AT&T Inc

NYSE:T

Earnings Call Transcript 2007-Q1

[Matthew Niknam, Deutsche Bank]

Okay, if everyone can go ahead and please take their seats for our final keynote of today and for the conference.

Last but not least, very happy to welcome back AT&T, CFO, John Stephens. John welcome back.

[John Stephens, Chief Financial Officer]

Thank you, thanks for having me.

So, lots to talk about. Maybe just to start, if you can help us think about AT&Ts key priorities for 2019 and remind us of your outlook for the year.

[John Stephens, Chief Financial Officer]

Sure. Thanks for having me, thanks for everybody being here, the last event of the day. First of all, Safe Harbor Statement. Some of the things I say today will be forward-looking statements. They are subject to risks and actual results may differ. So I recommend that you review our SEC Filings and review the information available on our website.

That being said, we’ve got six priorities for the coming year. We want to grow you know service revenues on our mobility side. We are going to stabilize our EG margin. We want to lead in network, and that's leading with FirstNet, with 5G, with fiber. We want to most importantly and always in the front of our list, pay down debt. We want to make sure that we pay down debt. We want to grow WarnerMedia and get our merger savings out of WarnerMedia. Those are the things that we are focused on.

With regard to our guidance; our guidance is, as is our first priority, paying down debt, getting our debt to the 2.5x net debt to EBITDA range. So we are you know laser focused on that and we believe we’ll get that done.

Secondly, we are going to grow adjusted EPS in the low single digits this year. We're going to generate free cash flow in the $26 billion range. We are going to have a dividend payout ratio in the high 50% level, which is a historically low level for us, and we're going to incur or spend or invest about $23 billion in gross capital. When we say that, when we say gross capital, because that will be prior to reimbursement on our first contract from the FirstNet authority. So those are the guidance for the year. It is a, if you will, reaffirmation of the guidance we gave earlier. It should be consistent and aligned.

With regard to this year, I do want to point out a few things and that is our quarterly spreads are going to be different than they historically were. First and foremost, because we're going to have WarnerMedia for the whole year; I want to make sure you're aware of that. WarnerMedia was $0.10 accretive in the fourth quarter. I expect it to continue to be accretive throughout the year, but I will tell you that historically WarnerMedia’s first and second quarter, because their sports contracts with NCA and NBA are followed by their two strongest quarters which are third and fourth. So that will change some of the, if you will, quarter-to-quarter relationship that you traditionally have seen out of AT&T.

Secondly, we are coming off a tremendously strong fourth quarter for our mobility business. Most of you know the iPhone came out in the third quarter. We had a lot of sales in the phone in the third quarter. In the fourth quarter, for a launch quarter we had a modest number of phone sales and we had tremendous – we had service revenue growth for the second quarter in a row and we had growth in our margins. Its almost 400 basis points, a little over 350 basis points.

So we are coming off a fourth quarter that is a step function higher than we have in prior years. We would expect to have a good first quarter in our wireless business, but I want to make sure with revenue recognition accounting now in the base, the comps will be different within 2018 and also with a full year of adoption of that, we probably got close to $200 million to $300 million of commission expense amortization in the first quarter for the mobility business alone. All that’s been taking into account in our guidance. Our guidance we feel good about it and we are sticking with it. Just want you to know that the spreads are going to be a little bit different.

When you go to our revenue for the first quarter, a couple of things I’ll point out as many of you are aware. At the end of last year the dollar really strengthened for a variety of reasons. So we'll see some impact on foreign exchange, but as you know, we also have foreign exchange impacts and expense. So I don't expect the profitability aspect to be measurable, but rather just be separate parts of the revenue and expense.

Additionally I want to just give you a factual point. For the first two months of 2018 we had equipment revenue in the mobility business of about $2.4 billion. For the first two months of 2019, we’ve had equipment revenue of about $2.3 billion.

So handset units continue to – what, it developed last year in a modest level. Customers continue to hold their handsets longer. As you all know, there is an offset for that in expense. So once again, not expecting any impact on profitability and certainly don't expect any impact on our guidance. So well that’s kind of the view point for our, you know our priorities, our guidance and some updates on that guidance.

[Matthew Niknam, Deutsche Bank]

So a lot to unpack. Maybe just to follow-up on the point around paying down debt, deleveraging plan. Any updates you can provide there and any progress you can share in terms of asset sales?

[John Stephens, Chief Financial Officer]

Okay, so first and foremost we close the transaction with $180 billion worth of debt, and when you take into account the cash purchase price offered before Time Warner, net of the cash on hand, it was about $40 billion, because they did over the cycle of the period that we were waiting to close, they accumulated a significant amount of cash.

If you think about it by the end of the year, our net debt was down to $171 billion or down $9 billion. So in that first six months of a couple of weeks we paid down $9 billion. So what we are expecting, and what we are guiding to for this year is something consistent with what we just did in the last six months. And with $26 billion of free cash flow we can expect to contribute about $12 billion net debt paid down from the free cash flow in excess of dividend.

We feel very good about our ability to generate $6 billion to $8 billion of assets sales. I don't have any asset sales to announce, but I think everyone knows we are actively on the market with a collection of real-estate. We have over 50 of our historic buildings on the market, we have a headquarters building in New York that's on the market, we have a collection of equity investments that are not core to our operations that we are looking at valuing and we have a whole process in place with the team focused on that, so I don’t have any specific items to announce.

I will make one point too. We filed our proxy yesterday and if you look at the proxy and the compensation structure for the current year, you'll notice that senior executives, one of the measures of our achievement relates to achieving getting the net debt down to 2.5x, net debt to EBITDA range. So we have made that a priority, the board has made that a priority and will compensate us based on our achievement of that.

[Matthew Niknam, Deutsche Bank]

Let's start with WarnerMedia. The merger was recently upheld by the appeals court. It appears you are moving forward with the next step in the integration process. So could you comment on the recently announced reorganization at WarnerMedia? What's the purpose of the realignment and how are you managing some of the cultural differences or perceived cultural differences?

[John Stephens, Chief Financial Officer]

Yes, so realignment is really to take advantage of all these great assets that WarnerMedia has. Put it in appropriate groupings, so that the managers can really take advantage of what's there. So if you thing about Warner Brothers Studios and what a tremendous asset – you saw what a great fourth quarter it had, things like Aquaman, The Mule, A Star is Born, as well as tremendous success in television. The Kominsky Method is actually a Warner Brothers television show.

So we saw – you can just look at the fourth quarter results and see that, if you think about the Hanna-Barbera and the library of children's activity in cartoon, animation and putting Cartoon Network with it, putting the IP that they have in movies and putting TMC or Turner Movie Channel with it. Putting that into a place that we can manage those together to come up with even better and more significant, more contributing products and offerings is really important, that's what we're doing there.

If you think about putting HBO and the great quality of content it has, but also – and the significant amount of money that's spent there, but also this great inventory of content and Turner and putting those two together so that they can leverage off each other, so they can use that content together in an appropriate manner in a great manner to benefit and take advantage of both of those and to make choices about that content investment in context of the whole of the content picture, not just in a Turner or an HBO separate business.

That's what we're doing and we’ve got – you know Bob Greenblatt is going to be a great leader there. We got Kevin Reilly who does great work and is going to come out with our – I mean take the lead on our DDC program. We got a collection of HBO executives who continue to do great work for us in that area.

Then you go to our news and sports and you think about what happens with news and sports and the ability that sort of speak to live programming. Putting that together, putting that together under Jeff Zucker and allowing him to run that business and really take advantage of his expertise, as well as how those two fit together, and then of course we've got you know our revenue piece. Gearhart’s going to run that with regard to our affiliate contracts, our advertising business, bringing those relationships, bringing that efficiency.

All of this is geared towards making the assets that are there more productive, more usable across the enterprise and so we feel really good about it and feel good about the leaders that we've got in place there.

[Matthew Niknam, Deutsche Bank]

Let's shift to wireless. Trends have been improving the last couple of quarters. 4Q service revenue growth I think was around 3%, double digit EBITDA growth. As we think about 2019, how should we think about these trends? How sustainable is the kind of progress you've seen in ‘18 into ’19?

[John Stephens, Chief Financial Officer]

So we have stated publicly and our priorities of growing mobility service revenues that’s key to us. You’ve seen what we’ve done in the last two quarters with about 3% each quarter. As you mentioned, it was 2-9 in the fourth quarter. So we expect that to continue.

I will tell you – I’ll give you the best example I can. As we talk about our network and we talk about everything we are doing from a first up perspective, but what it does is benefit all our customers. So I was walking through the lobby on my way to speak here and I did a speed test, turned off my WiFi and did a speed test on my phone and I got 160 meg speed as I was walking here. So the improvements we are making and we don't have a mini-cell tower parked out in the parking lot.

What we're doing with our network improvements in this holistic approach from LTE evolving into 5GE and then going to 5G, we believe will provide all of our customers, our existing ones and all the new ones will attract from FirstNet and other places with a great experience and that's got to be the focus. It will also, quite frankly bring our cost per megabit down significantly.

When you do that and you are focused on what your customers want, whether it's bundling it with a great HBO or other product or service, we do believe we have great excitement about what's going on with our wireless business and the hopes for the future.

[Matthew Niknam, Deutsche Bank]

You talked a little bit about, on the equipment side I think it sounds like customer’s still holding on to their handsets for longer; it doesn't seem like there's been a real change on that front?

[John Stephens, Chief Financial Officer]

Yeah and I’ll just point you to the statement I made and that statement is that you know our service revenue – excuse me, our equipment revenue was $100 million higher in the first two months of 2018, than it has been in the first two months of 2019 and I think all of you know what’s happened with handset prices, they’ve only gone up. So I'll leave you to make your own decisions about the rate and so for the upgrade rates. But it think throughout 2018 we saw some really modest handset upgrade rates as customers continue to value, they understand the value of that handset and continue to utilize it.

[Matthew Niknam, Deutsche Bank]

And on the competitive front on wireless, any updates you can share in terms of what you're seeing and how is the entry of cable MVNOs over the last one to two years changed things.

[John Stephens, Chief Financial Officer]

Yeah, I mean I'll say this, in the fourth quarter we mentioned in the prepaid market for example we had a really strong cricket offering; 225,000 or so net adds. But our total prepaid net adds were much closer to breakeven if you will. It’s because our AT&T prepaid or GoPhone was competing in a marketplace where people were giving $250 phone app for $100. We did not choose to participate in those, what I would consider on an economic promotions, and so we saw some of that in the fourth quarter.

That was probably more unusual than it was common as we seen more rational competition. We've seen some bogus out there, we've had some of those. You'll see some other things, but by and large we’ve seen more reasonableness in the competition. That give us some comfort and quite frankly we do believe that the quality of the network and the ability to give customers extensive data at great quality really makes a difference.

[Matthew Niknam, Deutsche Bank]

And in terms of the more rational competitive backdrop, that’s in the postpaid market as well or is that more of a prepaid comment.

[John Stephens, Chief Financial Officer]

I would tell you it's across the board. We will see a unique offers here and there. But what you will also see is many times some of these offers are only out there for a few days or a week and more measured from that perspective.

[Matthew Niknam, Deutsche Bank]

Okay. Let's talk about Entertainment Group, very topical; lots of headlines, lots of news. So you’ve outlined a plan coming into the year to stabilize Entertainment Group EBITDA in ’19. Maybe just to start, can you help us think about how you are going to get there and are you still on track given an exit rate in 4Q that was down fairly meaningfully year-on-year?

[John Stephens, Chief Financial Officer]

So, we still believe we're on track, still very comfortable with that statement. Let me kind of go from this direction. One, Entertainment Group’s got our dial tone business in it. Everybody knows our dial tone business is you know – as people move away from dial tone phones and move to wireless, that's been a constant trend for a decade. That is getting to be a smaller and smaller piece of business. So the pressure from that change in dial phone is much less, that's one.

Two, our broadband business is growing. You’ve seen our ARPUs, you’ve seen the growth in our fiber based and our IP based broadband customers. But you’ve also seen us build out now 11 million fiber to the prem. Almost the vast majority of consumer, not everyone but virtually all our consumers, and you know that we are committed to getting that number up to about 14 million in July of this year to meet our FCC requirements; we are on track to do that. What that gives us is a whole new footprint of fiber, of speed, of broadband to sell into and it's what is giving us the really good ARPUs and getting us the good share of market.

Now I will tell you, as we’ve said before after two years we're getting into that 30% market share, after three years we get to about 50% market share. I’d say that you know in the sense of, we really started building this out in the last few years. So even what we have in place today, we still have a lot more time to sell into it, as well as the additional 3 million that we’ll put in place this year, we’ll have time to sell into that over the next few years. So we feel very good about what broadband and specifically fiber based IP products are going to do for us.

Next you saw what happened with our advertising business. Remember our advertising business, Xandr, our advertising segment, a vast majority or our Entertainment Group from our television business. You saw the fourth quarter grew 26% year-over-year. That’s the – Xandr grew 43%, about 43%. That was in some part because of a company called AppNexus that we bought. But the advertising part of the business without AppNexus grew about 26%.

That was helped by an unusual midterm election where advertising was high. But even if you pulled out all the political ads, our advertising grew about 9%. That 9% growth is going into – the vast majority is going into the Entertainment Group. So that is a – those things, smaller challenges from dial tone, improvement in broadband and improvement in advertising are big tailwinds that really help us out in the entertainment and will be there for us for a long period of time.

The next step is our over the top products. The steps that we needed to change in over the top we did in the fourth quarter. Weather it was moving away from the promotions, where we were giving DIRECTV NOW for $10 or $15 a month and moving away from those as we mentioned, we had about 0.5 million of those at the end of June last year, by the end of the year we were essentially – didn't have any of those last.

We moved through that, we took the pricing on DTV Now up to market based pricing. The base case, for almost the second half of last year was around $40 and we added in options for things like an additional stream and pay-per-view and other things. So we said this before; our ARPUs are on the over the top product and increased about $11 or $12 in the fourth quarter year-over-year. So that improvement was made mainly in the second half or mainly in the fourth quarter, well that will be with us all year.

And then on the linear product, as you know we did a normal increase in prices in January as well as we had about 4 million customers in April last year for a 24 month price lock. We moved through about 2 million of them by the end of the year where either they bought in the bigger packages or some of them left us or bought down into an over the top product. We got through that first half and we'll get through that other half this year, and that will once again provide us a benefit in margin. So when you put all of that together, we feel very good about the opportunity to get Entertainment Group margins, what I'd like to say is flattish.

With all that being said, we are laser focused on cost controls, we are laser focused on bringing the content our customers want to see, bringing that to them, and we are looking to provide an advertising growth rate that helps both of us, the content providers, as well as the customers in the sense of being able to provide an economic tailwind they gives the customers more and shares the cost with advertisers. So we feel good about what we've got in place and we are working very, very hard to achieve it.

[Matthew Niknam, Deutsche Bank]

So a couple of follow ups; I think maybe just on that point, maybe on the call I think Randall or yourself talked about seeing some of this more meaningful improvement as early as 1Q. Is that a fair assessment as it relates to EG EBITDA?

[John Stephens, Chief Financial Officer]

Yeah, I mean I think we’ve said publicly before, we expect improvement throughout the year.

[Matthew Niknam, Deutsche Bank]

Okay, okay. So I’ll take the points that you listed maybe in reverse order. Linear video, can you talk about some of the pricing actions taken plus promotional activity. How do we think about traditional linier video volumes in that context?

[John Stephens, Chief Financial Officer]

So I guess let’s say this is – you know we're positioning ourselves to provide the video, the content to customers the way they want it. I mean we're uniquely able to do that, but it's been over the top, whether it’s a wireless, whether its traditional linier, however you know, whether it’s through an SVOD, whatever way you want to call it, a direct to consumer offering, we are uniquely positioned at it. Specifically with regard to the Entertainment Group, the key is getting the customer's the content they want to watch, at a price that they can afford and are willing to pay and then helping that advertising bridge the profitability and the accessibility, making the product more attractive to consumers, but also giving ourselves and our content partners the ability to be very – to get reasonable economics on it.

Additionally we need to drive cost out of that process. The biggest cost we have it that is so to speak, the truck role and getting that installation out. We've been beta testing within our employee base and we've got a lot of employees to test with a thing called Osprey, which is a self-installed, full linear product. You don't have to roll the truck, pull out a ladder, climb the roof and put out a satellite dish. You can hook this box in to your fiber line, your broadband line and whether it's ours or somebody else's, so effectively the only truck roll is the UPS truck.

It dramatically reduces our install cost, dramatically reduces our subscriber acquisition costs, very cost friendly and we're working to get that right, that will be the next step in taking costs out that makes it more efficient and allows us to provide customers a price point that they can afford and partnering with our content guys and with our own selves to make economics work.

[Matthew Niknam, Deutsche Bank]

What's the timing on the SM clients, any update?

[John Stephens, Chief Financial Officer]

We are going to – we are testing through this year. We haven’t given a specific date. Quite frankly the focus on that is making sure we get all the kinks worked out and it works really, really well before we release it. So I’ll leave it to John Donovan and his team when they feel comfortable to announce that release date. We are actively using it in the employee base today.

[Matthew Niknam, Deutsche Bank]

Okay, OTT. You talked a little bit about DIRECTV NOW maybe moving away from some of the aggressive promotional activity that you’ve had in the past. How does this, and maybe we can – we've been watching TV as well, but how do these products fit within your sort of broader video offering?

[John Stephens, Chief Financial Officer]

Well, I think you want to have – the customers want to watch things differently, that is you know some folks. I’m a guy with six children and you know my two boys, older boys love to have the full sports package. They've got the DIRECTTV offering because they want that full experience and they love that. I have two adult daughters who love to do things on over the top or a desktop offering. If you will that's a microcosm of our customer base opportunity that we want to have everything fit in that customer base opportunity perspective.

In an example of how we’ve done this before is I think many of you know, I guess it's been five years now. We went out and bought a company called Leap, which owns the prepaid offering cricket, which is now our offering. We were always that premier, postpaid, focused on the customer base and we wanted to be able to work in another customer segment that we didn't serve very you know extensively.

Cricket has been dramatically successful, has different characteristics, different offerings different price points, but it works, and anybody who’s seen our margins last year and specifically in the fourth quarter, you can see it must be successful because we got some dramatic successfully margins in our wireless business, while we have over 10 million customers on that prepaid platform. I know it's not the same thing. I know it's not exactly lines up. But it’ll give you that thought process of what we are trying to do with our business in the direct to consumer space, the SVOD, the over the top, the linear. We want to be able to serve customers how they want to be served.

[Matthew Niknam, Deutsche Bank]

I want to jump to direct to consumer in a sec, but before we leave Entertainment I have one last question and this comes up a lot, so I'm going to ask it, because maybe on behalf of the broader group. But as we think about Entertainment Group beyond 2019, how should investors think about future revenue and margin trends, and I say this in the context of the secular pressure, the biggest bucket of revenue linear video faces. How do we just think about the longer term trajectory?

[John Stephens, Chief Financial Officer]

In the total of entertainment I would tell you that you know I would expect the challenges from dial tone to continue to be smaller. I’d expect the broadband to continue to be healthier. I'd expect advertising to continue to grow. I'd expect the success of Osprey or the, if you will the reduction in truck rolls to reduce our subscriber acquisition costs and I would expect we’ll continue to work with content partners as well as customers to come up with innovative offerings.

It will be a lot of work. I’m not suggesting any way shape or form will be easy, but there are a lot of opportunities to continue to focus on that business and use it in a way particularly on things like as you expand your broadband footprint, we've got much better take rates. But I will tell you, when you get into our direct to consumer business and our offerings around HBO, you'll see us be able to do a whole host of things across the enterprise.

[Matthew Niknam, Deutsche Bank]

Maybe we can jump to that as the next topic. I think at the Analyst Day you had talked about coming out with the direct to consumer strategy going live 4Q of this year. I guess any updates you can share there in terms of the progress or upcoming milestone you should think about.

[John Stephens, Chief Financial Officer]

Yeah, probably not going to be able to provide too many updates. The finance guidance, they get to make all those calls, now which is appropriate, and especially when we got Kevin Reilly and Bob Greenblatt there who really are you know just top notch in their profession. While I’d suggest you those are the things we’ve said before, I would expect HBO to be a really, really important piece of that direct to consumer offering, whether it's in every offer or virtually all the offers, whether it's paired with great Warner Brothers, library of content, whether it's paired with other Live TV, I'll leave all of those things to that team. It’s now been established under John Stankey to make those decisions.

I’d expect to have something by the end of the year. We’ll see how that – we’ll give them time to work on it, but I believe we've got the right people and the right assets to come up with something that will be really unique and really high quality.

[Matthew Niknam, Deutsche Bank]

Okay and one more on this, to the extent you can answer it, how do you balance exclusivity with forgone licensing revenues, as you think about content that you…

[John Stephens, Chief Financial Officer]

You know just like every other financial and strategic decision. I mean the financial decisions are – you know the mathematics of it. The strategic decisions are how do you view and your position and what would going one way or the other do for you. I will tell you, you know we are in a position where we believe that getting our content out there ,more times and on more platforms can be really beneficial to us. So we just think about it as an individual decision, but we don't always jump to one answer or another.

[Matthew Niknam, Deutsche Bank]

Let's talk about the network. 5G, really topical here, really topical in mobile world.

[John Stephens, Chief Financial Officer]

Did I mention I had a 160 meg.

[Matthew Niknam, Deutsche Bank]

You did, you did say that, yes. So any updates you can give us in terms of for AT&T 5G priorities and timing and then maybe help us think about 5G evolution and how that helps more efficiently maybe transition the message to 5G.

[John Stephens, Chief Financial Officer]

Yes so if you haven’t heard it before, I’ll try to be as succinct as I can. First that contract comes out, we win it, we are awarded 20 megahertz nationwide, just in Band 14 and the 700 megahertz spectrum. We happen to have AWS3 20 megahertz of that. Much of it – virtually nationwide, much of it not actively being used and a similar amount of WCS.

We and all along on the FirstNet strategy was if we were to get it when we were putting that spectrum up, we would put up the other two bands at the same time. They are going to climb the tower. If you are going to have the crane, if you are going to be putting up equipment, do it all at once, it will be much more efficient, that's proving out.

So we are getting a 50% increase on average nationwide in our spectral capacity over a three year period. That's a dramatic leapfrog for our business, as well as we are putting in new technologies, 4-way MIMO, 4-way carrier aggregation, 256 QAM, all these physics that basically said what was challenging about our network before was that we had all the separate spectrum bands, we had all the separate highways and now with carrier aggregation you can push them all together and use them as if they were one highway.

So instead of four lanes we have, you know four separate lanes on four separate highways, we have one highway or four lanes where you could use any of the lanes dramatically increasing speeds, dramatically increasing quality and throughput and it works for existing customers, which is really important. It’s also very cost efficient, because as you know the government is paying us $6.5 billion to build out this network.

So in doing that for us it’s an evolution to our network, because we are putting all of this initial capacity and all these different technologies in place at once. So we're getting step function above the LTE that we had and evolving it towards 5G.

At the same time when we climb a tower now, we put up equipment that while some might not call it – we are putting up equipment that is 5G enabled by software. So when the 5G software comes out and we want to turn our – this evolving network into a 5G network, we can do it from a downloader or a data card or software upgrade, we don’t have to climb it again. And so that is the process we are going through and it’s proving to be very successful.

GSW came out with a study at the end of last year giving us the best network. I consistently do what I did today and tested that because I’m walking down the hall in LTE and see what I get and tell people and so we are seeing this in real time and real quality. That is the network, that’s the power of FirstNet for our general customer base, the power, the improvement that our network team, Scott Mair and his whole team are doing a tremendous job of getting us.

While that’s been said, FirstNet opens this up to 3 million firefighters, police officers, ENTs. We've been authorized to buy over 5,000 municipalities, government subdivisions, you know police departments, fire departments to sell into. We have 450,000 customers at the end of the quarter about their on the network. They are getting dramatically high quality service relentless preemption.

We are thrilled to be part of that kind of service that fits our culture, fits who – what we like to be able to do. I will mitigate a lot of those customers were customers of AT&T before, they you know migrated over to our FirstNet service, but now we are starting to add significant numbers of FirstNet customers, so we feel good about that.

If you think about the total universe of first responders, it’s about 3 million across the country. If you think about adding a phone or tablet, a body cam, maybe a drone, some other device, you can think about that population being possible 10 million type, that's how we think about it. We don't have much market share in that group. We had a very small merger, so that will be great for us. But then you think about friends and family, and you think like you just said, a firefighter’s husband on the plan or that firefighters children, that's a tremendous growth opportunity for us.

But if you think, if I got the fire department or maybe I get the police department, maybe I can get the dispatch people inside, maybe I can get near the city to get you on a Smart Cities contract to provide parking assistance and water management and expense management. So this ability to get in the door and provide this high quality service.

In this state we’re here when Irma hit and we were the first ones and our network worked. If you are a customer what are the other providers anywhere down here during that storm, you were probably riding on our network, because we carried all their traffic and we are putting, spending a lot of money, that’s $23 billion of CapEx you know and we spent over 20 billion last year, but it works and we believe it's going to be a great future for us, that mobility business. As well as the fact that the last two quarters we've been growing that service revenue in the 2.9%, 3% range, so that's a great item for us.

[Matthew Niknam, Deutsche Bank]

And so as we think about a lot of the work you are doing with FirstNet now, then we sort of think about the transition to 5G. There's a lot of moving parts within your capital budget. There's also the FTTH rollout which I think you’ll hit 14 million by Mid-July, late July this. So how do we think about longer term capital intensity for AT&T on a go forward basis. It sounds like you know between the moving parts we mention, there's also the push for it is more virtualization. It sounds like there's a downward buy. I mean is that fair? How do we think about it beyond ’19?

[John Stephens, Chief Financial Officer]

Yeah, so I’ll say it this way. Our business solutions group has been doing a great job in a challenging business for a long time, but they've held their margins. Well, how have they done that? Well, they’ve done it because we've done network function virtualization and you know software directed networks, right, so we've been doing this.

I think we are north of, well north of 55% of our network already virtualizes, already turned into software. As I talked about when the 5G software is available and us turning our network and we’ve talked about 200 million pops in 2020 being covered with 5G, that will be a software upgrade. So all of this leads to an efficiency opportunity on a going forward basis.

Having fiber to the home built out of 14 million in the end of July here will give us another opportunity to you know manage capital appropriately; having Mexico built out with 100 million LTE pops today give us an effective capital management compared to where our run rates have been over the last few years, so all of this gives us opportunities to manage it.

I will say with regard to FirstNet, we’ll continue to invest there this year as we publicly stated and I’d expect next year, because we finished that, the first milestone six months early. We finished it in September of last year. It wasn't due until the end of this month. The benefits we are seeing is encouraging us to try to stay efficiently, effectively and efficiently ahead of the game.

We’d like to keep it going, so I’d expect it will continue to invest in FirstNet and that evolutionary change in our network this year and next. But we’ll quickly have significant coverage of FirstNet. We are already over 40% of the country, that was at the end of the last year for making great progress. So we need to -- and when I say 40%, it's both a rural and an urban coverage, the statistic.

[Matthew Niknam, Deutsche Bank]

And the 200 million pop by 2020, that is 5G or is that 5G evolution?

[John Stephens, Chief Financial Officer]

5G.

[Matthew Niknam, Deutsche Bank]

5G, okay

[Matthew Niknam, Deutsche Bank]

The beauty of this evolutionary build that the network team is leading, the manner in which they are doing it and the beauty of having this you know extensive history with softverification, that may not be a word. One of my peers tells me it’s not, but…

[Matthew Niknam, Deutsche Bank]

You just invented it?

[John Stephens, Chief Financial Officer]

Yeah, I invented it. John Donovan tells me it's not a word, but anyway, but this ability to you know take network functions and put it in place and on to a software base so you can control and improve and upgrade them. We’ve been doing this for you know well more than five years. It's starting to reap benefits for us as we've seen in our business solutions group for a number of years.

[Matthew Niknam, Deutsche Bank]

On business solutions, I mean in business wire line in particular, typically it doesn’t get a lot of air time, but maybe you can talk a little bit about the latest you are seeing there, the outlook for that segment. I know there's been a big focus on maintaining profitability, but if you can comment just broadly on the competitive backdrop, demand backdrop.

[John Stephens, Chief Financial Officer]

Yes, so I can’t give you anything new that we didn’t give at the end of the fourth quarter earnings release. We continue to get really efficient, the team continues to really focus on the customer needs and wants and helping them migrate their networks and their services to the more strategic thinking.

I think the most exciting opportunity we have is as we go through this 5G build, we are convinced that business will lead in the innovation around 5G, whether it's in automated factories, whether it's healthcare opportunities, whether it's in a variety of IoT applications, but the ability to use that 5G, that low latency, high quality to you know from computers controlled manufacturing processes to monitor assets, to do a whole host of things, that efficiency will provide, will be grabbed on to by business and we believe that'll be the first set of revenue growth and innovative applications that we'll see. So we continue to be very engaged with at 4 to 1000 customer base.

There's has been some changes, structural changes with some mergers and so forth in the industry. I wouldn’t suggest you that I’ve seen any – see change in pricing or anything because of that, somewhat expect that and we’ll wait and see.

[Matthew Niknam, Deutsche Bank]

And so if we tie this all together, it’s a lot of moving parts. You touched on the different segments, talked about capital budget, debt pay downs, how should investors think about AT&Ts ability to sustain this $26 billion in cash flow beyond ’19? I think there's a lot of questions around the stock, the dividend, the cash flow. People want to understand that this is going to be safe, there's no sort of looming risk. How do you get comfortable that this 26 billion level could be sustainable beyond ’19?

[John Stephens, Chief Financial Officer]

Yeah, so a couple of just really simple points. Last two quarters growing mobility service revenues. Mobility’s are big engine. Mobility service revenue is 3% when you are at the same time dramatically improving the quality and coverage, speed of the network, the efficiency of the network, that’s pretty engaging, that's pretty encouraging. I feel very good about that.

And if you think about the fact that once you've got the FirstNet and this integrated bill done with this evolution and the software upgrades, the efficiency, the capital of that business can be quite dramatic, especially when you are going to have 150 megs of low band spectrum in the service, much more than any of your competitors, as well as the 350 megahertz nationwide of millimeter wave that we own today in the 39 band that we got from fiber tower. So we feel good about that and feel good about the cash flow aspects of that.

Entertainment getting to flattish and improving that business only makes a stronger. Mexico continued to be the fastest growing and improving that financial, the EBITDAs, the cash flows only continues to help. And then when you think of WarnerMedia and when you think of those properties and what they've done, I'm very optimistic about the future, I'm very optimistic about the cash flow capabilities and very optimistic about the stock.

[Matthew Niknam, Deutsche Bank]

We are late, we’ll end it there.

[John Stephens, Chief Financial Officer]

Thank you.

[Matthew Niknam, Deutsche Bank]

Thanks John.

[John Stephens, Chief Financial Officer]

I appreciate it very much.

[Matthew Niknam, Deutsche Bank]

All right.