more Androids in the mix, are you seeing a lower per-device subsidy cost or a lower purchasing price for AT&T, either now; or, is there some hope that you will be able to bring either subsidies or device purchase prices down going forward and lowering your equipment subsidy?

Yes. Simon, I was really pleased to see the Android sales, and they do carry a lower subsidy than some of the other phones we carry. We are seeing some nice opportunities as well coming up in the Windows Phone line with the Lumia 1020. That's a great device that I think is going to help to drive sales of Windows phones. So we are really, really pleased with the diversity of the portfolio that's increasingly more diverse almost every quarter that goes by.

Now, the thing about the usage -- I think this is really a great highlight that I want to make sure everybody gets. What we are seeing when we move customers from HSPA networks to LTE, we see a significant increase in the usage of data. We also see them buy larger buckets of data. So more usage, buying bigger buckets and, guess what? The net promoter scores on our LTE network are much higher.

So happy customers are buying more of our product and are buying it in bigger quantities, and I think that is what I see driving it. And we're just getting started. What I love about the LTE network that we have built is it's giving great service, but at the same time that that network is performing as good as any network, I think, on the planet right now, the more customers and usage that we move to the LTE network, the better that the HPA network performs.

So as a result, we are winning in market after market where we deploy LTE. We are winning not just the fastest and most reliable 4G LTE networks; we are winning on voice reliability, text reliability and data reliability.

So I feel really good that we have prospects to continue to grow usage and to get customers to buy bigger buckets in the future.

Great, thank you.

David Barton, Bank of America.

So two questions, if I could -- just the first one, strategic services had one of its strongest quarters that it's had in a really long time. I think you guys added maybe annualized $500 million of revenues this quarter in that segment. Could you talk about some of the drivers and whether those are going to continue and whether we could look for that growth out of that segment for the rest of the year?

And then the second question would be, obviously we've talked a little bit already on the call about the changing nature of competition as we look in the back half of the year. Verizon, for its part, is suggesting that they think they cannot just keep share but take share as they increase postpaid subscribers in the second half of the year. Obviously, Sprint and T-Mobile have their ambitions. Could you map out what is AT&T's position on balancing market share margin? What should we be expecting from AT&T as an objective function for the business? You don't have to tell us strategy, but what are you going to be managing this business to in the second half of the year? It would be helpful.

That's great, thanks, Dave. Let me take a shot at it and I'll ask Ralph to join in. First and foremost, on the strategic services, we are just seeing that there's an acceptance across the business for VPN, Ethernet, hosting and those high-quality IP services. We are specifically seeing an improvement in our small business high-speed broadband. I think we noted in our presentation that they were 81,000 -- that's a quarterly record for us, that our small business customers took. So even in a difficult economic situation and in a difficult and a challenged economic segment, we are seeing customers willing to upgrade to higher-quality speeds.

With that, we also have an all-out focus of our sales team on our sales effort on strategic services. They are really performing well.

And last thing I will tell you that, with Project VIP, we are really now beginning to address the opportunities in buildings which we are now taking fiber to and selling into those customer locations as we start that build process and we start making progress.

So it's all of those things, David. But in summary, it's a real focus and it's an acceptance by customers of the value of those strategic services, even in some of the challenged spaces of the business segment.

Specifically with regard to Wireless, as we have shown this quarter, we are going to compete. We are generating good margins. We are going to improve those margins in the second half of the year, but we are going to be able to compete.

I will give you one just simple point. In this quarter, where a new competitor got the iPhone, on a sequential basis our churn is down. So I think we need to put it in that focus -- our churn is down even in this quarter where a new competitor comes in, and even with all the new offerings that we are putting forth.

So we will be ready to compete. We are going to be smart about it. We are going to be customer-focused about it and, quite frankly, we believe that our network superiority is going to lead us to be able to perform very well in the second half of the year and, quite frankly, for years to come.

Dave, I would like to add a couple of views here. First, let me speak about the postpaid segment. I don't think we have ever been better positioned in the postpaid segment than we are today, and that's basically driven by the network performance that is the best that it has ever been, winning awards right and left and just providing outstanding performance. And as the LTE network gets all those awards, as we move customers there, the HSPA network gets better. And so from a network perspective, which is a key driver of churn, I don't think we have ever been better positioned. Our network team has done a great job, and you can see dramatic improvements in dropped calls. It's just a great, great story.

In addition to that, we continue to find ways to differentiate on devices. We just are about to roll out the Nokia Lumia 1020, which I think is an exceptional device. We also launched earlier this year the Samsung Active, which we call our whatever-proof phone, and so great network, great devices and great service differentiates us at the postpaid segment.

In the prepaid segment, I mentioned that our GoPhone sales were on the rise, and that's as a result of an upgrade in the platform that now finally allows us to sale LTE devices on the GoPhone platform. And those sales are doing very well as we populate the GoPhone family with state-of-the-art devices that, prior to this, we couldn't return on GoPhone. So GoPhone sales are doing very well. Our prepaid service that we recently launched is doing well.

And now with Leap and the Leap acquisition, I don't think we have ever been better positioned on the prepaid segment. So I like our positioning for the second half of this year better than almost any second half that I have faced in recent history. And, in addition to all of this, as we move our data growth into LTE, it's improving our cost structure and we feel good about that.

So I think, as you look out, we are really in the best shape that we have been heading into a second half that I have seen for a while.

That's great, guys, thank you very much.

Jason Armstrong, Goldman Sachs.

A couple questions. Maybe first on handset trade-ins, which are obviously set to be a little bit bigger part of the model going forward, I think, John, you talked about Next helping wireless margins. Maybe if you could offer some more context around this, maybe a framework for volumes you would expect here and what you can make on a resale or refurb device from a margin perspective.

And then second question -- Verizon, I think, talked about promotions at third-party distribution channels negatively impacting wireless margins in the quarter. I'm just wondering if you saw something similar to this that you'd call out.

Let me try that next question and ask Ralph to join in. The way I view it is simply this. In the marketplace the last few years, there have been high-quality used phones that neither the customer nor the provider, the transport provider, have taken advantage of their value. So when someone comes in to get a new phone, they often go in the drawer. They may be handed down, but they don't necessarily capture the value.

What Next allows the customer to do is, by bringing that phone in, that high-quality phone that still has some value, giving it to us, it lowers their cost to getting a new phone every 12 months. So they get value for it, and then we have a network of capabilities, whether to use it in our refurbishing, in our insurance business; whether we resell it to a wholesaler or whether we resell it in our stores.

So we are able to capture that value. Up to this program, it hasn't been a captured value. And as you well know, those phones -- many of the phones could have a $200 or $250 value. That's what makes this project work. That makes this offering work for both the customers and for us.

Jason, there were some new ones that we did that really drove up the volume of trade-ins something like 500% to 600% compared to the prior period. And the key was for customers to realize that they didn't have to worry about what they were going to get for the handset. If they brought us a handset that was within three years old in good working condition, then we would give them $100 off. All of a sudden, they didn't have to worry about going in, checking what it was worth. We would guarantee them that price. And we actually took the risk in what the value of that trade-in would be.

As it turns out, when they actually started trading them in, the value of the phone that they were trading in was much higher than what we had anticipated we were going to get. And so it was good for the customer. It assured them that they could get a certain amount for it. And for us, it turned out to be a good strategy.

In addition to that, Jason, when we laid out our AT&T Next program, we knew that in order for that program to work well, we had to have a very good trade-in program. So the trade-in program preceded AT&T next, and appropriately so, so we could get customers educated on the value of the trade-in, so we could get our reps to process it. And now it's part of the AT&T Next program, and I think it's going to hit with all cylinders firing as we have really educated the customers and our reps on how to process and do trade-ins.

Great, and then on the third-party --

Oh, I'm sorry. On the third-party distribution, yes, we did see some upgrade activity through third-party distribution. That's usually a little bit more expensive, but I would say that that wasn't the big driver for us. It was essentially the volume of upgrades that were done in the quarter that drove the pressure and the margins that you saw.

Okay, that's helpful, thank you.

Amir Rozwadowski, Barclays.

Ralph, I actually just wanted to follow up on some of the discussions around your recent promotion plans. While I recognize it's still early stages, how successful have these plans been in helping to manage equipment costs and ultimately fuel your belief in hitting your margin expansion target for the back half of the year? I'm thinking about the extension of the upgrade cycle here. I guess we're just trying to understand the different drivers here, given your comfort in your guidance.

Well, before we introduced AT&T Next, we did a lot of customer research, and there was overwhelming support for a program just like the one that we have launched. We actually launch the program early in a couple of markets, and the response has been good. We are feeling real positive about the impact that this could have both on customers and our financials, and so we are proceeding full speed ahead.

But I think the key with the program, as we heard from customers, is that they essentially wanted to upgrade their phones in a yearly cycle, which is typically when they get refreshed, and they wanted to do it with minimal outlay. And the fact that we can do that now for zero down, no upgrade fees, no activation fees and no finance fees means that you can actually walk out the door with a Lumia 1020 device with a 41-megapixel camera, the best of the best in camera technology, with zero money down, and a very reasonable payment.

So I think that that is what gets me excited, knowing that we can put that kind of technology in the hands of people and that they will enjoy it. But part of the process, Amir, was to get a trade-in program that was workable, and we have done that already as a result of the promotions that we have launched. And, by the way, because of our large base of iPhones, we stand to gain the most because the value of those smartphones is the highest.

That's very helpful, thank you. And then, John, just a question on your capital deployment strategy. You mentioned that your plan is to be opportunistic on your buyback going forward. Clearly, you are focused on finishing the Leap deal. Where could we see other areas of capital deployment in the near to midterm? Or perhaps, I guess the way to look at it is, what are your strategic priorities for capital deployment here?

Clearly, our strategic priorities -- there are two things in the short-term areas, is finishing off our Project VIP for the rest of this year, which includes our LTE and additional U-verse and fiber to the building builds, all those aspects of VIP; and, secondly, being prepared to close the deals we have in place before the FCC with regard to some of the spectrum deals, whether it be tuck-in, or whether it be the 700-B spectrum deals; and then, third, to have all of that done where we are still -- can very easily -- which is something we are very confident we can accomplish -- close the Leap deal whenever that becomes available.

So those are our priorities, if you will. I've said this before and I will say it on this call. Our dividend is clearly a sacred matter for us. We clearly understand as managers of AT&T the importance of our dividends to our shareholders. That's never a question. It's what we do after we've taken those -- satisfied those responsibilities. But those are the order of things.

And with our strong cash flows, we will continue to have opportunities to buy back shares. We will just be opportunistic as we go through that.

Great, thank you very much for the incremental color.

Timothy Horan, Oppenheimer.

I had two questions. First, John, it seems like the underlying strength in the quarter is really somewhat driven by the improvements in networks, both Wireless and here on wireline. Would you maybe think about accelerating velocity or extending velocity out a little further to maybe upgrade the networks a little bit more, given what we are seeing is really a great quarter in terms of acceleration in growth and in volumes? And then I had a follow-up for Ralph.

Sure, Tim. I agree with you; the performance of our network team in both Wireless and Wireline has been exceptional. And providing good quality service to our customers is always key to success.

With that being said, we are in a position from our balance sheet to fund things on an opportunistic basis and as we can get them done efficiently. I think that's what you saw in the second quarter with our CapEx, stepping up to the near-$5.5 billion range, about $900 million higher than last year and higher than the first quarter. We spent that money at this time because the network team could get more done and efficiently get it done. So we wanted to make sure we funded that, and we'll stick to that philosophy.

With that being said, I still believe we are going to be in the $21 billion range for our CapEx for this year. I think the network team has continued to outperform all aspects of their LTE build. We had originally targeted $150 million for last year, and we finished near $175 million. I think Ralph mentioned today that we are at $225 million and feel very comfortable that we are going to be near $270 million by the end of this year. And we are expecting to substantially complete the whole build by the middle of next year. So we are doing exactly what you're suggesting in the Wireless space.

In the Wireline space, we are going through the same process. So we are not afraid to go faster. We are just going to do it prudently and we are going to do it efficiently. So let me ask you for your next question for Ralph.

Thanks, Ralph, just sort of two small ones. But have you seen a slow down at all in the iPhone impact that T-Mobile has had on you? It usually lasts about a quarter or so, or when do you expect it to hit?

And then secondly, on Wireless data, are customers are starting to bump up against their caps in a way that might, with the pricing, lead to maybe some inelasticity? Are you worried about that all or seeing that all?

First, on the iPhone impact we have seen what, in terms of T-Mobile and them getting the iPhone, the same impact that we saw when Sprint got the iPhone and when Verizon got the iPhone. There's usually a spike in the port-outs in the time frame that they get the iPhone, and then it comes back down.

Quite frankly, the spike that we have seen from T-Mobile getting the iPhone is significantly less than the spikes that we saw with Sprint and the spikes that we saw with Verizon. And my expectations is that they will continue to come down over time, and so that's where we stand today.

In terms of Wireless data and people hitting the caps or bumping against them, we are not seeing a lot of that. What we are seeing, which was part of our strategy all along, Tim, is we know that there's an explosion going on with tablets. And our firm belief all the time was we needed to get mobile share out in the marketplace so customers could easily add a tablet. And at the time they add the tablet, then they increase the size of the data bucket. That's exactly what is happening.

So as customers add tablets, they are being smart enough to add or to increase the size of the data bucket. And so we are not seeing anything at this point that gives me concern, especially from a customer satisfaction point of view in terms of usage. Our customers are being smart. They can monitor the usage now more than ever before, and they are being cautious to make sure they don't have overages.

So I really think that this is huge for us, and that's why you saw the emphasis that we have on getting tablets. Those tablets are getting added to the network; data usage is going up, and the size of data buckets is on the rise as well.

To add to that, Tim; as Ralph had mentioned, 80% of the customers we have on tiered data programs, 80% of them are picking the higher-tiered buckets of data. So they are buying up, and we are pleased with our Mobile Share, where over 25% are buying the 10-gig bucket.

So it is working out just as Ralph mentioned, where those customers are buying those bigger buckets and generating that revenue, which is generating our service revenue growth and allowing us to continue to have great ARPU growth on our phones.

Very helpful.

Michael Rollins, Citi Investment Research.

Just a couple clarifications, and then maybe one higher-level question. First, is it possible to break out the dilution that you are seeing from VIP from an operating perspective, both for the second quarter and for the full year 2013?

And the second clarification is, last quarter you talked a lot about the impact of USF on the revenue, and I was wondering if you could give us an update. Was that also a headwind in the quarter, or was there any help from USF; just maybe directionally how that changed from the first quarter to the second quarter?

Mike, this is John; let me take the second question first, and that is the out of balance a situation with USF rates, those rates being different from last year to this year -- the same situation occurred in the second quarter at about the same level, at about the same amounts in the same relationship as it did in the first quarter. And so our numbers that we reported to you are overcoming that pressure, both on the Wireless side, in the Wireless ARPUs, and also in the Wireline side for both business and consumer.

So there's no change in that situation. We have overcome it in these numbers that are being reported.

And then on VIP?

On the breakout, we don't do that, Mike. But let me say it to you this way. If you look at our CapEx spend on a year-over-year basis for the quarter and on a sequential basis for the quarter, it's about $900 million in both cases increased. We don't give a trailing expense impact on our capital, but I will tell you that even our construction projects have some level of trailing expense. And then, quite frankly, our software projects have a much higher level of trailing expense.

The pressure for the quarter really relates to what I would view it as that $900 million increase times whatever percentage you'd apply to it. I would suggest to you that numbers could vary in anywhere from 10% to 20% to 25%. We are not going to get into what ours are specifically, but I don't think in the industry those kinds of percentages would be unusual. I will leave it to you guys to determine your own.

And then just one higher-level question on the Wireline business and, also, this would apply to the enterprise business. So you've talked about in the second quarter that you stepped over that line where you had sequential growth, albeit still down year-over-year. And I feel like if you go back historically, we have crossed that line into positive sequential before, but we have been brought back to that negative territory for a variety of factors from time to time, whether it was USF, whether it was the legacy parts of the business. In addition to your comments on the strategic services, are there aspects of what you are seeing in the legacy, or other aspects of your portfolio that make you believe that the step over to positive sequential growth could be more sustainable on a one- or a two-year basis?

Let me give you two different perspectives on that. One, on our consumer business, that's now greater than 50% U-verse, that is growing nearly on the consumer U-verse piece nearly just below 30%, I think the math will show you that when you've got now more than half of the business growing at somewhere between 25% and 30%, it's a more sustainable situation than it was a year ago or two years ago when that was -- the percentage of the business was 40% or maybe a third. So the math is different with regard to consumer because that base is so much bigger and so much bigger piece.

On the business side, I agree with you; the economy has given us challenges. We are pleased that we have gotten our strategic business services up to nearly 25% of our business revenues, but the economy is still uncertain, such that we are not in that same point. And that is why we mentioned that we were slightly positive on a sequential basis, and we will have to see how this plays out the rest of the year. The one encouraging piece there is what we mentioned in small business and how well our team has done in beginning to put U-verse or high-speed broadband into our small business space and the 80,000 high-speed broadband net adds they had this quarter. And we are optimistic about what we can do with that going forward. Particularly when you look at our trend, that's the highest quarter we've had on record and significantly better than the first quarter or the fourth quarter of last year.

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

Jonathan Chaplin, New Street Research.

Two quick questions, if I may. First of all, could you -- you may have mentioned this earlier, but I didn't hear it -- give us the number of iPhone sales in the quarter? And secondly, just --

John, just so you know, we are not disclosing that number. I think we disclosed the total number in our slide presentation of smartphone sales, the 6.8 million, and I think we disclose that we had a record Android sales. But we are not giving the specific iPhone number.

Got it, okay. And then could you give us a little bit more detail, John, just around the synergies that you expect from the Leap deal and how quickly you expect to be able to realize those?

Yes, let me say this, Jonathan. We will get into synergies and realizations and all of the normal impacts that we discuss as we get the deal closed. So we are not going to be in a position to talk about those now.

We do -- we are confident, we are expecting that the transaction's going to get closed after the government carries out its responsibilities and does a fair review. I will tell you; we are looking forward to getting this done. We believe that Leap is going to provide us the opportunity to expand services to customers in a segment of the mobility market that is now underserved. So we are excited about it. We believe it's going to be a positive, but we are going to wait and let the DOJ and the SEC go through their normal review process.

Got it. Thanks, John, thanks for taking the questions.

Thank you, let me close now. I want to thank you for being with us this afternoon. We have delivered a solid quarter with strong subscriber gains, growing revenues and improving networks. At this time, we are going to continue to invest in our business with our Project VIP, and we believe it is on pace to provide us even more opportunity going forward.

With that being said, we think this gives us strong momentum as we head into the second half of this year and into the years to come. So we are very excited about where we are at in our business; we believe our plans are playing out well, and we look forward to talking to you in the future.

Thank you very much for being on the call, and as always, thank you for your interest in AT&T. Have a good evening.

Thank you. 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.