AT&T Inc (T) 2013 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. And welcome to the AT&T third-quarter earnings release 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, this teleconference is being recorded. And, at this time, I will turn the conference call over to your host, Senior Vice President of Investor Relations, Ms. Susan Johnson.

Thank you, Tony. Good afternoon, everyone, and welcome. It is 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. John will provide an update with perspective on the quarter, then we will follow with Q's and A's. Let me remind you, our earnings material is available on the investor relations page of the AT&T website. That is www.ATT.com/investor.relations.

I also need to cover our Safe Harbor statement, which is on slide 2. 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.

Before I turn the call over to John, let me cover our consolidated financial summary, which is on slide 3. Consolidated revenue was $32.2 billion, up 2.2% driven by continued wireless growth, impressive U-verse gains, and rapid growth in strategic business services.

Reported EPS for the quarter was $0.72. That is up more than 14% over last year's third quarter. This includes $0.03 from the previously disclosed transfer of spectrum and $0.03 from income tax items. When you exclude these items, earnings per share was $0.66, an increase of almost 6.5% year over year.

Cash flow continues to be strong. Cash from operating activities for the quarter totaled $9.2 billion and free cash flow was $3.2 billion, and more than $11 billion year to date. Also in the third quarter, we bought back about 55 million shares for $1.9 billion, and year to date we have returned more than $18 billion to shareholders through dividends and buybacks.

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

Thank you, Susan, and good afternoon, everyone. And, as always, thank you for your interest in AT&T. Let me start with an overview on slide 4.

There is a lot we really like about the quarter. We grew revenues and EPS and cash generation continues to be robust. But, when you look at what is driving the business, the one thing that stands out is project velocity IP, or project VIP.

As you recall, we announced this plan just about a year ago. We said we would invest aggressively to expand our 4G LTE footprint, that we would expand our U-verse broadband reach, and that would we take fiber connectivity to a million new business locations.

Thanks to the great work of our network organization, we have made terrific progress on all of these fronts, including having the nation's fastest and most reliable 4G LTE network. And you can see the positive results in our third quarter results.

Our total wireless subscribers increased by nearly 1 million and our mobile data revenues grew nearly 18%. Revenues from our strategic business services, including VPN, Ethernet, hosting, and other advanced IP services, posted strong growth of nearly 16%.

And the one thing that has me the most excited is the outstanding performance and future potential of U-verse. We reached 10 million total U-verse subscribers this quarter, thanks to our best TV net gains in nearly 5 years and record third-quarter broadband sales. That is quite an achievement in this tough economy.

This helped drive our first billion-dollar U-verse revenue month ever, and that is growing at 28% year-over-year. This has been an incredible seven years since we first introduced the service, but project VIP has allowed us to take this platform to a whole new level. And we are obviously excited about the road ahead as we build on the VIP platform to create a network that is increasingly software-defined and video-centric.

With that in mind, let me give you a quick update on the progress of project VIP, starting on slide 5. Our project VIP initiative focused on expanding the growth platforms of our business. These include expanding our 4G LTE to 300 million POPs by the end of 2014, executing on our spectrum and network quality initiatives, expanding our highly successful U-verse services to 8.5 million new customer locations with high-speed broadband going to 57 million or approximately 75% of our wireline customer locations, while also bringing faster speeds. And, bringing fiber to 1 million additional customer locations.

We were going to get this done, but at the same time we were going to move to enhance our spectrum portfolio to meet the massive growth needs of our wireless data business today and into the future.

Underlying all this was strengthening in our financial structure and our balance sheet to give us the ability to invest and maintain financial flexibility. Even though it hasn't been a full year since we first laid out our plans, we are on track or ahead of schedule with each of these initiatives.

Let me give you a build update on our wireless progress on slide 6. Our 4G LTE build continues to exceed our original expectations. We now reached nearly 250 million POPs.

The performance of our network has been outstanding. We have the nation's most reliable 4G LTE network, according to our analysis of data from Nielsen, a well-known and leading global information and measurement company. PC World and PC Magazine also said our speeds are the fastest. And Route Metrics, who studies national network performance in 125 cities, said our overall call, data, and text networks ranks first or tied for first in 56 of the 78 cities studied to date in the second half of this year.

At the same time, we have also made significant progress in our spectrum position. Last November, we laid out a carefully planned spectrum strategy that would help us meet our midterm needs. I am pleased to say we have successfully executed those plans.

That includes a purchase of WCS spectrum, 700 megahertz B block, and other recently closed deals. And we have already placed into service the substantial part of the acquired 700 B block spectrum. Along with other pending transactions, this gives us a strong runway for our LTE expansion as we look ahead to future FCC auctions to address longer-term spectrum needs.

Our U-verse deployment is also well underway. Those details are on slide 7. We have increased our U-verse broadband customer locations by about 2.5 million this year with about 1 million of those being video capable. Ultimately, all 8.5 million customer locations will be video enabled.

In the third quarter, we also increased U-verse broadband speeds up to 45 megabits per second. We continue to roll out new markets, but we already offer those speeds in every region to almost 2/3 of our U-verse base. And we are moving forward with plans for speeds of 75 megabits per second and faster.

We have also begun deployment of 100% fiber broadband network in Austin, Texas that will deliver speeds up to 1 gigabit per second. And while all this helped drive the strong U-verse sales in the third quarter, almost all our gross adds in the third quarter came from non-project VIP areas. This means that there is even more room for growth -- more opportunity as we go forward with our VIP footprint.

On the business side, our fiber build to multitenant buildings now reaches about 200,000 new customer locations. That is well on our way to reach our year-end target and our 1 million locations target by 2015.

We have also made tremendous progress with our financial objectives. Let's turn to slide 8 for those details.

We committed to optimize our capital structure while investing aggressively in our networks. I am pleased to report that we are on target across the board.

First, we have moved to equalize our pension plan assets and liabilities for essentially a fully funded pension plan. The Department of Labor has published a proposed exemption for our voluntary contribution of a preferred equity interest in our wireless business. And this, along with an expected increase in discount rates, would move us to essentially fully funded status with our pension plan by the end of this year.

We are very proud that we are one of the few companies that still provide a pension benefit. And, with these moves, our employees and retirees can have the confidence in knowing that these benefits are very well-funded.

At the same time, we have also taken steps to help manage our healthcare costs both for employees and retirees, and continuing to move toward low premium, high-value, consumer-driven plans.

We have also been focusing on finding efficiencies in financing our debt. And even though our total debt is up year-over-year, our interest expense this year is down. Our average effective interest rate is down more than 60 basis points per year, while the weighted average time to maturity of our portfolio has basically remained unchanged.

We have also been active in monetizing assets, which improves our cash position. The recent tower sale adds to our financial strength and adds to the flexibility provided by earlier transactions. These moves help support our single-A credit rating, the highest credit rating among US-based telecom companies.

And the foundation for all of this, cash flow, continues to be strong. On top of our capital investment, we have continued our share repurchase program. To date, we have bought back 684 million shares with annualized future dividend savings of more than $1.2 billion per year.

Combining share buybacks with our dividend, we have already returned more than $18 billion to shareowners this year, more than $40 billion returned since the beginning of 2012. And we are doing this while maintaining a best in class credit rating, a significant achievement at a time of increased capital investment.

That is a quick update on project VIP. Now let's turn to our operational performance, starting with wireless on slide 9.

Data revenue continues to drive wireless revenue growth. Data is now a $22 billion annualized revenue stream, and it is growing at nearly 18%. And it has a lot of runway as customers continue to increase their data bundles.

That helped drive 3.7% revenue growth -- service revenue growth this quarter. And total wireless revenues were up more than 5% in the quarter.

Postpaid ARPU continues to be industry-leading. For the 19th consecutive quarter, we saw total postpaid ARPU growth. That is a record unmatched in the industry.

And our phone-only ARPU again increased by more than 3%. Our phone-only ARPU includes smartphones, but also includes our lower ARPU feature phones and wireless home phones as well, which makes the growth even more impressive.

We also had a very strong net add quarter. Those details are on slide 10. In fact, we added close to a million total subs. And versus the third quarter a year ago, our postpaid net adds more than doubled.

Our 363,000 postpaid gain in this quarter included 178,000 new smartphone net adds. They are part of our overall 1.2 million new smartphone customers, which I will walk you through on the next slide. This was accomplished even though we did see some impact from handset supply constraints.

We also lead the industry in postpaid tablet gains. Tablets continue to be strong growth opportunity for us with strong margins and much lower subsidies. And the vast majority of tablets added in the quarter were LTE devices.

While we are positive on smartphone net adds, we are seeing some pressure with our more price-sensitive subscribers on low-end 2G feature phones. We continue to be excited about our pending acquisition of Leap Wireless that will allow us to better compete in the prepaid space, and we are continuing to move forward to an expected first-quarter 2014 close.

Speaking of prepaid, it had its best performance in two years. And, as many of you know, the migration of tablets to postpaid plans has pressured this part of the business, and we are still seeing that. But the introduction of LTE capable GO phones and new pricing plans has helped spur growth at the higher end of the prepaid space for customers interested in usage-based pricing.

When you add up the acquisitions on top of our organic growth, we added more than 1 million retail postpaid and prepaid subscribers in the quarter. Connected devices are also doing well as more business turned to us for productivity through machine-to-machine solutions.

Reseller revenues increased year-over-year. However, resell had a net loss of 285,000 subscribers, primarily due to losses in the low revenue 2G subscriber accounts.

We are also seeing solid results in churn. Postpaid churn was down slightly year-over-year and total churn fell both sequentially and year-over-year. Both are notable achievements in this noisy competitive environment.

Let's now talk about our smartphone growth, which I mentioned earlier. Details are on slide 11.

We continue to grow our smartphone subscriber base, both from new customers and from current feature phone subscribers upgrading to smartphones. A record of 89% of our postpaid phone sales were smartphones, and we now have 75% of our postpaid phone base on smartphones. We expect that percentage to keep growing.

These are the premium subscribers in our business. They have twice the ARPU of non-smartphone subscribers and much lower churn. And the average usage on smartphones is continuing to grow at a rate more than 50% year-over-year.

Smartphones set another third quarter sales record of 6.7 million and we added 1.2 million new smartphone subscribers in the quarter. We also continue to see subscribers moving to usage-based data plans. Overall, 72% of our smartphone base have selected these plans.

And a growing number are choosing mobile share plans. We added more than 1 million new mobile share accounts in the quarter to reach 5.3 million. These accounts include more than 16 million devices on mobile share, keeping us on a pace of about three subscribers per account.

We continue to see strong take rates on high-end data plans for both mobile share and tiered data customers. In the last year, take rates on the high-end plans have grown from 9% to 22%, with 58% of the remaining on medium-sized data plans. So we've got a strong base, but we still have room to grow.

We have announced earlier this month that all new customers will now be on mobile share plans. Mobile share plans have already been popular with new customers and we offer several different plans that will best meet their needs.

Now let's took it take a look at margins on slide 12.

Our wireless EBITDA service margin was 42%. That does not include the impact on the gains from the transfer of spectrum.

We sold 600,000 more smartphones in the third quarter than the year ago and we had a third quarter record number of postpaid tablets as well. But even with this growth, our wireless EBITDA service margins expanded 40 basis points year-over-year.

Upgrades were far ahead of last year's pace and flat sequentially, and our upgrade rate for the quarter was 7.3%. The upgrades continued to solidify our high-value customer base and move them to more efficient LTE phones.

And with a high level of upgrades, we have increased the number of subscribers under contract in the quarter. These subscribers continue to bring long-term value, including higher ARPU, lower churn, and strong data growth. And increasing the number of LTE devices on our network is driving greater network efficiency as well as increasing data usage.

It is also moving customers off our 2G network, which eventually will allow us to repurpose that spectrum for other uses. More than 40% of smartphone subscribers are now on 4G LTE devices.

These efficiencies were offset somewhat by costs associated with new product offerings such as Digital Life, and expanding our prepaid wireless offerings. We now offer Digital Life in more than 50 markets.

Looking ahead, we expect lower year-over-year upgrades in the fourth quarter as we start seeing the benefits from our new 24-month upgrade model.

Customers are also responding well to AT&T Next as sales increased through the quarter. And we have continued to expand the program to additional channels.

The strength of our network is becoming a real selling factor for our wireless business. We are seeing outstanding speed and reliability performance, and greater efficiencies as more and more customers upgrade to LTE devices.

Our accelerated project VIP, LTE build, and improved coverage add to this momentum.

Now, let me turn to U-verse, and I would simply say that I don't think there is a better wireline growth story in the industry than U-verse. Turn to slide 13 for those details.

Strong revenue growth and record net adds are a compelling combination. And when you add in expansion of our platform to millions more customer locations, it is pretty easy to see the runway for U-verse is very long.

We had several important U-verse milestones in the quarter. First, we reached 10 million total U-verse subscribers, more than doubling the number we had just two years ago. That includes high-speed broadband subscribers, where we added third quarter record 655,000 customers. Almost 60% of our broadband subscribers are now on this U-verse platform.

We also had our second-best U-verse TV net adds ever and the most in almost five years, which keeps us as the fastest growing pay-TV provider in the country. In fact, we now have more paid TV subscribers than any other telco.

U-verse revenues growth has been just as impressive and is the fastest growing part of our business. We had our first billion-dollar U-verse revenue month in the third quarter, and this seven-year-old startup is now a $12 billion annualized revenue stream growing at more than 28%.

U-verse now represents 54% of total consumer revenues, which grew 2.4% in the quarter. The record of success gives us even more confidence in project VIP and the U-verse build that goes with it.

Now let's move to wireline business, which you can see on slide 14. The broad outlines of our wireline business trends continue what we have seen in recent quarters. Obviously, there is a challenging economic environment for business services.

At the same time, we are seeing growth in productivity services like advanced data, the cloud, and mobility. In fact, as I mentioned earlier, revenues from strategic business services were up almost 16% in the quarter and have grown to almost a quarter of business wireline revenue.

Our U-verse broadband is definitely making noise in the small business space, with record gains of nearly 100,000 new high-speed broadband customers in the third quarter. That is quite an achievement in this tough economy.

One of our best business growth areas are integrated solutions that take advantage of our global network and mobility strength. We had several key wins recently. For example, GE announced that it will connect its machines to the AT&T network and cloud, creating the first highly secure wireless communication network for GE's industrial Internet.

Another recent win with Delta Air Lines will put over 19,000 mobile devices in the hands of flight personnel to help personalize the in-flight experience for Delta's passengers.

These contracts highlight the importance of mobility and integrated IP networks. The majority of our larger business customers also purchase wireless services from us. We think the integration of wireless and wireline services for our business customers will be a big advantage going forward.

Now, let's look at consolidated and wireline margins on slide 15. For the quarter, our reported consolidated operating margin was 19.2%. This includes a 70 point basis benefit from the previously disclosed transfer of spectrum.

On an adjusted basis, year-over-year margins were down. Margin pressure was largely due to record smartphone sales and expenses related to project VIP investments.

We told you a year ago that there would be pressure on wireline margins with project VIP. We are seeing that this quarter, including success-based U-verse customer addition costs and trailing expenses from our capital spending. This pressure was partially offset by growth in consumer revenues, operational improvements in network sales and support functions, and a solid execution of cost initiatives.

Now, let's move to cash flow. Our summary is on slide 16.

In the first nine months of the year, cash from operations totaled $26.9 billion. Capital expenditures were $15.8 billion, as project VIP investing grows. And free cash flow before dividends was more than $11 billion.

In terms of uses of cash, total debt was stable in the third quarter with a debt to capital ratio of 46.9% and a net debt to EBITDA ratio of 1.76. If you include the cash from the recently announced transaction with Crown Castle, our net debt to EBITDA ratio would drop to around 1.64.

We also continue to buy back shares. We repurchased about 55 million shares in the quarter for just under $2 billion. With our dividend, this makes our total return to shareholders year to date of more than $18 billion and more than $40 billion since the beginning of 2012.

We continue to look for opportunities to improve our business. We are working with regulators on our proposed acquisition of Leap Wireless, and we continue to expect that deal will close in the first quarter of 2014. And we expect to close our recently announced tower transaction before the end of the year.

As I mentioned earlier, keeping a strong financial foundation is a priority for us. Our balance sheet is sound, our debt metrics are solid, and our strong cash flow gives us the flexibility to invest in growth initiatives while returning substantial value to shareholders.

Now, before we take questions, let me close with a quick recap of the highlights for the quarter. Those are on slide 17.

Project VIP network initiatives continue to move ahead of schedule. Revenue growth was solid. Consolidated wireless and consumer wireline. Consolidated wireless margins were stable even with pressure from strong smartphone sales and project VIP expenses. And EPS continues to grow.

A solid wireless quarter was complemented by a tremendous performance by U-verse. And when you add in strong strategic business service results, our confidence in project VIP growth platforms gets even stronger.

We're looking forward to finishing the year strong and building momentum as we move ahead. With that, Susan, let's go ahead and take some questions.

Thank you, John. Tony, I think we are now ready to open it up for some questions.

(Operator Instructions) Phil Cusick, JPMorgan.

John, I guess the first question is how do you think about using the TARP proceeds? And the 1.64 you just mentioned, is that the way the rating agency looks at it, given the shifting obligations?

It is a good question, Phil. First of all, I think the rating agencies take into account the lease commitment, and we are working through that with them for the stated first lease plus some level of renewals. We're going to that process now.

Don't have a certain number for how much they will, but I would expect it would be somewhere in the 10- to 15-year range of lease payments is what it seems to be approaching, which is certainly less than half of the total proceeds. I know those are real general numbers, but you are right; they will take some of that into account. That's the first question.

The second question is with regard to what are we going to do with the proceeds. I don't have a specific answer for you on that. I think we are going to follow the same pattern we have had before.

One, keep the dividends strong. Two, keep investing money in our networks to grow the business and to transform the business. Three, keep financial flexibility. We have been able to do all that before we got these proceeds, so feel good about that.

The next issue is then what do you do with the money afterwards. Do you pay down debt? Do you buy back shares? Do you keep it for additional flexibility? We will go through that evaluation.

But I will tell you we are going to continue to be opportunistic in buying back shares. I think we have shown that over the last year and a half and that hasn't changed. But we will be careful and opportunistic with that.

And then if I may, just one other quick one. What have you seen from the last 30 days in terms of the impact of the government shutdown and sort of business decision-making, government decision-making, and how should we think about that for the fourth quarter?

Yes. Phil, it is an interesting question. First and foremost, directly from the business that we get from the government, I wouldn't suggest to you that it is a significant or material amount anyway.

There has been some changes. There are certainly some usage changes and some adjustments in the amount they are using. So from that perspective, it is not material, not significant in any way.

From an overall perspective on just the business environment, the regulatory environment, and now the inconsistent -- instability of the government environment, I think it affects all businesses and we are seeing that. Our customers are being careful and being prudent. Because of that, business investment in general is has been slower.

And, as you can see on the employment levels, employment may also be impacted. So I think it is much more of an indirect impact on us than a direct impact.

Got it. Thanks, John.

Simon Flannery, Morgan Stanley.

John, you went through project VIP in some detail and obviously some good add results. Can you help us think through the trajectory of the wireline margin? When do you see the peak dilution from some of this investment? Is this something that we are kind of close to automate bottoming or is there a few more quarters of pressure?

And, related to that, CapEx was up significantly. If you spent the same level in Q4, you would be above your $21 billion. Any sort of changes in the timing there or might you be a little bit higher than the $21 billion? Thanks.

First and foremost, Simon, with regard to the CapEx spend, we are not trying to limit CapEx spending by a standard compared to last year. We are trying to smooth it out and get into a normal course. So I think we are on track for the guidance we provided and comfortable with that.

But I will tell you that the team that is building our networks is keeping things moving very quickly. And we are encouraging that activity in the sense that if they can build it, we are going to be supportive of it. We think that's really good for the customer and the services and the Company as a whole. But I don't expect any variance from the guidance we have provided previously on CapEx.

Secondly, with regard to margins, I will tell you that the way the sales activity has gone, and the way the build has gone, I would expect some continuing pressure because of success-based customer cost and, quite frankly, trailing expense on the buildout of the U-verse base.

And we are going to have buildout in the U-verse space well into -- certainly throughout 2014 and into 2015 -- certainly expected into 2015, so we will see some continuing pressure.

I don't mean to suggest that it would be accelerating in any way. But I don't expect us to get back to our higher level of normal margins for at least another year. But I am more than happy to pay for the success the team is having with regard to the customer additions.

Thank you.

John Hodulik, UBS.

John, over on the wireless side, I have heard you guys say that you are seeing pressure on the low end of the postpaid with some subscriber loss there. Is there any way, one, you could maybe sort of trend that for us; how that's been trending or talk about anything you could do to address it?

Or maybe even sort of size the exposure there, because I think you guys have mentioned it before and I think it does get some focus. And then, related -- T-Mo made some announcements today related to tablets. How do you guys think about that in terms of the competitive environment? Is that another relatively small change or is it something that could be more meaningful?

Let me go with the first question. With regard to the wireless market overall, it continues to be competitive. And there continues to be a lot of, as I mentioned in my comments, noise around what is going on.

I think the first thing to step back from is to realize that our churn was down year-over-year in total churn. On a postpaid basis, the churn was down sequentially. So even with all this activity, our churn numbers are doing really well.

We -- I would expect and we are hopeful to improve on that, but we think the power of our network and the power of our customer service is certainly helping that churn aspect. And that is the real measure of the business.

Secondly, I really want to point out, we are seeing some pressure in feature phones. We are seeing it from, quite frankly, two perspectives. One, it is about -- close to 70% of our feature phone losses come to us as smartphones.

If you see in the quarter, we added 1.2 million smartphone customers to our base, but only 180,000 of those were new adds. The other rest of them were conversions, basically, from our existing feature phone base. So that is where the most of them came from.

So that's the pressure of those 2G, is a lot of our customers are stepping up and effectively doubling their revenue with us.

Now, there are some customers who are really price-sensitive who are looking to others and we have come out with new plans, both in mobile share and in the tablet area, to address those needs and try to give value on a reasonable basis to those customers. So I view this as kind of a normal competitive process and we are going to -- with a great network, great customer service, we are going to be able to work this through very quickly.

Lastly, when we get Leap closed in the first quarter, we will have even another avenue, another methodology, another process, really, to put into our portfolio and to challenge that low end side of the business.

David Barden, Bank of America Merrill Lynch.

I want to start off just by maybe taking that question another step, John. And just on the network conversation we are having today, it is night and day. You guys have really started to try to take ownership of that most reliable network position in the marketplace.

But if you kind of look at the subscriber performance year-over-year, this year versus two years ago, you are really seeing, I think, a commensurate amount of market share that you are able to take from the rest of the marketplace with that ownership position of the most high-quality network in the market. Can you kind of address how you want to try to monetize the increased capital investment that you have been making in creating this network, in terms of more than just converting existing customers into smartphone customers, but trying to make more of it in terms of share gains?

And I guess the second question, if I could, just in terms of the Next program. Obviously, getting people to take the Next program is very value-accretive to the business, both in terms of the absolute value that these guys pay you. And also from an accounting perspective you get better margins from that.

Can you talk about what percentage of [growth] you are seeing that are taking this program? And -- so we can kind of think about how it's going to have an impact positively on the fourth quarter? Thanks.

Okay. Good questions. Let me comment on both the questions. First and foremost, I would suggest to you that more than doubling our postpaid phone adds is something that I am impressed by. I understand you're challenging it, but I am very pleased with it, especially at the same time where we are growing the prepaid market with regard to the GO phone, because of the challenges we had there.

When you add that performance to 700,000 connected device adds, we are adding about a million customers to the network in the quarter. That's very good.

And of the reselling customers that we add, as we said, were low revenue. We still grew reseller revenue in the quarter even with the reduction in customers. And they're mainly 2G type customers which, quite frankly, as everyone knows, we are in the process of repurposing think that spectrum anyway.

So it is dealing with a situation where we are going to have to deal with over the next few years. So we are, if you will, recognizing the fact that there has been real improvement. We certainly are striving for further improvement.

When you get into the -- getting a return on the investments we are making, I would suggest to you this way. When you look at the total revenue growth of 5%, you really bring that Next issue into the revenue story in the sense of it is real economic revenue we are getting.

And so our revenue growth, when you take into account our both service and equipment, it is [now] at a 5% level. But if you look more at just the -- what you call the service revenue piece of it, David, the story goes like this. First, we are growing smartphone penetration, so we are getting more people on smartphones. As they do that, they are using more data. That's where that key data growth of nearly 18% is.

When you look at that, then we look at what they are buying, and they're continuing to buy in high level data usage plans. So we doubled the percentage of customers who are buying kind of the 10 gig plans over the year. It went from 9% to 22% of that customer base on usage plans.

If you think about that, that's just the start. There is a long way to go to add revenue to the existing customers. When we complete the LTE build that we have this video-centric network out there on the wireless space, we expect to see continued growth. All of that is just on the existing customer base.

And then you move forward with the things like Digital Life, like the connected car, like the additional prepaid business we will be investing in. We are pretty excited and pretty confident in our ability to get really solid returns out of our investment.

Joe Mastrogiovanni, Credit Suisse.

John, you mentioned that the competitive environment is getting a little more aggressive. As we look over the next 6 to 12 months in wireless, how should we think about the balance between subscriber growth and profitability? And are you willing to accept some pressure on the margins to maintain or even pick up share if there is an opportunity with the new network quality metrics that you have been showing?

Yes, Joe, good question. We are always interested in growth, but we are also always interested in smart growth or profitable growth. We are not going to do anything to build one stat up at the cost of our shareholders' returns or investment. But, yes, we are going to watch it very carefully.

The biggest change over the next 6 to 9 months we will see, I think, is the continued buildout, completed buildout of our 4G LTE network, because that's a big advantage for us. And, two, it will be our ability to close the Leap transaction and use that Cricket brand and infrastructure to really take advantage of that marketplace in a different way, with different capabilities than we have today. And that is a real positive for us.

Jason Armstrong, Goldman Sachs.

Maybe a couple of questions. First, John, in relation to your comments on -- and you said this a couple of times -- the best credit rating amongst US telcos, is that merely sort of a statement of where you are now? Or is that a commitment to maintaining this credit rating in the future?

And I guess I am getting at the obvious question here. Clearly, there is an ability to add a lot of leverage. Verizon just proved that out. And you have pointed to rather large opportunities for potential global M&A. So just trying to sync that up.

And then, secondly, on U-verse, as you talk about the speeds, 45 megs and moving higher, just how quickly can you sort of cover the footprint with these type of speeds? And has this started to change the market share momentum in those markets at all? Thanks.

Great. Jason, let me take the second one first. On the 45 megs we are at in all the regions today, two-thirds of the footprint today, and we are already seeing not -- it is still early with the 45 megs. But just with the U-verse platform, we are already seeing significant changes, improvements in churn and customer retention capabilities.

It is what is fueling the decision to invest not only in the capital, but also in the success-based expenses of converting these customers to this U-verse platform. So we are already seeing that today.

We expect that, with the 45 meg speeds become standard and as we move even towards 75 or higher speeds, we think that just improves our opportunity to be sticky, to lower churn and to retain the customers. We are also seeing some good ARPU activity in the overall broadband segment that also gives us confidence.

So we are -- with direct question on 45 megs, two-thirds of our customers have that capability receiving it today, and footprint, we are ramping that up and we are moving forward to go towards 75. It is early to say a specific tied into the 45 megs, but we have seen with the U-verse platform in total has been really positive.

With regard to the credit metrics, quite frankly, having the best credit rating and having a solid A is just the facts of where we are today. We are very proud of that. We have committed back last week -- or last year when we did the VIP announcement that we were going to strive to stay at a single-A rating. We have done that.

And we have done that while we were paying great dividends, while we were buying back shares, while we were making capital improvements. And so it is worthy to note that we, if you will, did we what said we were going to do, and we continue to hold those ratings and continue to have a lot of flexibility.

With regard to any transactions, I've got no comments. There has been enough written and said about a variety of M&A. There is nothing new to add there. No comment with regard to any of that.

Michael Rollins, Citi Investments.

Just a couple, if I could. First, as you think about the multi-year trajectory for the wireless margins, what would you say the three key things are there to deliver a better margin? Especially in the context of the performance that you are looking for this year versus last year where the change maybe was a little bit more muted than maybe what the anticipation was at the beginning of the year?

And then, just secondly, can you talk a little bit more about the evidence that you are seeing in terms of more usage from the customers? You mentioned the tiers of rate plans that customers are on in terms of high versus mid for data consumption plans.

Is the upgrade rate -- our people going to more data usage driving a meaningful amount of that wireless service revenue growth yet? And is that something that you would expect to continue to get better as we progress each of the next number of quarters? Thanks.

Thanks, Mike. Let me give you four items with regard to your first question as opposed to three. I think, one, continuing the network efficiency that LTE provides and driving that efficiency that LTE provides, as we give our customers LTE devices, as we show -- [get that efficient] and are able to groom our networks, I think will be a real driver of margin expansion.

I think as we continue to manage the subsidy side, not only in educating the consumers about what these phones cost, not only getting value from a trade-in process and capturing economic value of the trade-ins that Next might do, but also getting fairer pricing in the equipment side, I think will drive our margins.

I think the data growth you just talked about is a real driver of revenue growth. And it is a driver of revenue that doesn't come with any of the normal billing administrative sales cost. It is existing customers getting more value by using more and buying more from us.

And then the last thing is just a real focus -- a management focus on efficiency and a management focus on streamlining our cost structure. We have had that around here and under a One AT&T initiative and we are going to continue those efforts.

Those are the four things I think from a Company perspective that really will drive continued progress in our wireless margins.

On the data growth, definitely believe there is more opportunity for data growth. If you look at the $5.5 billion quarter, the revenue base or about a $22 billion annualized revenue stream, it is growing at nearly 18%. That is coming from having this great network experience, which enables people to use it more so they want to use it more, they're going to get a better experience, so they are buying up.

As we mentioned, our usage-based plans, only 22% of them have high data buckets today. On mobile share that is 10 gig. On individual plans that is 4 gigs.

But we have seen that more than double over the last year. It was only 9% last year. Now it is 22%. That is a lot of runway to grow. And so we feel really good about that.

We think, as these customers have this good experience, and continue to use it more, they are going to buy more gigs and be happy with it because of the experience. So that is where we see the data growth. I won't get into specifics about how much of the 5.1% growth related to that or how much of the buy-up related to that, but we are excited about the opportunity it provides.

Thanks for all those details.

Brett Feldman, Deutsche Bank.

Thanks. I'm going to stick with the wireless margin theme. You mentioned Next, which you launched during the quarter. You have new upgrade policies that are taking effect in now.

In light of all that, how should we be sort of sizing the margin trend in wireless into the fourth quarter? And, along those lines, what are some of the key inputs? In other words, what is your outlook for things like postpaid upgrade rates or overall smartphone sales within the context of levels that we have seen in the past?

So Brett, that is a good question. And, honestly, a lot of the comments you had will be parts of the answer to the question.

First and foremost, we are not giving any specific guidance for the fourth quarter on those margins. But we are not changing our overall guidance for the year. And we are going to stick by the guidance we gave specifically on wireless margins that we are going to grow margins year-over-year. So that will give you some indication of what we expect in the fourth quarter.

Secondly, the push points you mentioned, the upgrade cycle going to 24 months tied to the contract -- the policy now tied to the contract, the Next improvement, this data revenue growth that we have seen, other efficiencies we put in not only from the LTE network being more efficient, but what we've put in the cost structure, all of those things give us confidence that we are going to be able to meet the year-over-year LTE objectives.

So that's really how I think about it and why I feel comfortable with standing by the guidance we gave at the beginning of the year.

And do you have any additional color you can give us on the adoption rate of Next?

Yes. We haven't been giving that publicly. And, quite frankly, we are still pretty early in that. And so as we get through kind of a full upgrade cycle with a new device and plenty of supply on those devices and go through a holiday season, we will probably have a lot better insight.

I am not committing to release that data at that time, but I will tell you, it is early in the process. We have been pleased, and we think it's been a good customer experience where they can capture the value of the trade-in phone, which is really the key to it. It is the economics that makes sense for both parties.

Jennifer Fritzche, Wells Fargo.

Thank you for taking the question; just a question on the mobile share plan. I think you said 72% of your smartphone base is now under it. You have a year under your belt with this experience.

Are these customers proving to be stickier customers? I would think so, because your postpaid churn was lower than I was looking for.

Yes. Thanks, Jennifer. I think 72% of our smartphone customers are on usage rate plans. So, Jennifer, that would be -- include not only the mobile share, but the tier data. The mobile share is about 16 million of our customers. It is about 5 million accounts, about three per account.

But, yes, we are having good results with those with regard to the plans, not only with smartphones, quite frankly, in general on churn, on revenues, and the quality of the customer experience. So, while we don't publish those specific numbers, yes, we are having good results with that. And we believe, as we have shown with some recent changes in the mobile share plan, it is an appropriate way for us to move forward.

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

Amir Rozwadowski, Barclays.

John, it does seem as though you folks are benefiting from your investment initiatives that you announced just under a year ago. I was wondering if you might be able to provide us with some color on where you expect spending trajectory to go perhaps beyond just the near term, because I know you addressed that in an earlier question. And if that has shifted, given the fact that you seem to be ahead of plan with respect to your initial plans.

And also I was wondering if you could provide any color around the supplier domain 2.0 initiative that you have seen now that it has been unveiled and to the vendors. Because it does seem that, longer-term, that initiative could provide some significant cost savings down the line.

Right. Let me try to address your questions. I think we have said in the past that we would expect that CapEx for this year to be in the $21 billion range, and for 2014 and 2015 to be in the $20 billion range. At this time, we are not adjusting that or changing that.

Once again, we are going to be very thoughtful about accelerating any build programs. And where we can do it efficiently, we will do that.

I will tell you that the one new issue or one issue that is coming up is that, with the Leap announcement and with our ATNI purchase, we may have some additional capital requirements related to those. As we said publicly, we will announce the financial implications of -- specifically of Leap when we closed the deal, which we expect to do in the first quarter.

So we are not changing any of the guidance that we have talked about for the three-year. Longer-term, we really do believe that software directed networks are an opportunity for us. We think it gives us an ability to not only improve quality, but manage cost effectively. And so we are excited about that.

I think early results from that have been encouraging, and the early results at our network team has been encouraging, but I don't want to suggest to you that it is going to have an impact in the guidance that we have already given. I don't want to suggest or imply that we are going to move away from that.

Great. Thank you very much for the incremental color.

First, let me close with a quick recap. We delivered strong EPS and strong revenue growth. We delivered solid wireless games and terrific U-verse results in the quarter.

We continue to make significant progress across our growth platforms -- global data, U-verse, and strategic business services and our project VIP expansion brings us even more opportunity.

Our momentum is solid and we are setting the bar on network performance, which we believe leaves us well-positioned for future growth.

Once again, very sincere in telling you thank you for being on the call. We really do appreciate your interest at AT&T, and have a good day.

Ladies and gentlemen, that does include 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.