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AT&T's CEO Presents At Morgan Stanley Technology, Media & Telecom Conference (Transcript)

AT&T Inc. (T) Morgan Stanley Technology, Media & Telecom Conference Call March 6, 2014 11:00 AM ET


Randall L. Stephenson – Chairman and Chief Executive Officer


Simon Flannery – Morgan Stanley & Co. LLC

Simon Flannery – Morgan Stanley & Co. LLC

Okay. Good morning everybody welcome today for AT&T Conference. Thanks all for your participation and for those of you traveling today, safe travel. It’s my great pleasure to introduce Randall Stephenson the Chairman and CEO of AT&T. great to have here welcome back to San Francisco.

Randall L. Stephenson

Thank you, Simon.

Simon Flannery - Morgan Stanley & Co. LLC

Please note that all important disclosures, including personal holding disclosures and Morgan Stanley disclosures appear on the Morgan Stanley public website at www.morganstanley.com/researchdisclosures or at the registration desk. Randall, perhaps if we can start with a broad question, can you talk about the key initiatives for AT&T in 2014, your position in the industry and the outlook for the company?

Randall L. Stephenson

Sure. I will be glad to.

Simon Flannery – Morgan Stanley & Co. LLC

You heard our Safe Harbor up there, if you don’t mind just put that back up real quick, I need to do a little house-keeping or so. Some of these statements could contain forward-looking comments and their risk could be materially different and you can go out to our website to see the details of it.

Randall L. Stephenson

Thank you. Yes 2014, kind of how we’re viewing 2014 Simon changed a bit just literally in the last few weeks and it changed by virtue of a little transaction that was announced Comcast/Time Warner, and that's a blockbuster deal from our standpoint. It’s an industry redefining deal from our standpoint. And we’ve spent a lot of time obviously reviewing the transaction and it creates an impressive business. In fact it's a business that’s going to cover 80% of the households in the U.S., the footprint will and it’s going to be vertically integrated with content.

So we look at this, say well, this is an important transaction. We think it’s going to have a rather wholesome regulatory review process, we anticipate that. But our studying of this is that it probably gets done. It’s probably going to have some air on the transactions terms and conditions. And so, what do we think it's done and that be in the case, when you think about 2014 the kind of focus is ones mind on the prioritization.

We came into 2014 really, really focused on completing our VIP build that’s our network infrastructure commitment that we began a little over a year ago. And it puts us heightened sense of urgency to see on the VIP build and we are really going to be very, very aggressive pushing hard on completing all the various areas of VIP. That most important, obviously being the LTE deployment. And we have been going really, really hard with LTE. We will buy midyear this year, hit 300 million people past with our LTE deployment and will be largely done by this summer.

I got to tell you, I’m more and more pleased and impressed by the LTE deployment and though the performance of this network has been really, really good, and we expected it to be terrific. It’s exceeded my expectation somewhat. As you look at speed performance, it is I would say it hands down the top speed network in the United States. When you look at reliability, it depends on whose third-party test you look, it’s us or Verizon, but I think right now it’s a dead heat maybe a jump ball in overall quality and reliability. And so that’s going very well and the byproduct of that, that people shouldn’t miss, is we probably come through one of the most competitive years in our industry’s history on wireless. And in the fourth quarter, we had the lowest churn rate that we’ve experienced on our mobility side.

So, finish the deal on LTE next year high, high priority but the remainder of VIP, obviously is our consumer broadband build and we are going very aggressively on deploying our IP broadband technology and fiber deeper into the network, passing more homes of our video component. That is now a $13 billion revenue run rate business, our U-verse businesses, it’s still growing 28% and so the VIP initiative, some question that you really wanted to invest that much into last mile capability and I think we are proving that was the right decision. And we are having terrific success.

One thing it’s interesting, about the VIP build is as we’ve been doing this, we began a fiber deployment in Austin, a very targeted fiber deployment in Austin. And the cost dynamics to this deployment have been really, really encouraging but the market adoption in the performance of fiber to the home, and we call it our GigaPower, U-verse GigaPower technology that we are deploying there, has been very, very encouraging.

And in fact I would tell you, we are so encouraged that we want to begin taking this to other communities and what we’re doing is in cities and municipalities, we can get the terms and conditions like we have in Austin. We are redirecting VIP investment to fiber to the home deployment, and in fact we are going to launch the service in Dallas this summer. And so you are going to see other communities as we begin to deploy this technology emerge around the United States, very, very encouraged and like I said, in light of a new competitor, a new structure in the industry where we are going to be a little more aggressive and assertive in deploying that technology around the country.

And then as you move into the business space, deploying fiber to business locations, a very aggressive deployment, we are going to hit 1 million new business locations with fiber this year. IP broadband, our Ethernet deployments are going great. In fact, we have a category of strategic services and business we call it and it’s basically VPN, Ethernet, fiber-based solutions IP broadband. That is now a $9 billion revenue stream.

Coming into this year that revenue stream was growing 10%, exiting this year it’s growing over 17% and it’s had a nice momentum as we walk through the course of the year. So we’re very encouraged as we move into next year. Our equation on this is we need to get those strategic services growing over 20% and beyond 30% of total revenues. Once we do that, we have a sustainable growth business on the Enterprise business side and so those are kind of what’s got us focused right now, it’s focused on the U.S., getting this VIP build completed.

Simon Flannery – Morgan Stanley & Co. LLC

Right. Well, that’s a good summary. Maybe we can turn to Europe for a minute; you were at Mobile World Congress in Barcelona last week, you’ve talked a lot about the European opportunity. How do you see mobile Internet investment opportunities in Europe? Any change in your views there?

Randall L. Stephenson

We’ve been pretty consistent over the last year and a half on our views of Europe and it’s real simple. The mobile Internet phenomenon that has transpired in the U.S., we know for fact, it’s going to be replicated around the world. And so, you will see it take-off, just like all other technologies, when we deploy them in the U.S., eventually they begin to move around the globe and mature and scale around the globe.

On the mobile Internet, it seemed very obvious to us that the next logical stopping point for it to take-off was Europe. And Europe way under invested for quite some period of time in terms of LTE and so forth. And we just really thought given the demographic profile of Europe, it will take-off in Europe.

And I was at Mobile World Congress a year ago in Spain and one year ago I was very impressed by being at the Mobile World Congress in Spain and you could not get one single LTE signal. And I was there last week and there are more than one carrier with LTE up in Barcelona now. And as you began to look around Europe, you are seeing that once somebody moves and begins to invest, others invest, you are seeing also a number of the carriers whose balance sheets have been a little stressed and it has been hindering them from doing much investment, a lot of them are getting their balance sheets shot-up, Vodafone’s is obviously very shot-up, right.

So Vodafone is investing now aggressively. You are seeing LTE deploy broadly in England. You are seeing it deployed in Germany now. And so what we had always believe was going to transpire is now transpiring. There is kind of an upside when you think about how would you like to enter Europe, there is the opportunity of, would you like to own assets.

As you see these investments happening, you may kind of begin to think the window maybe closing on perhaps only wireless assets, but there are still other opportunities in Europe and the Global SIM, we’ve talked about it a lot, but we have been out in front on establishing and developing a Global SIM, that still gives us opportunities to take advantage of a European expansion of LTE and technology and I believe you will see around the world, automobile manufacturers, for example, picking a single carrier to deliver their capabilities around the globe by virtue of the Global SIM.

So we think there is still lots of opportunities in Europe, still pretty excited about Europe, but it’s finally beginning to take-off, the people are finally investing there.

Simon Flannery – Morgan Stanley & Co. LLC

Good, thank you. So, lets turn back to the U.S. if we could and I think one of the big themes here today has been wireless competition, here we seen team Mobile with their on-carrier strategy and they have had a good reversal improvement in their asset, they were on the stage yesterday talking about strong momentum into 2014 and yet, when I look at your churn numbers, you have remained that it’s at some very good level. So can you just talk about the impact that you have seen from the competitive moves in the industry and how you are able to continue to put up the kind of growth you are expecting for the year?

Randall L. Stephenson

So 2013 was, it was kind of a fascinating year for me, because you reflect back on 2013 and we came into the year expecting, disruptive behavior in the competitive environment. The player that proved to be most disruptive was not the one that we expected, but nonetheless, we’ve got what we expect coming into the year and what you now see happening in the U.S. is interesting and that is four national competitors competing at every level, I mean we’re competing aggressively on price, competing on devices, we’re competing on customer service and retail experience.

But what is unique and really different about the U.S. is to have four national competitors, all competing aggressively on network quality and network differentiation and I think this is really fascinating, four nation-wide carriers deploying the latest technology and investing very, very aggressively and you don’t see that happening anywhere else in the world, you are hard pressed to find that kind of phenomenon around the world. And so there are actually a number of regional competitors in the U.S. that are investing very, very aggressively.

And so it’s an interesting competitive dynamic. I think it’s a good healthy competitive dynamic, what it has done and what is transpired in 2013 is a competitive environment where the customer has a lot more transparency in terms of what the value proposition from the players are.

And so in a very short period of time, the industry has moved from one where for the last 30 years, is growing up with heavy subsidization of equipment put it into the customers’ hands and some fairly high pricing to offset the cost of the investment that you put into the customers’ hands.

Now all of the sudden, we are bring you some transparency to what the price of that handset, the cost of that handset is and letting the customer make a decision that if you would like to buy the handset, then there is an exchange of that in different value proposition that lower pricing on the recurring revenue streams that are available and the customers are overwhelmingly choosing that equation.

Now we’re financing those handsets to a large degree. Our next product is basically a handset financing program where the customer finances the handset over 12 months to 18 months and get some much lower price point and customers are loving this.

In fact, we launched this I think third quarter of last year, fourth quarter 15% of our smartphones were on this type of arrangement. In December, the number was 20%. We’re seeing that number continue to move up and we actually think that the industry is at a place where you can actually see line of site to the subsidy equation just fundamentally changing in a very short period of time and who would have thought, right.

So the competitive dynamic has brought about a very different value proposition for the customer, but at same token, you look at the new pricing in the marketplace and its driving another interesting behavior and that is we have these family share or mobile share plans. We buy big buckets of data and then as you buy your bucket of data, you add handsets for $15, it’s all you can need voice and text.

We are seeing an impressive number of our customers move to these plans and buying up to 10 gig, minimum of 10 gig type plans and so that's a very encouraging sign. People are understanding the value of the service now that’s in the data, they are buying aggressively on the data side. So it’s an interesting dynamic. The place where we are going to be really focused from a competitive standpoint in 2014 is going to begin this month, is we are going to have probably close the Leap deal this month, our acquisition of Leap Wireless.

And to have the Cricket brand which is a very, very strong brand down market into the prepaid segment, that’s a brand that performs very well when you ask customers why would you not consider Cricket? They say one reasons overwhelmingly, its coverage.

Well all those said, overnight, the Cricket brand is going to have nation-wide coverage on the AT&T network and this is the part of the market we have not participated in the past and we are going to be fairly aggressive here. It’s a place where we can go, leverage a different brand that leverage the AT&T network quality and we are going to still be little disruptive down at that end of the market. We think there is some really good returns and good growth opportunity and customers are asking for a high quality network experience there in the market, so it will be an interesting time down there this year.

Simon Flannery – Morgan Stanley & Co. LLC

Great. So if we continue on the traffic growth phenomenon, you are talking about more people taking 10 gigs, leads us to the question on Spectrum. Can you just assess proxy of Spectrum position today? You have done a lot of deals overtime, but how do you think about your Spectrum position out of couple of years and what about the auctions as a source of Spectrum, what about acquiring Dish as a portfolio and then how are you thinking about that?

Randall L. Stephenson

Yes. So the last three years, two and a half years, it’s been a single-minded focus on securing our Spectrum position and getting ourselves good line of site to sustain growth and I think we have done a very, very good job of securing our Spectrum position and as you know, it started with the WCS piecing that footprint together and it took several transactions to get the WCS footprint pieced together and get the regulatory rules such that we could use it for mobile internet and that's done.

And we’ll begin deploying that Spectrum next year and it’s a nice 30 megahertz nation-wide footprint, wireless Spectrum and ready to be deployed and so that's kind of a nice launching pad if you will for this. Then we got the deal done with Verizon last year when we bought their lower 700 megahertz block and it pretty much completed our 700 megahertz footprint. So we have a very nice 700 megahertz footprint with a lot of room to grow there.

We’ve announced the Leap transaction, which is in the AWS band and Leap will pair very nicely with the Aloha transaction we just announced end of last year. So we’ve got a very nice footprint at the AWS level, so then we did 60 other transactions just last year alone for Spectrum and ATNI, former Alltel property down the Southeast United States had a very nice footprint.

And so I feel pretty good about where we are on Spectrum to the next few years. Now all of us in the industry are witnessing this data explosion, which has been impressive. The data explosion is now turning into a video explosion and video is what is now driving the traffic on the network and its impressive, the level of video that’s reversing these networks. We think it’s a wonderful growth opportunity for the industry, in fact we have a project Xtreme [ph] which is all about one thing and that is equipping the mobile network to accommodate video and it’s re-architecting a number of elements of the network to accommodate video and obviously LTE broadcast technology is going to be a vital part of that. But that said, we are going to need – the industry is going to need another round of Spectrum.

And so the AWS auctions are ones that we are going to obviously be very active in and then watch very closely. The big one, the big auction that the industry is paying a lot of attention to is the broadcast Spectrum, that's expected to come to market in 2015 and this one is no lay-up in terms of execution for anybody.

I think the FCC has a very, very difficult task in front of them. This auction is a triple bank shot and to pull it off, is going to test their metal and their capability to execute on this. Tom Wheeler is a very bright man. He understands what he has in front of him, but to get the buyers and the sellers at a place where the clearing prices create blocks of Spectrum that are truly a value to the carriers is going to be difficult. I’m hopeful that this thing comes off in 2015. I think the industry is very hopeful that it comes off. We need it. The industry is going to need it, but time will tell.

Simon Flannery – Morgan Stanley & Co. LLC

Okay, good. While we are on the subject of regulation, can you just touch on that neutrality. There has been a lot of discussion in the media, Comcast and Netflix and so forth. Where does AT&T stand?

Randall L. Stephenson

I think it’s not a consequential issue. The industry had landed on a net neutrality approach that I think was healthy for content providers, it was healthy for the tech sector, it was healthy for the industry and it was a concept we had landed on. And as a result, you were seeing investment pour in all areas. The carriers were investing aggressively, the tech guys were investing aggressively, content guys are investing aggressively. There is a lawsuit and the Verizon won and so it caused a lot of people to say is this thrown up in the year. We don’t think so.

We think the industry is going to land on a place. It does not look too dissimilar from where we were, and so I think Tom Wheeler has been quoted recently saying, that he thinks there is a solution that the industry can land on, that doesn’t require some kind of extensive rule making. If we go into a detailed Title 2 type rulemaking, that’s going to be a long laborious process and it will be good for nobody in the industry. So we think the industry can come together and deal with this appropriately.

Simon Flannery – Morgan Stanley & Co. LLC

And then you were talking about the growth in video on your Wireless Network. We’ve had a lot of discussion this week about over-the-top business models and you’ve obviously got an important platform with U-verse, but how do you think about core cutting on these alternative models and AT&T’s role in that?

Randall L. Stephenson

It’s funny in this industry. Every time a disruptive capability comes along, we all anticipate how big it’s going to be and everybody gears up for a major transition. Whether it was VoIP on the fixed line side or wireless substitution, wireless to wireline, it never happens as fast as everybody expects, but when it does happen, it happens bigger than everybody expects and I think over-the-top video will be a case of that.

It’s not evolving quite as quickly as a lot of people anticipated, but I do think it’s going to be significant in the industry. And we at AT&T think that’s a good thing. We think it gives the consumer what they are looking for, gives them the optionality that the consumer is looking for and but the consumer in their viewpoint, they are buying content. And as a consumer, you are confused, if I bought the content, why does it matter if I look at it on a tablet versus a TV versus a PC versus a smartphone. I paid for the content, I want to watch it where I want to watch it. We’ve got an industry trying to dictate where the content is consumed, those barriers are going to come down and those models are going to change and what we are about AT&T is trying to facilitate that.

We think that’s a good thing for the industry and so obviously, when we entered into content negotiations, ensuring the ability to distribute that content across multiple devices is a high priority for us, facilitating Netflix, we think Netflix is a good thing for the industry and accommodating and Netflix capability is very important to us and so it’s something very encouraging and we would like to see growth.

Simon Flannery – Morgan Stanley & Co. LLC

Okay. You mentioned connected car earlier in the Global SIM and Internet of Things, Machine-to-Machine has been a big topic already at the conference. Where do you think the biggest opportunities are and perhaps just if you can just recap exactly what the Global SIM is for those?

Randall L. Stephenson

Global SIM is basically a sim that you can put in to any device that will work anywhere around the world and if you are somebody creating, either you develop some device or an automobile and you want to develop a capability to leverage these LTE networks, you don’t want to develop with a sim that works in the United States, one sim in one platform and different sim in a different platform that works in Europe and a different one that works in Asia, but it’d be nice to have one sim that you can deploy one time it works in all devices around the world and so we worked aggressively to develop Global SIM technology and we are deploying it in the number of different areas with the various MDN folks.

Probably, the easiest one to grasp and that has the best line of site for the industry is the connected car and we have been very aggressively building a platform for this over the last three years and in fact as you look at the various manufacturers now, 2015 in the Unites States there are going to be 15 million cars manufactured roughly 50% of those will have this connected capability in them.

We are now contracted AT&T with 40% of those will be on the AT&T network using an AT&T sim and it will be the Global SIM as to how they deploy will be different issue, but 40% will be on AT&T, there are number of discussions underway. We think that numbers volume will be 50% or better by the time 2015 gets you; this is very exciting, because as an automobile manufacturer, it can change the game for you in terms of diagnostics and upgrading software and so forth, it will change the nature of the experience with in the automobile everything from music. I see Pandora will be speaking right after us here, but Pandora in the dash, those types of services will be the music experience.

Navigation experiences will change. There will be Internet-based navigation experiences and you can go on and that’s all on the front seat, right and under the hood in terms of diagnostics and so forth. It’s the back seat, the delivery of entertainment and so forth, we just think there is a lot of opportunities.

We think of the car is becoming the next connected device. You have a mobile share plan and you just connected another device and happens to be your automobile. So connecting the car we think is very important, connecting the house and then we think is really important. When you think of M2M devices that do monitoring within the home become very, very inexpensive to manufacture and to deploy within the home when it’s wireless-based, LTE-based and so everything from water sensors, the temperature sensors, the light controls, hatchback controls so forth.

Equipping the home and monitoring the home wirelessly, this becomes a very, very interesting proposition. We are launched in 63 markets, with our Digital Life product and this has been really interesting, an eye opening. The customer reception to this has been off the charge is good, it’s the highest in NPS scores that we track in our company on this product and this capability. And we’re having a lot of companies from outside the U.S. come to us wanting to license this capability. And so another opportunity to monetize outside the U.S. and so connecting the home and then just go to the machine-to-machine. We’ve announced a strategic deal with General Electric. And General Electric is being very progressive as they think M2M and they want everything that they manufacture to be networked and networked wirelessly, everything from jet engines to generation equipment and so forth diagnostic type work, sensors and so forth. So everything they do will be networked.

Emerson is obviously the compressor, should be networked. I mean so we’re doing a lot in that area. We’ve done a deal with IBM. We worked together and have a big data experience around M2M, but I think we’re very, very close to a place in both the industrial world and the consumer electronics world where very few things what we manufactured that are not wirelessly networked at some level. And we think this is a significant revenue opportunity for the industry.

Simon Flannery – Morgan Stanley & Co. LLC

Good. So if we can turn to the balance sheet for a moment. Are you and the Board thinking about managing the trade-off between investing in VIP, the dividend, buybacks, the right to leverage several acquisitions, preparing the Spectrum of since. What are the various priorities there?

Randall L. Stephenson

Well, obviously investment is priority number one. And we’ve set a direction and made a commitment to our VIP build. And 2014 is our peak year. It’s our peak year on LTE deployment. It’s our peak year on fiber deployment and our IP broadband extension, and we’re committed to finishing that especially in light of as I said the competitive dynamic changing with Comcast and Time Warner. So we want to get that finished in 2014. So that's about a $21 billion capital spend this year.

You put on top of that bonus depreciation going away this year and so but after you spent $21 billion in capital and pay a $9 billion dividend, the level of cash available just from operations is not as significant as it was last couple of years. So share buybacks we’ve said publicly that their will be dialed back of this year, but as we generate opportunistically other cash, you will see us in the market buying back stock, but like last year I think we generated $7 billion of cash from asset sales. A year before, we did a comparable number.

Always just working the portfolio, clean-up the portfolio there will be cash flows from asset dispositions and opportunistically we’ll be in the market buying the stock at $32 of share. We like the stock a lot.

Simon Flannery – Morgan Stanley & Co. LLC

So, if it is the peak year, there has been a lot of talk about, Software Defined Networks and redefining that.

Randall L. Stephenson


Simon Flannery – Morgan Stanley & Co. LLC

It’s a network architecture. Help us think about the opportunities there and you are project agile as well to try to drive some efficiencies. Can you just give us a …

Randall L. Stephenson

Thanks. We feel pretty good about the cash flow generation capability of the business. And to continue funding the capital requirements of this business, we feel very, very good about that and a lot of areas of the business the capital requirements, I use this term a lot, but they are going to have a downward bias, and particularly the area that you identified and John Donovan spoke, I think it was yesterday or day before on our Software Defined Network or our real-time User-Defined Network Cloud technology where basically what we’re doing is you think about what has transpired in the datacenter over the last few years with cloud technology where you virtualize what’s going on inside the data center and you drive the hardware costs down and software, because of the driving factor in the data center and we have driven efficiencies into the data center that are 50% and 60% productivity efficiencies in the data center.

Think about taking that same capability now and pushing it into the network. That’s what we are talking about with the user defined network cloud and this is not rocket science, it’s got to take a lot of developed middle effort, it’s not going to happen next year, although some elements of it will be implemented this year, but it’s going to take a number of years to really make this happen, but as you begin to deploy this type of virtualization into the network, those 50% efficiencies begin to manifest themselves deep into the core of the network. Now that’s significant, that’s a significant capital saving or a significant cash flow savings as well.

We also continue to have a number of opportunities. We generate just as a matter of course, year-in and year-out at least $1 billion a year of just productivity improvements where we invest in productivity enhancements. We’ve announced a Project Agile, which is going through any number of areas of the business and standardizing processes and capabilities whether it will be billing systems, whether it will be customer care systems and so forth and there are significant opportunities.

We are on a path right now. We are investing the capital to make this happen and these are all fairly predictable business cases that we can take $3 billion of run rate costs out of the business by 2017. It’s not inconsequential, right. We continue to do a good job on managing labor costs as well. So the cash flow characteristics of the business are actually very healthy. They are going have to be, there are going to be spectrum auctions coming, they are going to require a lot of cash. We are going to continue to invest in fiber deployment, but we do feel good about our downward bias on the capital requirements just inherently in the business overtime.

Simon Flannery – Morgan Stanley & Co. LLC

Okay. All right, well, with that, we’ve got time for a couple of questions here. Please wait for mike.

Earnings Call Part 2: