AT&T Inc T
Q4 2011 Earnings Call Transcript
Transcript Call Date 01/26/2012

Operator: Ladies and gentlemen, thank you for standing by, and welcome to the AT&T Fourth Quarter 2011 Earnings Release. For the conference, all the participants are in a listen-only mode. There will be an opportunity for your questions. Instructions will be given at that time. As a reminder, today's call is being recorded.

With being said, I will turn the conference now to Brooks McCorcle. Please, go ahead.

Brooks McCorcle - IR: Thanks, John. Good morning, everyone. Welcome to our fourth quarter conference call. It's really great to have you with us this morning.

As John mentioned, this is Brooks McCorcle, Head of Investor Relations for AT&T, and on the call joining me this morning are Randall Stephenson, AT&T's Chairman and Chief Executive Officer; and John Stephens, AT&T's Chief Financial Officer. Randall will provide opening comments, then John will cover our results, and then we'll follow with Qs and As.

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

I also need to reference our Safe Harbor statement, which is on Slide 3, and that says that this presentation and comments may contain forward-looking statements. They are subject to risks and details are in our SEC filing and on AT&T's website.

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

Randall L. Stephenson - Chairman, CEO and President: Thanks, Brooks. Morning everybody. I'll start with just a couple of brief comments on 2011, then what I want to do is just move into our plans and outlook for 2012.

2011 was obviously an eventful year, not only for us, but the entire industry, and what I hope didn't get lost in all of the news cycles on mergers and iPhones is what AT&T accomplished during the course of the year, and really how that positioned us for 2012. We came out of 2011 with each of our key growth platforms – mobile broadband, strategic business services, and U-verse – all growing at strong double digits. I mean, it's better than three-fourths of our total revenues now come from wireless, data, and managed services, and those have a combined growth rate above 7%.

We had really strong mobile sales throughout the year. In fact, we had a blow out holiday season, and in the fourth quarter, we sold 9.4 million smartphones. That's 50% above our previous record. In the year, when our competitors began selling the iPhone, e outsold them in every single quarter. We also led all competitors in total wireless substantial added, 7.7 million, for the year, and we're number one in just about every key mobile broadband growth metric, smartphones, emerging devices, postpaid data ARPU, and customers on tiered pricing plans.

When you look at the network side of the equation, this was for us an unprecedented year. We challenged our network team to push call retainability on our 3G network above 99% by year-end, and we've now hit or beat that three months running. We closed the year with 80% of our total mobile data traffic on Ethernet backhaul, and that's well ahead of our original plan, and we're pleased to have that deployment behind us because we believe we now have the most robust backhaul infrastructure in the industry. This is a backhaul infrastructure that is built for data.

On top of this infrastructure and on our HSPA+ platform, we're now deploying 4G LTE, and today, we have the best data speeds in the country. The iPhone 4S on our network has download speeds that are three times our peers.

In wireline, our U-verse build is now largely complete. So, we have in place an IP video and broadband platform that reaches 30 million customer locations, which gives us significant headroom now to drive penetration.

On the business side of the equation, despite the economy, we've executed a very steady climb in revenue trends. We're now two straight quarters of sequential increases and we have a line of sight to year-over-year growth this year, and we continue to be very, very strong in terms of cash generation capabilities on operations, better than $34 billion, for the year.

So, with these data points, I like how we're set up for 2012, and as we sit here in January, I tell you, we probably have the best visibility of going forward that we've had in quite some time. John is going to cover the outlook in detail, but at a very high level here's what you are to expect from us as we go into 2012. We're going to continue to be very aggressive in growing or mobile broadband franchise. We'll return to revenue growth in our business segments. We'll expand wireless and consolidated margins. We will achieve mid single-digit EPS growth or better. Cash generation continues to look very strong again next year and given the operational momentum we have in the business, all of this appears very achievable and probably at the conservative end of our expectations.

I'd add that this outlook is not dependent on any kind of boost in the economy. Holiday sales suggest there's a possibility for some light tailwinds and we're hopeful for that, but all the core fundamentals suggest we're looking at continued slow U.S. economic growth and higher unemployment. So we built our plans around a fairly low growth scenario. As we look ahead, the issue that gives me the most concerned quite frankly is in our ability to execute. The number one issue for us as we move forward and for the industry, I believe continues to be spectrum. This industry continues to see just explosive mobile broadband growth and is providing one of the few bright spots in the U.S. economy, but I think we all understand this growth cannot continue without more spectrum being cleared and brought to market and despite all the speeches from the SEC we are all still waiting.

The last significant spectrum auction was nearly five years ago now and this SEC has made abundantly clear that they'll not allow significant M&A to help bridge the delays and freeing up new spectrum. So in the absence of auctions, our company and others in the industry have taken the logical step of entering into smaller transactions to acquire the spectrum we need to meet this demand, but even here we need the SEC's action and leadership and unfortunately even the smallest and most routine spectrum deals are receiving intense scrutiny from this FCC, often times taking up to a year and sometimes longer before these are approved.

Now, hope I’m wrong, but it appears the FCC is intent on picking winners and losers rather than letting these markets work. A lot of recent comments and speeches by certain members of this FCC suggests that they and not Congress should decide how spectrum auctions are conducted including who can participate and what the conditions should be for participating.

Meanwhile, we pile more and more regulatory uncertainty on top of an industry that is the foundation for a lot of today's innovation, making it difficult for all of us to allocate and commit capital. In this industry, we all know capital investment equals jobs. So the end result of this is we have an industry that is just really stuck in terms of creating real capacity.

We will certainly do our part as we move forward to provide leadership on these issues, but it’s also clearly time for Congress and the FCC to step up, and in the interim, this environment has a lot of clear implications for our business and these are in three different areas. First, while our current overall spectrum position is competitive, we've led the way in mobile data. Therefore, our utilization rates are running very high and demand continues to accelerate. So, we'll continue to do a number of things.

In a capacity constrained environment, usage-based data plans, increased pricing, managing the speeds of the highest volume users, these are all logical and necessary steps to manage utilization.

LTE deployment is also going to play a role. We ended 2011 with 74 million LTE POPs covered and we will accelerate that pace considerably in 2012 setting us up to complete our deployment to 80% of the U.S. population in 2013, and LTE does give us a 30% to 40% lift in network efficiency, but at current growth rates that equates to only about a year’s increase in traffic. So, while LTE is important, it's not the silver bullet in terms of capacity planning. What that means is to meet customer demand we have to continue our push to add spectrum in the open market. You'll see us being active there. And we will continue to advocate for more open auctions, as soon as possible.

Then second in this environment, we will accelerate our efforts to improve our overall growth profile, and we'll do that by looking at opportunities to either divest or restructure low performing and nonstrategic assets. You've seen us do this for the last year or two with our Sterling Commerce sale and the restructure of our Telmex Holdings, and you'll see more of these actions over the next 24 months.

Third, given the economic and regulatory situation, it makes sense for us to begin to resume our share repurchase plan. We currently have a $300 million share authorization. That's about 5% of our shares outstanding, and we'll begin to execute on that immediately. As we go through the year, our Board will likely evaluate further actions.

So, our cash flow is strong, the balance sheet is rock solid, we've reduced total debt by $6.5 billion in the fourth quarter alone, and this gives us a lot of flexibility and a lot of capacity to return value to our owners.

So with that I'm going to turn it over to John to cover results, and I'll stick around for Q&A. So, John?

John Stephens - SVP and CFO: Thank you, Randall. Good morning, everyone. Let me begin by providing consolidated financial summary, which is on Slide 6. 2011 was a story of record mobile broadband sales, and solid revenue gains. Revenues were up 2% for the year and 3.6% in the fourth quarter alone. Stronger-than-expected smartphone sales also impacted earnings and margins.

In the fourth quarter, we reported earnings per share of a negative $1.12. Excluding $1.54 of mainly noncash one-time items, earnings per share for the fourth quarter was $0.42. One-time items included $0.65 of non-cash pressure from the year-end mark-to-market change for our benefit plans. The actuarial loss on benefit plans was driven by a reduction in the discount rate from 5.8% to 5.3%.

While our investment returns were better than the overall market, they were less than our expectations, but that was largely offset by better than expected force retention and medical cost management. $0.48 of the non-cash pressure is due to asset impairments in our Yellow Pages and directory operations. This was part of an annual review of intangible assets comparing them to fair market values of similarly situated companies. $0.44 of pressure is due to the previously announced termination of the T-Mobile USA transaction and we have $0.03 of help from a tax settlement.

Cash flow continues to be strong; $2 billion in the quarter and $14.4 billion for the year, and when you adjust out the one-time contract termination payment, it was outstanding. Looking ahead to 2012, we expect earnings to grow in the mid single-digits or better for the year.

Now, let's look at revenue growth and how our growth drivers are transforming our revenue mix. Details are on Slide 7. Fourth quarter consolidated revenues totaled $32.5 billion, up 3.6%. For the year, consolidated revenues grew by almost $2.5 billion. The growth drivers were strong mobile broadband results, very good U-verse gains and continued strength in strategic business services. In 2011, 76% of our revenues came from wireless and wireline data and managed services, that's up from 68% or more than $10 billion from just two years ago, and revenues from these areas grew about $7 billion last year or more than 7% for 2011. We're confident this mix shift will continue. In fact, in 2012 we expect consolidated revenues to continue to grow, thanks to strength in these growth drivers with little expected lift from the economy.

Now let's take a look at wireless on Slide 8. Our mobility sales channel did an outstanding job delivering not only the best sales quarter in our history, but the best smartphone sales quarter in the history of the industry. We added more than 2.5 million subscribers. This includes gains in every customer category. Postpaid net adds were terrific with our best performance in five quarters, adding 717,000 subscribers. Tablets drove prepaid net adds, reseller sales continue to be strong and we had another million plus quarter with connected devices.

We did see churn increase slightly only six basis points of the postpaid side, during what we view as the most competitive quarter of the year. Strong smartphone sales also drove impressive revenue growth. Total wireless revenues were up $1.5 billion or 10% and wireless service revenues increased by $0.50 billion. We grew postpaid ARPU as we have done for every quarter for the last three years. We also grow from a much higher base than anyone else. Our postpaid ARPU is $6 higher than our closest competitor. And in 2012, we expect postpaid ARPU to continue to grow and to grow 2% for the year, thanks in part to new pricing plans that we announced last week.

We also continue to bring more subscribers onto our network with tiered data plans, more than 22 million at the end of the quarter, with most choosing the higher price plan. As more of our base moves to tiered plans and as data use increases, we expect our compelling ARPU growth story to continue.

Our wireless data results are on Slide 9. Our mobility achieved – Ralph de la Vega was on the call today, he would say something like, we had a blockbuster smartphone sales. Well, I'm not Ralph, but I’ve got to tell you, I share his enthusiasm. Our mobile broadband sales were nothing short of incredible. Our wireless team sold 9.4 million smartphones or more than 100,000 devices a day for every single day of the quarter. That’s nearly twice as many as we had in the third quarter, and 50% higher than our previous record. Smartphone subscribers now make up about 57% of our postpaid subscriber base, and accounted for 82% of postpaid sales during the quarter. Much of this growth was driven by the launch of the iPhone 4S and record iPhone sales, but we also had record Android device sales, doubling sales from the year earlier quarter.

Branded computing sales also had a best ever performance. We added 571,000, thanks to strong tablet and tethering plan sales. We now have more than 5 million branded computing devices on the network. Strong mobile broadband sales help drive data growth. Data revenues were $22 billion in 2011, growing it 21% for the year. APRU for smartphones continues to be strong nearly twice that of our other devices, and about 87% of smartphone subscribers are on family or business plans. These customers are excellent investment, because they have lower churn.

I can't say enough about how well our mobility crew did in the fourth quarter. We not only held our own in a very competitive quarter, but we set a new industry sales standard as well. But you don't have these results without having a terrific network. We are committed to creating not only the world's most advanced network, but also the network most open to innovation, and we made tremendous progress towards this goal. Highlights are on Slide 10.

First, we had a great LTE launch last year, making AT&T the only U.S. carrier to provide 4G speeds through both LTE and HSPA+ technologies. This means we deliver the best possible blended speed, which enables a better mobile experience for our customers. This pays of big for iPhone 4S customers, with download speeds up to three times faster than on any other carrier's network. You can also see the impacts of our CapEx investments in network upgrades and in expanded mobile broadband coverage. These investments are having a positive impact on our wireless quality metrics.

As Randall mentioned, our average national 3G call retention has exceeded 99% since mid-September. In 2012, we expect to double our LTE coverage with continued improvement in capacity and enhanced backhaul. We're very proud of what we have accomplished and full credit goes to our hardworking network team for an incredible effort.

Now, let's look at wireless margins. Details are on Slide 11. As you know, the investments we made to drive record smartphone sales and record upgrades have impacted wireless margins, but you also know the long-term value of these subscribers; lower churn, higher ARPUs, and strong data growth. Our strategy has been to grow this space, which we continue to do, while keeping existing smartphone subscribers on our network which we did at record-breaking levels in the fourth quarter. Handset upgrades were about 12%.

Looking ahead, we expect service margins to improve in 2012. In fact, I expect, we'll get service EBITDA margins back to 40%. Driving this will be continued strong but stabilizing smartphone sales during the year, helped in part by the full impact of the upgrade policy that was introduced last year. Additional revenues are expected from the new data pricing plans that we announced last week and greater efficiencies, both in operations and billing. This really speaks to our long-term goal of building a strong smartphone base, while working to improve margins.

Now, let's take a look at the wireline business starting with consumer on Slide 12. U-verse continues to drive consumer growth, six straight quarters of year-over-year revenue increases. U-verse was a $6.7 billion revenue stream in 2011. That's almost triple the revenue from just two years earlier, and in the fourth quarter, revenues grew about 44% year-over-year and as we scale, U-verse margins continue to improve, contributing to profitability.

During the quarter, we added 208,000 U-verse subscribers to reach 3.8 million customers in service. Meanwhile, our U-verse broadband net adds accelerated, three times our TV additions, which includes new U-verse, small business subscribers, faster broadband speeds, plus mobility, these are combinations small business customers are looking for and AT&T's strength in both areas is a competitive advantage. We're also seeing broadband and U-verse voice over IP attach rates remain solid. With our U-verse build largely complete, we now past more than 30 million living units, but penetration continues to expand. We now have 25% penetration in areas marketed to for 36 months or more and we believe there is a lot of room for growth. Our video service is recognized as the best in the business and we are growing faster than any other pay TV provider. In 2012, we expect continued U-verse subscriber growth helping key consumer revenue stable.

Now, let's look at wireline business, which you can see on Slide 13. We have been watching revenue trends slowly get better in business even without the benefit of an improving economy. For the second quarter in a row, we had sequential revenue growth, thanks to growth in our strategic business services. As things such as Ethernet, VPNs and application services, which were up 18.4% for the year and it's now nearly a $6 billion business. We are seeing positive trends in almost every part of the business. Our global enterprise business had its second straight quarter of year-over-year data growth. Wholesale had its third straight quarter of sequential revenue growth and revenue trends in small business continue to improve with another quarter of broadband growth. We now have 80% of our target central offices ready for IP-DSLAM broadband sales and we’ll soon begin selling into those central offices.

This success helped wireline business margins improve year-over-year for the fourth consecutive quarter. We expect these positive wireline business trends to continue in 2012, and that the wireline business will return to revenue growth this year, thanks to growth in network sourcing, mobility applications and virtualized services. As we said, we expect this growth with little lift from the macro economy.

Now, let’s look at margins and cash flow. Consolidated comparisons are on Slide 14. Record breaking smartphone sales and postpaid net adds, considerably higher than initial estimates, had an impact on our consolidated margins. For the year, our adjusted consolidated operating margin was 17.8%. That compares to 18.5% in 2010.

Our wireline operating margins were relatively stable from 2010. We were able to offset declines in legacy services in a sluggish economy, thanks to improving revenue trends, Scaling IP data and solid execution with our One AT&T initiatives. Across the business, total force was down more than 10,000 in 2011. In 2012, we expect to expand consolidated operating margins, driven primarily by wireless expansion with stable wireline margins.

Our cash flow story continues to be outstanding. Our cash summary is on Slide 15. Cash from operations totaled $34.6 billion. Capital expenditures were $20.3 billion. Free cash flow before dividends was $14.4 billion, a very strong performance especially when you consider these things. We increased capital spending during the year. We made $1 billion contribution to the pension fund in the fourth quarter, and a $3 billion payment as part of the T-Mobile transaction in the fourth quarter. Dividends totaled $10.2 billion for the year.

In terms of, uses of cash, total debt is down almost $6.5 billion from the third quarter of 2011 levels with a debt to capital ratio of 38%, and a net debt to adjusted EBITDA ratio of 1.5, and as Randall mentioned, we also plan to begin aggressively buying back stock from our previously authorized share buyback.

Looking ahead in 2012, we expect capital expenditures to be about $20 billion with continued investment in our growth drivers, and we expect free cash flow in the $15 billion to $16 billion range for the year. Our balance sheet is sound, our debt metric solid, our strong cash flow gives us the flexibility to invest or to retire debt, while returning substantial value to shareholders.

Let me close with a quick recap of 2011 on Slide 16. We executed very well this year, with good momentum across our business. We grew revenues, and had incredible cash flows. We set industry records for mobile broadband. Strength in strategic business services, as business wireline poised for growth and U-verse drove growth in consumer wireline. We also continue to invest in the future almost $100 billion over the last five years, and we've done all that while continuing to return value to our shareholders.

Let me also do a recap of 2012 guidance that we have provided throughout this call. That's on Slide 17. Looking at 2012, we have a solid strategic plan in place that will help us grow revenues, expand margins, increase earnings, while continuing to have a very strong cash flows. In wireless, we expect to expand margins while growing postpaid ARPU by 2% for the year. We expect to return wireline business to revenue growth and keep wireline consumer revenue stable while also keeping wireline margins stable.

We are targeting capital expenditures at the same level as 2011, approximately $20 billion. We expect free cash flow in the $15 billion to $16 billion range, and we will begin share buybacks.

This is a growth focused outlook and also reflects our ability to execute on the cost side. We expect little help from the economy but are certainly prepared to take advantage of any opportunities that exist. This is a time of unprecedented growth for an incredibly dynamic industry. We have a great position and a solid track record of creating value for our owners, and we expect to improve on that record in 2012.

Brooks, that concludes our prepared remarks. We're ready for Q&A.

Brooks McCorcle - IR: Great. Thank you, John. John, I think we're ready to open up for questions.

Transcript Call Date 01/26/2012

Operator: Simon Flannery, Morgan Stanley.

Simon Flannery - Morgan Stanley: Randall, I think one of the things you were hoping to get from T-Mobile was a better prepaid platform, prepaid is about two-thirds of the percent of the new subscribers coming on. Can you talk about how prepaid will fit into your strategy given what Verizon and some others have done here recently for 2012 and perhaps you could expand a little bit more on your comments about looking at underperforming assets, might we see spin-offs of (several lines), sale of directories, is that the sort of s absorbing we should be thinking about?

Randall L. Stephenson - Chairman, CEO and President: Yeah, thank you Simon, and good morning. On the prepaid platform we've been rather transparent about the prepaid area in terms of when you're spectrum constrained, you get really focused on the markets you want to pursue and we have obviously been very, very focused on the high-end of the market and the beauty of T-Mobile was, it not only came with spectrum, which would allow for some efficiencies within a prepaid platform that allow you to move down market. As we are getting more and more, a better performance out of our network and as we move to LTE and begin to free up some of the 3G spectrum, this is probably an area that we'll look to for growth Simon, in fact, we had a lot of work going on, on this right now. I wouldn't expect or wouldn't have you expect to see that in the next six months, but when you look to the next 12 to 24 months, prepaid will obviously become a focus for us, especially when you think in terms of mobile data because mobile data that's probably an underserved area where that segment of the market does not have a robust dada offering in a prepaid environment. So that will be a focus as we begin to mine out some capacity as we move to LTE. In terms of the underperforming assets, you've hit a couple areas, obviously we just took a rather large charge in our directory operations to reflect a lot of the current comparable pricing in the market for those types of assets. That's one area that were going to obviously take a very hard look at. While I don’t want to give any indication on M&A activity, it’s one of these areas that we're going to have to decide, do we keep it or do we restructure it as we move forward. So, the other being rural access lines; we have been apprehensive on moving, doing anything on rural access lines because the issue here is, do you have a broadband product for rural America, and we've all been trying to find a broadband solution that was economically viable to get out to rural America, and we're not finding one to be quite candid. The best opportunity we have is LTE, and we are obviously rather excited about the opportunity to use LTE to get to rural America with the T-Mobile transaction. That having been set aside, now we're looking at rural America and asking, what's the broadband solution? We don't have one right now. So, you'll see some activity and some structuring changes over the next couple of months that will provide some idea in terms of where we're headed. We're going to have to either completely restructure those businesses, but cost structure has to change, not only the wage and benefit cost structure but just the cost structure associated with the technology, legacy TDM infrastructure out there, and leaving them as they are, they will continue to be underperforming assets. So, we're going to have to make some fundamental changes and there's more to come on that, but as I've said, the next 12 months to 24 months will bring more clarity to that, but these are areas that we as a Company have to address in short order.

Operator: John Hodulik, UBS.

John Hodulik - UBS: Randall, maybe picking up on the spectrum issue, maybe a little bit more detail, if you could, on your spectrum needs? I mean, obviously you have some runway with the new 4G network, but you said, you'd be more aggressive in that area over, say, in 2012. I mean, what kind of opportunities are out there? I mean, is it more private companies like Aloha or even potentially other larger companies out there that are operating businesses that have spectrum that you guys could look at, if you could just characterize the sort of environment for new spectrum that already exists, and then maybe talk a little bit about from a frequency standpoint, I mean, obviously for you guys the lower the better, but where would you look at spectrum if – basically trying to get a sense for how badly and how soon you're going to need new spectrum?

Randall L. Stephenson - Chairman, CEO and President: Yeah. Okay, John, what I'd tell you is the immediate timeframe in terms of through our LTE deployment through 2013, feel really good about where we are. We've got sufficient spectrum to get us through LTE deployment, and then as you begin to transition off your 3G networks to LTE, it will buy us some more time in using DAS solutions and Wi-Fi solutions, but when you kind of look out and span the horizon or scan the horizon, there are no secrets. Everybody knows where this spectrum resides and who is holding it. Our biggest issue isn't identifying it and pursuing it; our biggest issue is understanding what we're allowed to do, and we're literally sitting here in a situation where we don't know how much spectrum we're allowed to hold, who we're allowed to do business with and so forth, that was the basis of my comments in the opening session. We've just gone through a process where we've tried to get a transaction approved and the FCC came out with a report and said that we exceeded the spectrum caps in over 200 markets. You can imagine how surprised we were to read that, until you've read deeper into the report and realized they had changed the spectrum screens. It might have been nice to have known they were going to change those spectrum screens ahead of time, but that is what it is. Then literally a couple of weeks later, they approve our acquisition of the Qualcomm spectrum, and in reading the report they evaluated it using the old spectrum caps, so we're literally sitting here in a situation, where we don't know what spectrum caps are going to apply from one transaction to the next. So, our first issue is not identifying which spectrum we go after, but identifying what the rules are, how will these transactions be evaluated, who are we allowed to do business with and who are we not allowed to do business with. In terms of the frequencies that we're interested in, it's no surprise, we tend to favor the lower band, the 700 megahertz spectrum, we have a very, very good position in that particular location, so we obviously have a lot interest in the spectrum that resides down there, we've done a number of transactions in that particular area since the auctions occurred in 2007. So, that's obviously an important area for us. AWS is obviously a good area for us to operate. We've launched our LTE network in the Chicago area on the AWS spectrum in that frequency and is performing quite nicely. So, those would obviously be the priorities. But again, the who and the what is not the question, it's what can we do and what are we allowed to do, is the real question for us right now.

Operator: Michael Rollins, Citi Investment Research.

Michael Rollins - Citi Investment Research: First, on the wireless side, you've talked about the improvement in network quality but also that the network is running hot. Can you talk about the opportunities that you have to continue to manage the high quality of service to the broad-base of HSPA+ customers, and what the implications are for CapEx? Then, secondly, a little bit more on the business side. Can you just give maybe an expansion of comments in terms of what you're seeing on strategic revenue growth and what's been driving the strong growth there, and also, maybe what you're seeing on the legacy service side and maybe some swelling in the rate of revenue erosion there?

Randall L. Stephenson - Chairman, CEO and President: Sure, Michael. On the network quality side, wireless network quality, with T-Mobile behind us, we're back to blocking and tackling, if you will, and that means re-initiating significant cell split. So we had a cell split strategy that was on hold until we got to the T-Mobile transition. So we're back to doing cell splits. We continue to go very, very aggressively on distributed antenna system solutions and so going inside of buildings and lighting of buildings from the inside, Wi-Fi solutions, all of these we just continue and there's no new science here per se obviously, additional spectrum, where we can pick it up is another part of the equation and so you'll continue to see us be aggressive there. I think we have some transactions approved by the FCC last week, but before last week we had eight transactions setting up for the FCC waiting for approval, so we could begin investing. So you'll just continue to see us do a lot of the typical blocking and tackling. You'll also see us in markets where we've launched LTE, be very aggressive in migrating customers to the LTE platform and if you're buying today an Android smartphone from AT&T, you're probably buying an LTE equipped handset. So as we turn out LTE in any of these markets, you're just inherently on the LTE network. So that obviously facilitates getting us the capacity of relief that we need as well. So it's going to be a number of initiatives. In terms of the business services side, what's driving it? Again, there's no big secrecy here. VPNs are a huge part of this. Our business customers moving aggressively to VPN solutions and we continue to run mid-teen type growth rates of VPN. The other is Ethernet and native Ethernet solutions whether to businesses or a really big business opportunity for us right now is deploying this to cellular companies. Wireless companies are buying Ethernet to the cell site aggressively as we told you, we now have 80% of our mobile broadband traffic on native Ethernet. All mobile companies are trying to get there as fast as they can. We think we are way ahead of the game in this regard. The benefits from it are dramatic in terms of throughput increases you see by getting that backhaul infrastructure in place on Ethernet, so we're seeing big opportunities there and then lots of opportunities in terms of new application services that are riding on top. Once you put the VPN in place, customers are buying more and more applications and services that ride on top of that, whether it be video conferencing, telepresence, and so forth, that we are having a lot of success there. So you put it all together, we continue to get 17% type growth from these strategic services and business. That’s helping offset the migration that we are seeing from a lot of the legacy products as you said, so traditional voice continues to be in decline as you would guess. Traditional data services and really – they are somewhat flat but data is growing in spite of flat legacy data services. So all in, we are feeling really good about the business side of the house. What I would remind you is that these strategic services are growing at this 17% clip in what we are seeing is still a very sluggish economy. I mean, this is not a high growth economy. These businesses tend to invest in telecom as they hire people. These businesses have not been hiring, but our spend from these companies in these services are growing. What we are hopeful for and now we are some signs, is very kind of faint signs, but we are seeing some signs and maybe there is some economic tailwinds here. If we get those then we think there’s some serious upside to our business side of the house and business revenue growth.

Operator: Mike McCormack, Nomura Securities.

Mike McCormack - Nomura Securities: Randall, I guess, just thinking back about the introduction of the iPhone and obviously a lot has happened since then, but clearly there was an expectation for improvement and proving an NPV positive story. But maybe just help us with what the headwinds have been there, because if you look back over the past couple years on churn metrics, ARPU growth rates, and margins, where just it doesn’t seem like we're getting the benefits of either iPhone or smartphone penetration, can you just walk us – I think, voice is obviously an issue there, but any other headwinds that you think that you can address as we go forward, and then John just thinking about EPS guide, have you included a thought process iPhone refresh? Thanks.

Randall L. Stephenson - Chairman, CEO and President: I guess, what I would suggest is while we've had margin pressures as we've gone deeper and deeper into the smartphone category, they continue to be high NPV product categories, and in fact, the ARPUs are significantly higher than traditional mobile phone type capabilities, and to think that we're getting to 57% penetration of our smartphone base or of our postpaid base – excuse me – with smartphones, and keeping margins in that 40% range. To penetrate that deeply, and keep margins at this 40% range, I actually think is better than I might have hoped for. I – it was a while before we had expectations that 80% of our sales would be in smartphone categories, but to sell 80% of all of your sales being smartphones and keeping margins in this 40% range for the year, actually I'm not too disappointed with that, and I think, it's going to prove to be a terrific platform for us, because here's what we're seeing, Mike, and that is you get a customer on smartphone, and then you get a customer with FamilyTalk plans her family plans on smartphones, then the smartphone becomes the platform for the new services that we're now selling. Somebody buys a tablet and puts their tablet on a 3G or 4G network, that customer puts that device on the same network as their smartphone, so we think it's going to prove to be a very important platform as we move forward. That's why we're not shying away from continuing to pursue this market. We have done some things where we've heightened up the upgrade policy to try to begin to manage the cost of the upgrades in this particular base, but all things considered, I am pleased with the smartphone category, and we'll continue to do things to tighten up margins as we go forward. We also took some actions during the course of this year that had an effect on our ARPU and we believe it's going to prove to be a temporary effect on our ARPU, and that is, with 2011 being the year when we first had competition for the iPhone, we made some strategic moves. We introduced unlimited mobile-to-mobile calling if you had an unlimited text plan. That proved to be a very sticky move from a pricing standpoint, but it's had a negative effect on ARPU over a couple of quarters. We're seeing that stabilize now, we don't expect to continue to see that dilution on ARPU as we move forward, but that did have an effect this year that we think is largely behind us, and as we move to 2012, should not continue to suppress ARPUs. But all-in, I continue to be a bull, big-time bull, in the smartphone category and iPhones in general.

Mike McCormack - Nomura Securities: I'm sorry, Randall, just as a quick follow-up on that, you had identified part of the voice pressure there but are you seeing – obviously, upgrades are running pretty high across the entire industry, but are you seeing that people come into the store for the upgrade to the smartphone, making decisions on how many voice minutes they want, because it seems like – and I've got a couple of younger kids but they just don't talk on the phone anymore, so are we seeing sort of the pricing down to these lower buckets?

Randall L. Stephenson - Chairman, CEO and President: Without a doubt, and you're seeing it from the phenomenon you just described, and that is, young people – it's almost uncool to talk on a phone, right, texting and messaging are keys. So, that has had its effect. But also, when we did go to mobile-to-mobile calling, this will tell you how efficient these markets are, but people began to immediately – particularly in small business – immediately right-size their plans to reflect the mobile-to-mobile calling feature and so we did see a step down very quickly, but as I mentioned, we're beginning to see that mitigate.

John Stephens - SVP and CFO: Mike, with regard to your question with regard to the 2012 expectations, two points on smartphone sales and an iPhone refresh. We do have a smartphone sales flat compared to '11 and our expectations and that is on a 25 million unit level, which is a record for us. So we did assume that we would have that same level again and that's after we've fully implemented during this year, our new handset upgrade policy, so that also takes into account some growth opportunities.

Operator: Phil Cusick, JP Morgan.

Phil Cusick - JPMorgan: Hey guys, first is follow-up on what you just said John, so that's flat from the fourth quarter smartphone run rate right?

John Stephens - SVP and CFO: I am sorry. The annual run rate for the smartphones in 2011 was 25 million and we have plans that assume we're going to stay at that level for the year in 2012. It just may be mixed differently by quarter. That in my opinion is a significant number, particularly since we'll have the new upgrade policy fully implemented this year.

Phil Cusick - JPMorgan: You would expect upgrades to moderate somewhat in '12?

John Stephens - SVP and CFO: Yes.

Phil Cusick - JPMorgan: So a bigger question. Can you talk about the wireline business a little bit, so it sounds like you said it will turn positive in 2012, does that mean sort of positive for the year or at some point, maybe during the back half it switches to positive, and then talk about margins there. So, flat year-over-year, is there any potential for additional cost cuts or is it really sort of mix shift still and there’s not much to be done with that level?

John Stephens - SVP and CFO: I directly expect revenue to grow for the entire year for the overall, whether it occurs fully in the first quarter or it occurs later. It will occur for the full year, we expect revenues to grow. Secondly, there are additional cost opportunities and savings opportunities. We’ve got a tremendous distance in getting our ‘One AT&T initiatives’ and our other cost efficiencies in place, but there's always – as one of my peers would say there is always more, and we're going to continue to work for them more. We do have a headwind of continued legacy product challenges, and so those cost savings maybe be able to offset that. Finally, as we mentioned here previously, we are not assuming a significant lift – a measurable lift at all from the economy, and as such if we have that lift there would be an opportunity to perform better than what we've expected.

Operator: Jonathan Chaplin, Credit Suisse.

Jonathan Chaplin - Credit Suisse: A couple of quick questions for John. So firstly, on the share repurchases, is the impact of share repurchases included in your EPS guidance, and if so, how much does that contribute? I’m wondering, if you could just talk a little bit about how you sort of manage between wanting to take as many shares out as quickly as possible early in the year versus maintaining that 1.5 times debt-to-EBITDA ratio? Could you go significantly above that, and maybe implement something like an accelerated share repurchase program early in the year, and then trend back down to that over the course of the year? And then sorry one final question, on the impact of the upgrade policy change, can you just run through when you think that impact will start showing up and how much do you think the upgrade rate could come down in 2012 over 2011? Thanks.

John Stephens - SVP and CFO: So, John, let me try to take it in short order. First of all, with regard to the assumptions we made in the plan with regard to share repurchase, I would suggest to you my guidance – our guidance for the year wouldn’t be any different based on moving that share repurchase assumptions around. It wouldn't have changed – it did not change the guidance we're giving you. So, if we had no share repurchase we'd stay with that mid-single digit EPS growth. That's first question, I hope that's responsive. Second question with regard to our debt ratios. I think you need to understand and I know you do, John, but I think you need to step back and look at our balance sheet today, with over $3 billion in cash on our balance sheet, look at the cash flows that we are expecting to generate over – close to $6 billion over our dividend requirements, that total of $9 billion gives you good insight into how much shares, we can repurchase, or can give you one insight on how much shares we can repurchase without affecting debt metrics. And so, we will be prudent. We are sticking to our standards with regard to the 1.5 in the debt to equity kind of guidelines we've given, but we have cash generation – a company like ours has significant flexibility in the timing of those kinds of activities. The upgrade policy, I would expect to go into full force at the end of the second quarter. We've put it in place in the first quarter a year ago, and it takes about a year and a half to be fully implemented. You probably won't see the full effects of it, until the second half of this year. That's our expectations. I will tell you that in this first year, we are expecting to see some improvement but we have not given, and I don't believe we are giving, guidance on the specific impact on upgrades.

Operator: Jason Armstrong, Goldman Sachs.

Jason Armstrong - Goldman Sachs: Randall, maybe just a quick follow-up on the regulatory environment. What in your mind is the path to more clarity out of DC, what would you need to see from them, or are we just to assume that you effectively need a complete reset at the FCC to contemplate anything else asides that you'd take to them? Then, maybe just a quick follow-up on the upgrade percentage, obviously such a big swing factor for wireless margins. The industry seem to go through waves of tightening and loosening upgrade policies, your latest move obviously very constructive and tightening, but maybe you can talk bigger picture and longer-term, can we as an industry get into a sustained period of tightening that would really reflect sort of a greater degree of discipline?

Randall L. Stephenson - Chairman, CEO and President: In terms of the regulatory environment, Jason, I will tell you there is one thing that could be done in very, very short order that would kind of lift the veil or cloud of uncertainty surrounding a lot of this, and that is Congress passes legislation initiating the auctions is very prescriptive to the SEC in terms of what the FCC's role is in the auctions, and the House has a bill that has been drafted, and it accomplishes exactly that. The FCC is obviously contesting that language. I think the chairman made a speech the week after the holidays – the chairman of the FCC where he said, he needed the rules to be fluid. My interpretation is, these rules are so fluid, you can drink out of them with a straw right now. So, what we need from Congress is prescriptive legislation on how these auctions should be performed. The language is presently in the current H4ouse bill, if that bill were to get passed, I think it starts to lift of the veil of uncertainty surrounding the industry. In terms of upgrade policy Jason, what you're articulating and discussing is the indication of an incredibly competitive environment in the mobility world and I think what you're beginning to see is the smartphone market is maturing a bit and as it matures I think you'll begin to see different behavior among all the players. I probably can't go much further than that, but as I've said in the very beginning, I feel like we have about as much visibility into the future as we have had in quite some time, so that intimates a certain degree of predictability that has not been there before and we'll see. We've built our plan and our margin expectations around selling a comparable number of smartphones as we did in 2011, so 25 million. Will there be some new iconic device that nobody anticipated come out during the course of the year, perhaps, but I do think 25 million sales is probably a reasonable expectation for us and if we can get if we don't we do a 25 million sales is probably a reasonable expectation for us and if we can get – if we do a 25 million sales level than a 40% margin is probably an achievable level.

John Stephens - SVP and CFO: Jason, one thing. If I can add, Jason, one point I'll make Jason, as we go through this transition on our network and the ability to provide LTE, one aspect of this refresh process as Randall mentioned, that doesn't get lost on is we really don't necessarily have to give much in the way of financial incentives to get our customers, this was clearly shown in the fourth quarter to get them to go to the latest technology. So we have an opportunity to shift dramatic levels of traffic to LTE, also as the industry all begins to follow to a similar situation for us with regard wireline – wireless handset subsidies and cost and structure. We would hopefully expect that everyone would act rationally in the process.

Operator: David Barden, Bank of America Merrill Lynch.

David Barden - Bank of America Merrill Lynch: I guess, just first, John. When you mention that – you thought that wireless margins could be as high as 40% in 2012, were you meaning that you expect it to be able to maybe touch 40% at some point in time, or is that kind more of a full year look? Then, on the consumer revenues, for the last couple quarters it looks like they've been coming down sequentially. I know, you’ve talked about some of the headwinds that you are facing with the legacy businesses in trying to restructure those, but is there a risk that consumer revenues might dip back down into negative territory, and then get offset by some of the advances in business, as we look into the 2012 mix? Thanks a lot.

John Stephens - SVP and CFO: First of all, on the wireless margins, the expectation I mentioned on 40% were for the full year. We will see how the different quarters go because of volumes and new handsets issuances and so forth, but that kind of was intended for the year. With regard to the consumer revenues, a couple of things, I think, I'd point out to you, we’ve got the U-verse build complete or essentially complete. We will continue to do a little bit more here and there, but we’ve past 30 million homes, so now we have a full 30 million home capability to sell into. So, we have opportunities to continue that growth. I think we mentioned that there was 16% penetration in our eligible living units, and in those they are longer than 36 months, for more like 25%. The other piece of that is we are having tremendous results with our high-speed U-verse type broadband, not only in consumer, but in small business, and so those opportunity to sell into more (indiscernible) market, and that continued push on high speed internet and attach rate report give me optimism over continuing to have good performance in consumer. With that being said, we are expecting even better performance in business, and they've proven it. They have shown it. The strategic services give us factual support for that thought process.

David Barden - Bank of America Merrill Lynch: If I could just follow-up real quick, Randall, just one quick one for you, if we could just get your kind of take on the Verizon agreement with the cable companies, their cross marketing agreement, now kind of anticipating potential Verizon selling of cable products in your territory, how do you look at that transaction, would you support it at the FCC, how do you think about it competitively, what does it make you want to do to respond that'd be very helpful? Thanks.

Randall L. Stephenson - Chairman, CEO and President: Yeah. It relates to them selling cable products. Interesting, it was obviously – their footprints don't overlap so much, and so – I don't know – I think, it will be interesting to see how the FCC deals with it. It appears to me to be a logical transaction. I obviously will be watching very closely, because again it's – hopefully, it's one more data point on what the spectrum screens really are, which if it does nothing, it should give us some clarity on what we're able to do we move forward. So, we will be a participant in terms of comments or anything on this, just watching as a very interested bystander hopefully getting some indication what it means for us, in terms of what we're able to do.

Brooks McCorcle - IR: Okay. John, I think, we have time for one more question.

Operator: Craig Moffett, Sanford Bernstein.

Craig Moffett - Sanford C. Bernstein: I wonder if you can just help me, Randall, with the growth outlook, if I'm doing the math right, it looks like service revenue growth in the wireless business, excluding the hardware sales has now actually dropped to about 4% and as you said, the smartphone penetration is now at about 57%, how do I think about kind of reaccelerating growth in that business, where does it come from since the incremental data penetration rates and the growth rates are starting to subside a bit?

Randall L. Stephenson - Chairman, CEO and President: Yeah Craig, good morning. So 57% of smartphone penetration, as we said sales of smartphones represented 80% of our sales. So every time we peg what the penetration rate will get to, it seems like the percentage of sales moves up another notch and so we think we still have quite a ways to run in terms of smartphone penetration and you continue, we'll continue to see ARPU lift as we penetrate smartphones more and more into the base. Also I believe that what you're seeing right now 1.4% postpaid ARPU growth, I believe you'll see that accelerate next year as we work through some of our unlimited mobile-to-mobile calling price changes. So we think we'll see some ARPU lift in terms of the growth rate going into next year. So that will be very important and then again as I mentioned, I'm absolutely convinced the smartphone is a platform and the customer that you hold with a smartphone is the customer that you will sell the tablet, is the customer that you will sell connected devices, is the customer you will sell home monitoring capabilities. I just really believe it is becoming more and more a factor in terms a platform in terms of further penetration of mobile data. That's why we are going so aggressively on LTE and then we haven't really begun to broach business mobility and business mobility in terms of applications, I think we're very early in the cycle in terms of businesses mobilizing all aspects of what they do, whether it be sales force automation or imaging and there's just so many applications of businesses are just starting to get their hands around that will become a significant driver of growth. So we feel pretty good that we have a long way to run in terms of growth in the mobile broadband infrastructure. You've seen us invest heavily. We'll continue to invest again getting to LTE 80% coverage by 2013 and we just think it's going to be a terrific opportunity. So with that, we are going to close and I want to thank everybody for taking part. As I said, 2012 we probably got the best visibility we've had in quite some time. Our growth engines are on track. It is being led as you've heard by our comments and your questions on this call by mobile broadband. The key for us is spectrum. We need the FCC and Congress to get us to open up, get us to a point of open auctions and then these will be done as soon as possible. We're committed to making sure that AT&T is structured for growth. We're going to look at low growth and nonstrategic assets and make some decisions over the next few months and given this environment, we'll begin significant share repurchases and we'll do that immediately. So looking forward to a good 2012. Thank you again for joining us and I we'll talk to you later. Thank you.

Operator: Thanks everybody. Have a great day. Thanks John.

Brooks McCorcle - IR: You're welcome. Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T's executive teleconference service. You may now disconnect.