AT&T Inc (T) 0 Q0 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the AT&T first-quarter earnings release 2014.

(Operator Instructions)

I will now turn the conference over to Susan Johnson, Senior Vice President, Investor Relations.

Please go ahead.

Thank you, Kathy.

Good afternoon, everyone, and welcome.

It's great to have you with us today.

I'm 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 overview with perspective on the quarter; then we'll follow up with questions and answers.

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

That's www.att.com/investor.relations.

Now before I turn the call over to John, let me quickly cover our consolidated financial summary, which is on slide 3. We had our best consolidated revenue growth in more than two years, up 3.6%, driven by strong wireless growth; our best consumer wireline growth since the introduction of U-verse in 2006; and rapid growth in strategic business services.

EPS for the quarter was $0.71 when adjusting for some transactional expense associated with the Leap acquisition.

When compared on an adjusted basis, that's up nearly 11% over last year's first quarter.

Consolidated margins were up year over year due to wireless expansion margin expansion offsetting wireline pressure.

Cash flow started the year strong.

In fact, cash from operating activities for the quarter was the highest it's been since 2007: $8.8 billion.

Our solid cash flow allowed us to make significant investments in Project VIP and the growth drivers of our business.

Capital spending was $5.8 billion, and that gave us free cash flow of $3.0 billion for the quarter.

We also continued to be opportunistic in buying back shares as part of our repurchase program.

In the first quarter we bought back about 37 million shares for $1.2 billion.

Now, with that overview, I will turn to call over to AT&T's Chief Financial Officer, John Stephens.

John?

Thanks, Susan, and hello, everyone, and thanks for joining us today and for your interest in AT&T.

Before I get to our operational highlights, let me take a moment and give you a broader view of our business strategy, beginning with slide 3.

As you know, we have been working very deliberately on a multiyear plan to transform our business.

In the first quarter we really began to see the benefits of this transformation effort.

You have seen us transform our networks from legacy services to an all-IP program and a best-in-class network.

Project VIP is accelerating that transformation through our LTE deployment, U-verse expansion, and fiber build to businesses.

We also reached a significant milestone in the quarter with our Domain 2.0 initiative.

We named two leading companies, Amdocs and Juniper Networks, as primary vendors that will help us achieve our vision of a user-defined network cloud -- a modern, cloud-based architecture.

We also made significant strides in transforming the wireless customer value proposition.

This transformation began with the move from feature phones to smartphones.

These smartphones soon became the remote control of our lives and drove significant data usage.

In recent years we began the transition to usage-based pricing and away from device subsidies.

In the first quarter we accelerated that transformation, thanks to the transparency and simplicity of our Mobile Share and Next plans.

At the same time, we transformed our wireline business from legacy services such as DSL to IP networks and IP services.

In the first quarter this transformation helped drive our strongest consumer wireline growth in years.

And in business, our strategic business services continued its steady growth.

And our transformation is not slowing down.

Yesterday you saw us announce plans to strategically target 21 new markets to expand our ultra-fast fiber networks to deliver U-verse with GigaPower.

Moves such as this are one more indicator of our ongoing transformation.

Behind all this is the strength of our balance sheet.

Our strong cash from operations allows us to return substantial value to shareholders through dividends and share buybacks while still having the ability to invest in our future.

Now let's get to our highlights for the quarter, which begin on slide 5. We had an impressive start to the year.

Let me begin with a quick overview of the quarter.

We made major moves in wireless that are reshaping the way we do business.

We completed our Leap transaction and have begun the integration process.

This will accelerate our prepaid initiative as we launch the new Cricket brand in the second quarter.

And we have reached a critical point in our wireline business, where we can clearly see that our Project VIP plans are working and transforming the business.

These efforts resulted in our strongest consolidated revenue growth in more than two years while also driving double-digit adjusted EPS gains.

And we did this while still dealing with a very weak economy.

To start, wireless execution was superb in the quarter.

We had our best postpaid net add first quarter in five years, and revenue growth was strong.

We also made massive strides in changing the subsidy model, giving customers greater choice and a more transparent way of choosing their wireless equipment and service plan.

AT&T Next take rates were strong, as more and more customers choose the installment plan method of purchasing handsets.

And the shift to Mobile Share plans was nothing short of incredible.

The number of new Mobile Share accounts and connections tripled year over year, with nearly half of our accounts now on 10 gigabyte or larger plans.

At the same time, U-verse continued its steady march of transforming our wireline business.

In fact, we had our best consumer wireline revenue growth since the introduction of U-verse about eight years ago.

And the outlook for U-verse continues to be solid as we expand U-verse footprint and look to increase penetration.

The transformation also continues in business wireline.

Strategic business services revenues were up more than 16% in the quarter -- so a very solid start with excellent momentum.

Now let me provide more details, starting with our wireless business, on slide 6. Perhaps the biggest story in the quarter was the strong growth in total and postpaid subscribers.

We added more than 600,000 postpaid subscribers in the quarter, with smartphones and tablets leading the way.

That's more than twice as many as a year ago and the best first quarter in five years.

Overall, we had more than 1 million net ads in the quarter, as we showed year-over-year improvement in every customer category.

In prepaid we continue to make progress in adding smartphone subscribers.

In the first quarter alone we added 255,000 prepaid smartphone subscribers to our network.

This helped drive year-over-year prepaid revenue growth.

Also, during the quarter we took a major step in transforming prepaid with the close of our Leap transaction, adding 4.5 million prepaid customers, of which nearly 70% are using smartphones.

We are really excited about this new opportunity.

Churn continues to be a solid story for us.

Total churn was stable for the quarter, with postpaid churn down sequentially and up slightly year over year.

That's a great achievement in what is definitely a noisy competitive environment.

We believe Mobile Share will have a positive long-term impact on churn.

In fact, postpaid churn got progressively better throughout the quarter.

As the transition of our customer base to usage-based plans accelerates, so does the shifting of our handset sales to AT&T Next.

Those details as well as revenue breakouts are on slide 7.

The transformation of our customer base can be clearly seen this quarter.

The combination of AT&T Next to Mobile Share value plans has added a level of transparency in the smartphone buying model that customers haven't seen before.

This new model lets customers choose what plan best suits their needs, and many customers have been choosing to move off the subsidy model for simpler pricing.

And for a large number of our customers, that means AT&T Next.

More than 40% of smartphone gross adds and upgrades in the quarter were on AT&T Next.

That's up from 15% in the fourth quarter.

The shift away from a subsidy model has major implications.

First, revenues shift to equipment from service as customers sign up for the Next contracts.

You see that in our strong equipment growth for the quarter with slower service revenue growth.

Second, AT&T Next accelerates the move to LTE-capable devices.

About 57% of smartphones on our network are LTE-capable, providing a superior customer experience on a best-in-class network.

It also means they are on our most efficient network.

And third, we see this as an investment in our high-quality customer base and in customer choice.

It peels back the layers of the subsidy model and allows customers to make clear choices.

It also helps build a stronger bond with our postpaid base in a noisy competitive environment, and we believe we are well positioned to use working capital in this way.

With our strong balance sheet, we believe we can do this prudently and effectively.

Another important aspect of Next is that these are our highest credit quality customers.

That's who Next was designed for, and that's who is selecting Next.

I talked earlier about our transformation.

It leads us to a different set of metrics than what we had used in the past.

Next and the shift to equipment revenue changes the way we look at ARPU.

Phone-only ARPU, a metric we have shared for some time and which includes only service revenue, increased by 0.4% in the quarter.

However, phone-only ARPU plus Next monthly billings increased by 2% year over year.

This move to Mobile Share plans in the quarter was incredible.

More detail is on slide 8.

During the quarter we introduced several new Mobile Share value pricing plans for both families and individuals to help customers move off the subsidy model.

First, we introduced new attractive pricing for the 10 gig or larger plans for customers who purchase a phone with AT&T Next or bring their own device.

Second, we rolled out similar value pricing for 1 gigabyte and 2 gigabyte plans.

At the same time, we made it easier for subscribers to move off the traditional subsidy model by allowing them to take advantage of these attractive new Mobile Share value pricing options in advance of upgrading to Next.

We see this as another investment in our customer base.

The cumulative impact of these changes was significant.

First the number of Mobile Share accounts and connections rose sharply in the quarter, increasing by more than 50% since year-end and tripling year over year.

Second, there was a major migration of subscribers to Mobile Share plans of 10 gigs or higher.

Customers bought up.

More than two-thirds of Mobile Share account activity went to [10] (corrected by company after the call) gigabytes or higher plans in the quarter, driving overall penetration to almost 50%.

That's up from just 27% in the fourth quarter of 2013.

And third, these new offerings prompted about 1 million postpaid subscribers who were on unlimited plans to elect to shift to Mobile Share pricing.

This helped drive the overall number of smartphone subscribers on tiered data pricing to 81%.

That's a full 6% point increase in just one quarter.

At the same time, we added more than 1 million new postpaid smartphone customers.

That includes customers who are staying with us and upgrading from feature phones.

Our postpaid smartphone sales continued to run in the 90%-plus range, and our total postpaid smartphone base is at 78%.

Now let's look at margins on slide 9. In the first quarter wireless EBITDA service margins were 45.4%.

That's a 220 basis point increase from year-ago levels, even though we had a significant increase in postpaid gross adds year over year.

The margin expansion was driven by several factors, such as the moves to the 24-month upgrades; network efficiencies; and operational improvements.

Next also had a positive impact on margins.

All these activities more than offset the pressures we saw in the quarter: Cost of strong net adds, both postpaid and total customer growth; additional promotional activity relating to our transformation; additional customer care costs related to Mobile Share and Next; and increased start-up investments in prepaid and Digital Life.

Our actions to improve margins also helped ease the pressure from about 1.1 million accelerated smartphone upgrades that occurred in the quarter.

These are customers who took advantage of new pricing and moved to Mobile Share plans and upgraded early.

Without this boost, Next take rates would have been closer to 35%.

In total we had 2.9 million AT&T Next sales in the quarter.

And now, more than a quarter of our postpaid smartphone base is on a Mobile Share value non-subsidy pricing, and is no longer tied to the subsidy model.

Another margin comparison is total wireless EBITDA margin.

That was stable year over year, even with all the growth and investment activities we had underway in the quarter.

There was a lot of moving pieces in our wireless business last quarter: the huge shift to Mobile Share plans, the tremendous popularity of AT&T Next, the increase in total and postpaid net adds, and the transition away from the subsidy model.

But it all comes down to customer choice.

We are making the buying process as open and transparent as possible, and then letting customers manage the process.

We believe this is not only best for our customers but best for our shareholders.

Now let me turn to our wireline story, starting on slide 10.

The wireline story continues to be one of transformation.

That transformation began first in consumer, when we introduced U-verse.

Since that time we have flipped the revenue model.

What once was a declining revenue stream had a 4.3% growth in the first quarter, accelerating from 2% a year ago.

Total U-verse revenues are now a nearly $14 billion annualized revenue stream and still growing at almost 30%.

And U-verse now represents almost 60% of consumer revenues.

We also see the transformation in our broadband results.

More than two-thirds of our total broadband base, or about 11 million subscribers, are now on U-verse broadband, our highest-speed and highest-quality product.

These gains drove total positive broadband net adds in the quarter, and we are positioned to continue that growth as our U-verse footprint expands and penetration improves.

It also helped drive total broadband ARPU, which was up 9% in the quarter.

U-verse TV continues to be popular, as we added more than 200,000 subscribers.

Churn continues to be low, and penetration is growing.

In U-verse Voice, our Voice over IP product just passed 4 million customers.

We also announced an important initiative in the over-the-top space with The Chernin Group.

We are excited about the new venture and believe the combination of our two skill sets can create something truly impressive.

We hope to start rolling out an offering later this year.

Now let's move to business wireline, which is on slide 11.

While wireline consumer was the first out of the gates with its move to IP, wireline business started the process a little later, but you can still see the transformation going on there, as well.

The clearest way to see it is in the steady, consistent growth of strategic business services.

Via services such as VPN, ethernet, hosting, and other advanced IP services, those services now make up more than 26% of total business wireline revenue, and growth is up more than 16% year over year.

Overall, revenues were down year over year, in line with the slow economy and recent trends, but there are positive signs.

In enterprise, our global business services, we actually showed slight service revenue growth year over year.

Given recent headwinds, that is seen as very positive.

The biggest drag on the quarter was wholesale.

It was challenged by network grooming as wireless carriers aggressively decommissioned legacy circuits.

However, if you look at our retail business by itself, enterprise and small- and medium-sized businesses, total revenue was down only slightly in the quarter.

And when you look at what business customers pay us for their total AT&T bill, both wireline and wireless, total retail revenue actually grew year over year.

We expect our transformation to IP will continue to make headway in the business space.

And at the same time, we continue to look for signs that the economy will improve and provide us an additional lift.

Now let's look at consolidated wireline margins on slide 12.

You see the impact from our transformation on these consolidated margins.

For the quarter our consolidated margin was 19.3%, up 40 basis points year over year.

Wireless margin improvement helped offset wireline pressure from trailing expenses tied to Project VIP.

Wireline margins were down from a year ago but essentially flat with fourth quarter.

Declines in legacy services and content and retransmission price increases pressured our results, but this pressure was partially offset by growth in consumer revenues and gains in strategic business services.

At the same time, Project Agile is gaining steam.

Project Agile is our new initiative that is improving efficiency in how the Company organizes and operates to deliver best-in-class customer experience as an all-IP, all-mobile, and all-cloud services company.

We are taking our initial cost savings from Agile and reinvesting in the project.

We expect One Rate savings in the $3 billion range by 2017.

Now let's move to cash flows.

The summary is on slide 13.

Our ability to generate cash continues to be strong.

In the first quarter, cash from operations totaled $8.8 billion or about $1.70 a share.

That's the highest cash from ops in seven years and almost 4 times our quarterly dividend commitment.

Capital expenditures were $5.8 billion, as we took these strong cash flows and invested in Project VIP.

And free cash flow before dividends was $3 billion, on track with our full-year guidance, even as AT&T Next changes the subsidy model.

In terms of uses of cash, dividend payments for the quarter totaled about $2.4 billion, and we repurchased about 37 million shares for another $1.2 billion.

Our Board of Directors has also approved a fourth $300 million share buyback, as we continue to be opportunistic in buying back shares.

Since we began buying back shares about two years ago, we have bought back about 13% of the outstanding shares of the Company and saved more than $1 billion in cash from eased dividend requirements.

We also continue to look for opportunities to monetize some of our assets.

This included more than $400 million in sales of America Movil shares and real estate in the first quarter.

We continue to move forward with our plans to sell our Connecticut wireline properties to Frontier for $2 billion, and we expect that transaction to close by the end of the year.

During the first quarter we also closed our Leap acquisition.

A high-level look at that strategy and integration of Leap assets is on slide 14.

First and foremost, the acquisition of Leap has clear and immediate benefits and value creation.

The value of the spectrum we received was significant: about $3 billion in value.

At the same time, we will be able to get significant value from Leap's $3 billion tax net operating loss and turn that into real cash for our shareholders.

And finally, we immediately refinanced about 90% of Leap's debt, which will save us $500 million in interest expense over just the remaining term of that debt.

When you add these synergies together the value of just these items was greater than the total price of Leap.

From a strategic perspective, the acquisition of the Cricket brand accelerates our move into the prepaid space.

We plan to launch the new Cricket brand in the second quarter, combining with AT&T's existing prepaid operations to create the new Cricket, with a national presence in more than 3,000 distribution points across the country.

The focus will be on simple plans with affordable devices, helping customers take advantage of the same -- of a smart new choice in no-contract wireless.

And all this is on a best-in-class network.

We are also integrating Leap customers and its networks.

The customer transition is expected to take about 18 months, as we move customers off of the outdated CDMA network on to AT&T's GSM network.

We will start deploying unutilized spectrum immediately, continuing our efforts into 2015.

Integration costs are expected to be about $1.2 billion over a two-year period, with about half of that expected in 2014.

CapEx will be in the $1 billion range, but significantly offset by efficiencies with other wireless build plans, and with the majority of the spend targeted in 2015.

Leap operational pressure will drive $0.05 of dilution in EPS this year, with most of it in the second half of 2014.

We are very excited about this new growth opportunity and expect it to really kickstart our new prepaid strategy.

We are also updating our outlook for the full year after the Leap acquisition.

Those details are on slide 15.

We now expect consolidated revenue growth of 4% or greater for the year as we fold in Leap and see continued strength in wireless and wireline consumer.

We continue to expect stable consolidated margins, which includes Leap operational pressure.

And we expect EPS growth in the mid-single digits, even with the dilution from the Leap operations and continued investment in growth initiatives.

We still expect capital spending to be in the $21 billion range that we gave you in January, with most of Leap's integration impact in 2015.

We also expect free cash flow in the $11 billion range; that's even with expected strong Next sales and Leap costs.

And you can expect us to continue to invest in our business transformation and growth opportunities.

I now will turn it back to Susan for a quick summary of the quarter, and then we can get to your questions.

Thank you, John.

Our recap of a very solid quarter is on slide 16.

We definitely saw the impact of our business transformation in the first quarter.

Revenue growth was strong; that includes the best consolidated revenue growth in more than two years and the strongest consumer revenue growth since we launched U-verse.

That helped drive double-digit adjusted EPS growth for the quarter.

Wireless was led by the best first-quarter postpaid growth we have seen in five years.

And AT&T Next and Mobile Share are transforming the customer value proposition, and put a large dent in the subsidy model while accelerating the growth of larger tiered data plans.

In wireline we are seeing the impact of our investments in IP.

U-verse continues its robust growth, and business continues to transform with growth in strategic business services.

I will now close out the call with a quick review of our Safe Harbor statement, and then we are going to open it up for questions and answers.

Our Safe Harbor statement is shown on slide 2.

This presentation and the comments we are going through may contain forward-looking statements that are subject to risks.

Results may differ materially.

Details in our SEC filings are on AT&T's website.

And now, Kathy, let's go ahead, and we will open up the call to take your questions.

(Operator Instructions) Simon Flannery, Morgan Stanley.

John, if we could start with the guidance revision, and in particular, the Next impact.

Can you just talk about the context of where you are in the middle of April versus where you were in January, when you set the original guidance?

It sounds like Next is gaining more momentum than you expected.

So if you could give color around this 35%, 40% -- are you expecting that to be 50% next quarter or 60% in the second half?

Some color around what you expect, what we should think about there, and how that has changed over three months.

You gave the monthly take rates last quarter; you didn't do that this quarter.

And then if you just touch briefly on Europe.

Any update to the commentary around, perhaps, the window closing there?

Thank you.

First and foremost, with regard to Europe, I will stand by what we have said before, for all the same reasons we said before -- the window is closing.

But I will say this: as you can see from these results, and as Randall, and I, and others have said before, we are focused here on this market.

And you can see why -- from the success that we have had in this first quarter -- see why we have that focus here in the United States, and it remains there.

With regard to the Next impact from an adoption standpoint, what we wanted to make sure everyone was aware of -- that we made a decision in February to allow customers to early adopt or early upgrade under Next.

And that drove about 1.1 million early adoptions.

That drove some margin pressure, quite frankly, in the first quarter.

We were able to overcome it, but those early adoptions did drive some pressure.

So the real normal kind of run rate for the group of customers that were qualified under our normal 24-month process ended up about 1.8 million, and that's about 35%.

So we did grow from that December 20% or the fourth-quarter overall 15% up to 35%.

And we will see how it goes forward.

I wouldn't expect that same acceleration from the 15% to more than 40% because of that early adoption.

And, quite frankly, because of the early adoption we may have some impact on the customers during the last three quarters of the year, because they moved their adoptions up and caused us that margin pressure in the first quarter.

But we are very pleased with the take rates.

Customers seemed to like it, and we are going to expand some of the channels we have the sales in.

So I do believe that the 35% is going to become a new standard.

We may do better than that.

We will see how it goes as we move forward.

We are not giving a specific prediction.

Okay.

So there has been a little bit of a change in your expectations, I guess, versus when you set guidance originally, because I guess you are only changing revenues at this point.

But I guess there are some puts and takes on the other lines.

Yes.

So what we are doing on revenues is really off the strength of consumer wireline, what we saw there, and quite frankly, off the strength of wireless.

As much as Next certainly will have an impact -- but really, it was much more about postpaid net adds and total net adds; and as we mentioned earlier, what we have seen in churn and this improving churn picture that we have seen throughout the quarter, giving us optimism about the full year; and an ability to raise that guidance to 4% or greater.

That's what's driving the change in guidance.

Good.

Thanks a lot.

Mike McCormack, Jefferies.

John, just thinking about the higher Next uptake, I think, than what was initially anticipated, and outpacing.

The impact on the cash flow -- obviously, you are not changing your guidance for that, but were there anticipated levers that you are thinking about pulling there?

And is VIP factoring part of that thought process?

And thinking about wireline margins, what are we thinking about the puts and takes there as far as the ability to increase margin?

Does Agile have a positive impact?

And thinking about U-verse margins overall, are they starting to contribute in a more meaningful way?

Thanks for the questions, Mike; let's make sure I knock them all off here, if you will.

First and foremost, with margins and wireline, with where we are at in our VIP build process, we are going to continue to see some investments in the customers and the build through 2015.

So while we are working very, very hard to improve margins, as we did sequentially in the first quarter, we expect real margin -- or larger margin improvements in 2016 and forward in wireline.

So that's the first point.

Agile is definitely generating savings, and we are optimistic about its impact.

But right now, at this time, we are choosing to reinvest the savings wherever we can in a prudent manner to accelerate the overall growth of the Company.

Third, with regard to free cash flow, the real thought process on not changing guidance has a couple of different factors.

One, when we came down with the final Leap business plan, we are focused on getting the unutilized spectrum into service right away.

We have some commitments on a 90-day and a 12-month process.

Quite frankly, that's -- putting that spectrum to use -- the team is really good at it.

They are already well underway on it.

But it's not a capital intensive; it's adding it to our already existing network.

The big piece of the capital -- the transformation of the CDMA network to our GSM network is going to really have a capital pressure in 2013, so that's the first point.

The second point is our working capital, as is evidenced by our cash from operations of $8.8 billion -- our working capital was very strong.

And we have efforts across the board: receivables, payables, inventory management, a number of items.

The success the overall team showed in being able to achieve good cash management gives us the confidence to keep free cash flow guidance at the same level, even with these increasing Next sales.

So really, that's where that's going.

With regard to your specific question on financing and VIP, we have a very active process in evaluating that.

We have not done that.

We haven't committed to do that.

It all comes down to costs, and whether we can do it in a reasonable manner from a cost perspective.

We are optimistic about the ability to do that, and we are well down the road in talking to really qualified parties who would be interested in participating with us.

We haven't made that decision yet.

Great.

Thanks, John.

John Hodulik, UBS.

Okay.

Thanks.

John, can you just give us a little more detail on the accelerated upgrades that you saw in the quarter?

Is that going to continue into the second quarter?

And if possible -- I could probably figure it out -- but if you could quantify the impact on margins.

And then as it relates to service revenue growth, we saw a deceleration there, but then stronger customer adds than we thought.

How should we expect that to trend through the year?

You know, it was a big decrease quarter to quarter.

Is that going to continue, or is this a sort of new level?

How do those two variables work out?

Thanks.

Let me make sure I get things knocked out here for you.

John, first of all, the $1.1 million -- let me give you this impression, or this explanation.

First and foremost, with an average unit costing about $600, those that are sold on Next would cause us to recognize $600 of equipment expense.

On the revenue side we would start by measuring those receivables, which will be $600 million, and then basically taking two charges against those: one for an interest charge for the receivable being payable over 20 months or 26 months; but secondly, for the forgiveness of the remaining receivables when the phone is traded in.

While we are not giving specific numbers, I will tell you, we have gone model by model and evaluated the trade-in value.

And we take into account all kinds of variables: whether we sold the model the day it was launched, whether we sold the model six months or eight months after launch, so on and so forth -- how other related models have been selling in the used market; whether there is an overseas market.

We take all this into account.

Essentially, though, I can give you this kind of guidance: on the day we issue it, you could have a write-down on the revenues from the handset from anywhere from 0% to 25%, depending on the different facts and circumstances.

I will just give you that as the way to think about it.

You could then take that differential -- those discounts on interest and those discounts on the trade-in value -- and compare how much of a loss that generates per unit.

It will give you the idea of kind of the pressure we faced in the first quarter from those accelerated units.

Secondly, I can't give you specific guidance on how that continued upgrade opportunity will impact us in the second, third, and fourth quarter.

The same program is out there.

It's the available number of people that take advantage of it has shrunk for two reasons: one, because the 1.1 million customers already took it; and two, because we have expanded time.

And some of the people that were covered by it now would have qualified anyway.

So it will work itself down.

I would suggest to you, though, the strongest piece of it may have already occurred, just because it was so successful in the first quarter.

With regard to customer as, John, we are not giving specific guidance on that.

I will tell you, we were very pleased that the strength of the customer adds improved throughout the quarter and that churn improved throughout the quarter.

So we believe that this combination of Mobile Share; of Next; of, quite frankly, transparency in pricing and, if you will, upfront honesty with customers is working.

And we believe that that is going to position us well in this -- what I call noisy competitive environment.

So we are optimistic about going forward with it, but we are not giving any specific guidance.

Okay.

Thanks, John.

Joseph Mastrogiovanni, Credit Suisse.

John, given the growth you are seeing in data, now with a plan to sell prepaid more aggressively on the LTE network, how comfortable are you with your spectrum position?

And you know, we have seen the comments about potentially reevaluating your participation in the broadcast auctions.

How do you view your need for low-band versus mid-band spectrum?

Good question, Joe.

Let me first be clear on something with regard to the broadcast spectrums.

We would like to participate at the auction.

We are and have been working with the Commission to establish auction rules that will certainly promote a good result for AT&T but will also promote a successful result for the auction.

So we are interested in participating.

With that being said, I will tell you, I am very pleased -- I am very pleased to get the Leap transaction done and that we were able to work through with the SEC and the DOJ to get that completed.

The unutilized spectrum that we have available to us immediately in over 200 markets that our team is putting into service right now, is actively getting that done, is really helping us and will help us in quality service and dealing with the network demands.

This acceleration through Next and these early upgrades to LTE devices is really helping us with our network, because our LTE network is our most efficient.

So we are moving a lot of customers onto that.

And that's another way we are dealing with our issues.

If you will, though, the first and foremost is we feel pretty good about our spectrum position right now.

We feel like we have positioned ourselves well with the transactions and the spectrum deals we've done over the last few years, and we are optimistic about it.

But as with anybody, we are always looking to continue to have that available.

Last question again, Joe, was on prepaid?

And quite frankly, that's a great opportunity for us, particularly with the new Cricket brand -- that platform, that distribution, that customer segment that we haven't necessarily focused on in the past.

Second, we believe the network differentiation will provide a real opportunity there.

But third, as we mentioned, 70% of the new Cricket customers use smartphones.

So over the next 18 months, when we have to transition them to GSM smartphones, it will be really -- it could be very opportunistic for us, if we are able to figure out a way to take our Next program trade-ins and provide those kind of quality handsets to our prepaid customers.

Not only alleviate the cost, but give them a real quality experience.

So we are optimistic about all of it.

We have a lot to do, have a lot of work ahead of us.

But we are optimistic about it.

Great.

Thanks.

Philip Cusick, JPMorgan.

I guess, first, a really quick follow-up.

I wanted to make sure that I understood: when you talk about the revenue guidance increase, does that include the acquisition of Leap?

Is that in there?

Yes, it does.

Okay.

And that's about, call it, 100 basis points or a little more.

Is that fair?

100 basis points?

That's a fair number; yes.

Okay.

And then, I guess, second question: as you think about the Next plan and sort of making it transparent for customers on what the handsets cost, are you seeing a different selection of handsets for Next customers versus subsidized customers, when they walk in and they see what handsets really go for?

You know, Phil, I think it's a little early for us to make any conclusions on that.

I say that in suggesting that I don't know that we've seen anything that is really substantially different.

So I wouldn't want to leave you with the impression that we have, and we are not sharing it.

It just hasn't happened yet.

But it is early in the process.

I will tell you, it's -- as much as anything, it's been a great process for us.

When we started that trade-in program last year, about the middle of last year, and learned about how the trade-in process could work, and how to utilize it, and then taking those skills for us through, quite frankly, the first quarter, we are continuing to learn and continuing to refine the process.

But I can't tell you we've seen a dramatic change in purchasing activity.

And just to follow up there, what is the sort of reverse logistics happening in that trade-in program?

What are you doing with the phones now?

How do you expect to deal with them as the volumes, I would expect, ramp pretty aggressively in the next couple of years?

So as you might expect, from the Next program itself we don't have very many trade-ins yet, because we haven't lapped the first year -- the first 12-month cycle.

But the expectations are a couple.

One, we are seeing great take rates on our insurance program.

Not only historically, but specifically with Next.

And so these trade-in phones, we expect, will be used in our insurance fulfillment.

That's one.

Two, we are working hard to figure out a way to make them cost efficiently deployable in our prepaid market, whether it's specifically in the new Cricket brand.

Three, we always have the opportunity to sell them on the wholesale market, which is what we did mainly last year.

With the quality of the handsets our customers use and with us having the international standard for handset technology, we were satisfied or pleased with the demand for our handsets that we dealt with last year and feel optimistic, because the handsets we may be dealing with this year might be newer in their lifecycle than the ones we had to deal with last year.

So those are the, if you will, mechanisms to make sure we get value out of the process.

Got it.

Thanks, John.

Tim Horan, Oppenheimer.

Great quarter.

John, I think you blew through -- definitely our estimates, but I think the Street estimates, on subscriber adds.

Can you maybe give a little more color?

What's going on?

Do you think the overall market is just expanding, or are you guys kind of gaining share?

If so, maybe talk about who you are gaining it from?

And then I guess we were concerned, and there's been some concern out there, about the early termination fees that some of your competitors are paying.

Can you talk about how that process hit you throughout the quarter?

Thanks.

Sure, Tim.

First of all, I will tell you that a lot of the offers that came out right at the beginning of the quarter -- I won't say that they didn't have any impact, but I will say that the impact of everything we did changed throughout the quarter.

Specifically, the biggest impact was the decision to push Mobile Share value plans in February and early adoption of Next.

And when we did those two things in connection, we saw significant take rates; and we saw improvements in not only customer growth, customer additions, but we saw churn come down.

And we saw that improve throughout the quarter.

So the more customers understood, the better it got in the results.

So, I guess, real simply, while it's a very noisy, competitive environment, we were able to do well across the board.

We don't give individual porting ratios, but we were certainly positive porting in total.

And very strong results from all aspects of our business.

We don't have any reason to believe we shouldn't be able to continue it.

We have to see how things play out and how we continue to play in this competitive environment.

But we are optimistic about what we can do going forward.

And then just maybe a longer-term outlook on Next.

Have you thought at all about maybe just phasing out the subsidy programs and moving everyone over to Next in the next couple of years?

Because it seems like it would be substantially more profitable.

I know you talked about going through some of the economics there, but your subsidies were in the $400 range before that.

And maybe it's $100 upfront here on Next.

So, Tim, we certainly consider those things.

I guess the first thing -- and this may sound simplistic, but the first thing is it starts with the customer.

And so our customers still -- some of our customers still choose the subsidy program, even in the first quarter.

So we want to make sure we stay focused on what they have and what they want and be responsive to them.

So that's the first thing.

So I wouldn't suggest that it would be eliminated as long as there is a significant amount of customers who enjoy it and prefer it.

I will tell you this, though.

As we see the Next program grow, we are expecting to see some changes in pricing and some ability for the consumer to drive efficiency in the market that maybe the handset providers or the transport companies couldn't drive themselves.

And that will give us an opportunity to not only give customers a better deal -- as they drive efficiency, they will get savings.

But we believe as they drive efficiency and get savings for themselves, they will give us the opportunity to get savings on the subsidy model.

And that's a long-term, optimistic point for us.

So that $400 that you referenced, Tim -- we would hope, based on the success of Next and the customers' purchasing activities, Next would help us -- give us an opportunity to make inroads into that $400.

Thank you.

Frank Louthan, Raymond James.

I want to talk a little bit about the fiber builds that you have announced -- they put them out yesterday.

I just wanted to see what's sort of time frame and the commitment to those markets.

And then talk just a little bit about the economics of deploying fiber -- the GigaPower product -- now versus what you saw a couple of years ago.

It seems like the economics have improved for you.

What are some of the drivers of that that are making that more of a feasible build than what you saw a few years ago?

Yes.

So first and foremost, right now the four markets that we have announced in, specifically, Austin, where we made the most progress in -- we are being able to do this within our scope of our VIP Program and in our scope of U-verse, where typically we are able to direct dollars from that effort and move them into this fiber-focused effort of GigaPower.

What we are seeing there is take rates in Austin that surprised us, that exceeded our expectations.

We are seeing customers' quality scores -- very pleased.

And what we are seeing is being able to sell much more online in a much more efficient manner than necessarily we have done in the past.

The key to the success there was that we were able to get kind of right of way, and permitting, and pull rights, and other rights to build in the same manner as other companies, which we haven't had historically.

And we were able to focus our build on the customers that drove demand as opposed to ubiquitous coverage.

So those two things are what is driving the success.

Those two things drive the changes in the financial metrics.

When you can build to where the demand is, you can have much higher penetrations and get much higher returns to support that build.

We will start -- in fact, I think there have been discussions today with many of the leaders of the market areas in the cities that we spelled out.

We are very optimistic about those markets and believe we are uniquely positioned in many of those markets because of the existing backbone we have in many of those markets to build off of and to provide that really high-quality service.

Okay.

Great.

Thank you.

I think I am going to call for the last question, as we are almost out of time.

David Barden, Bank of America.

So I guess I've got a couple of questions, if I could.

So, John, thank you for your walking through some of the accounting practices that go along with Next.

I guess my math is that every Next customer is generating something around $500 of upfront equipment revenue relative to the traditional subscriber, who might be generating closer to $200.

And that $300 delta times 2.9 million Next adds would be about $900 million of incremental equipment revenue relative to the old approach.

And that seems to foot with the year-over-year change in your accounts receivable working capital number.

So I was wondering if we could kind of just go right to the nuts and bolts of it and see what was the Next impact on the quarter, specifically, from the differences in how you account now versus how you would have accounted if you just used the subsidy model?

And then, I guess, the second question, if I could, was: it looks like you changed the definition of ARPU in the disclosures this quarter.

I guess the old numbers look about $2 lower than the new numbers.

So I was wondering if you could kind of talk a little bit about that change as well?

Thanks.

Sure.

First of all, we are not going to get into specific details.

But let me give you a couple of points about what you said that I think are maybe a little bit -- need some refinement.

First and foremost, on day one under the old subsidy model, we got about $240.

We also got a $200 copayment, but we usually had somewhere between -- about a $40 activation fee.

So that is the first piece.

The second piece is if you think about an average phone costs about $600, and you adjust that for an interest charge, and you adjust it from anywhere from 0% to 25% contingency loss for the trade-in value reduction, you are going to get a much different number than $500.

You are going to get a lower number than $500.

Second, if you think about what happened in the quarter, we had 1.1 million accelerated upgrades.

So this Next program generated those.

That doesn't generate a benefit -- actually, that generates pressure on the margins.

So I think all of those items have to be taken into account.

Specifically, I would tell you on the change in accounts receivable, yes, there is some accounts receivable change related to Next.

Our total Next account receivables are going to be in the $2 billion range.

I think we said at the end of last year, it was in the $900 million range.

But I want to be straight with everyone in the sense that the 12-month receivables -- the billings for the next 12 months -- are in our accounts receivable line, because they are short-term, recurrent assets.

But those receivables that go out beyond 12 months are our long-term or other assets.

So the accounting rules don't allow us to have that clarity with regard to it.

That's why we have provided in our quarterly filings the total Next receivable.

With regard to ARPUs, you are right.

We are changing it, as we are shifting the model, and having people pay for equipment, and choosing -- they are electing to pay for the equipment.

And in return, they are taking a discounted service price.

Our new ARPU metric is service ARPU plus monthly Next billings.

And when you add those together, which we've done on our presentation, you can see our growth rates -- still a strong 2% on the ARPU side.

So we feel good about that.

But it's, if you will, a view towards what the customer is paying us -- you know, writing the check to us for on a monthly basis.

So, John, just on that -- so you are adding service ARPU plus a portion of the equipment revenue back into the service revenue number for the ARPU calculation?

Just the monthly billings.

Okay.

And then, just if I could clarify that --.

And David, that won't tie to equipment revenue, because the equipment revenue is -- you're right.

Much of it is recognized upfront.

This is how much we -- this is the $30 a month we bill a customer who is on a 20-month Next plan for a phone that costs $600.

Right.

And for those advanced upgrade plans, the ones that you allowed to upgrade early, did you book any revenue for those?

Or did you just give them the phone?

No.

They came in and signed up to pay us, effectively, the $30 a month for 20 straight months.

So, yes, we booked revenue in the same manner as we booked at all the others.

Okay.

Great.

Thank you guys for helping.

Thank you.

Folks, with that, let me take a moment to thank all of you for being on the call today.

We have started off the year very strong and have made major strides in transforming our business.

As a result, we saw strong revenue and EPS growth, along with major gains in our growth drivers.

We drove a strategic shift in the subsidy model by changing the way customers buy their handsets.

It's been an exciting quarter and an exciting start to the year.

And we look forward to the opportunities that lie ahead.

Thanks again for being on the call.

And as always, thank you for your interest in AT&T, and have a good evening.

Thank you.

Ladies and gentlemen, that does conclude our conference for today.

Thank you for your participation and for using AT&T Executive Teleconference.

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