AT&T Inc (T) — Q4 2016 Earnings Call Transcript

Okay. Well, thank you, Cathy, and good afternoon, everyone. Welcome to the fourth quarter conference call. Good to have everybody with us. Joining me on the call today is Randall Stephenson, AT&T's Chairman and CEO; and John Stephens, AT&T's Chief Financial Officer. John's going to cover our operational results along with a 2017 outlook, and Randall will follow that with an overall business update and then we will follow that with Q&A. As always, our earnings material is available on the Investor Relations page of AT&T's website, and that includes our newly redesigned investor briefing which you’ll want to take a look at. You can find them at att.com/investor.relations. I need to call your attention to the Safe Harbor statement on page three, which states that some of our comments today may be forward-looking, subject to risks and uncertainties. Results may differ materially, and additional information is available in AT&T and Time Warner's SEC filings and on the Investor Relations page of each company's respective websites. We are also in the quiet period for the FCC Spectrum Auction, so we can't address any questions about spectrum today. And I will also turn your attention to page four, which is information regarding the SEC filings, specifically the recently filed form S-4. Again, that's on slide four. And now, I'll turn the call over to AT&T's CFO, John Stephens.

Thanks, Mike, and hello everyone, and thanks for being on the call today. Before I turn over to Randall for a strategic view of our company, I'd like to provide a brief overview of our fourth quarter and full-year operational results that are on slide five. Our teams executed very well in 2016. We grew revenues, and on an adjusted basis, we expanded operating margins and increased earnings as we had projected. Free cash flow came in at the high end of expectations, even with strong capital investment. On top of that, we made significant progress with our integration of DIRECTV, meeting our cost synergy targets and launching our first over-the-top video service nationwide. For the fourth quarter, consolidated revenues were down slightly due to fewer upgrade sales and some pressure on our legacy services. But customer gains and growth in video and IT-based services mostly offset these declines. At the same time, we continued to see adjusted consolidated margin expansion, even as we invested in customer growth opportunities in mobility, video, and Mexico. For the fourth quarter, our adjusted EPS was $0.66 or up nearly 5%. This includes adjustments for amortization, our annual mark-to-market pension plan adjustment, merger integration-related items, and a one-time tax gain that was excluded. During the quarter, we aligned our depreciation schedules with our updated business cases and engineering studies for certain network assets; this lowered depreciation expense on a sequential and year-over-year basis. This impact was offset by investments in strong wireless customer growth, both in the U.S. and Mexico, and the development, launch, and promotion of DIRECTV NOW. And while we expect those depreciation benefits to continue in 2017, they are expected to be offset by other non-cash items such as reductions in capitalized interest, benefit plan expense, and taxes. Earnings in the fourth quarter were impacted by revenue pressure in our legacy wireline services due to a lack of fixed business investment, as well as competition in the small business sector. Moving to cash flows, we had more than $39 billion in cash from operations for the full year. That’s a record for us. This allowed us to return substantial value to shareholders through dividends while also investing more in capital than we ever had before. Capital investment was $22.9 billion for the year, including taking advantage of pricing and financing terms from our vendors that made good business sense for us, particularly with bonus depreciations still intact. Our investments are growth-focused. For example, we're ahead of plan with our fiber to the home build. Today, we market nearly 4 million consumer customer locations. Free cash flow was strong, coming in at $3.7 billion for the quarter and nearly $17 billion for the year. That gives us a dividend payout ratio of 70% for the full year. Our net debt to adjusted EBITDA ratio came in at 2.26 times. Let's now take a look at our operations where you see a consistent story of investment and the subscriber growth it generated. Those details are on slide six. Let’s start with wireless, which had a terrific quarter. As a reminder, the company is providing supplemental information for its total U.S. wireless operations. In a traditionally very busy quarter, we had strong subscriber growth, lower postpaid churn, and record margins. EBITDA service margin was the highest ever for both the full year and the quarter. We also turned in record full-year operating income margins while investing in the growth of our smartphone subscribers with offers such as unlimited wireless with video and a buy one get one free offer. This helped grow our branded smartphone base by nearly 1.1 million when you include customer upgrades. Churn was a solid story all year and didn’t disappoint in the fourth quarter. Postpaid phone churn was a record fourth quarter low of 0.98%, and overall postpaid churn improved year-over-year, in part due to the increasing number of wireless and video bundles. Those numbers include churn pressure from our 2G network shutdown with strong sales even with the higher margins and 2G shutdown. We added 1.5 million total subscribers with more than 0.5 million postpaid net adds. Branded phone subscribers continued to grow. We added about 340,000 branded phones in the quarter. We did lose postpaid feature phones in the quarter; however, if you back out our forced turnover due to the 2G network shutdown, our postpaid phone base was essentially flat. The 2G shutdown impacted net adds by about 22 basis points of pressure to our total churn. We see it most in our reseller and connected device numbers. But the team executed well, and the network shutdown is now complete. It's a competitive market and a busy quarter, but our wireless team turned in another solid performance. It was also a big quarter for our entertainment group. The launch of DIRECTV NOW got most of the headlines. This robust over-the-top offering started strong, adding more than 200,000 paid subscribers in its first months. This gave us solid video subscriber growth in the quarter. We’re pleased with the initial results from DIRECTV NOW, but we’re going to be careful with our expectations. Customer promotions and launch pricing helped drive strong growth, and it's still early. We're learning more about the subscriber base and the platform while we work through the expected challenges that come with launching a new innovative service of this magnitude. Early subscriber demographics tend to be more urban, younger, and apartment dwellers compared to a typical linear customer. Entertainment group revenues grew with gains in video and IP services. Legacy services are less than 10% of total revenues but still represent about a 250 basis-point drag on the group’s growth rate. AdWorks continues to add scale as well. There was a $1.5 billion business in 2016 with revenues growing at double-digit rates. Fourth quarter margins were down year-over-year because we didn’t hesitate to invest in growth opportunities. That includes startup and launch costs for DIRECTV NOW and increased promotional efforts to new and existing customers across our entire product set. There were additional margin pressures as customer rate increases were less than the content cost increases. This supports our thesis for acquiring Time Warner and strengthens our position in content. In broadband, overall subscribers were relatively stable in the quarter, while our fiber buildout continues to be a great story. Our penetration of broadband is a full 9 percentage points higher in those markets compared with our non-fiber footprint. After we launch our 100% fiber network in the new market, we're seeing about half of the new broadband customers buying speeds of 100 megabits per second or higher, with 30% of the customers taking a gig. The real kicker is that the vast majority of recent sales in those markets are taking multiple services from us. So, as our fiber deployment accelerates, we’re excited about this growth opportunity. Now, let's look at business solutions on slide seven. Our business segment continues to perform well even as it feels the impact of a lagging economy and the lack of business fixed investment. Wireless growth was solid but not enough to overcome the pressures of legacy services decline. The drop off in business wireline spending was felt in all our business segments. Enterprise maintains a leading share position in a tough environment, but comparisons were impacted by the second quarter 2016 sale of some of our hosting operations. Small business is seeing the impact of competition. Strategic business services’ growth helped offset some of the decline in business solutions; it was up $230 million or 8.3% year-over-year. These services now represent 38% of wireline revenues and an annualized revenue stream of around $12 billion. Margins expanded as EBITDA grew by more than $50 million, as efficient cost management helped to offset the impact of a slow economy. We’re also seeing continued progress on our network virtualization and our software-defined network enabled services. Our virtualization plan is ahead of schedule with 34% of our network virtualized at the end of the year and NetBond continues to be well-received with 19 of the leading cloud service providers now making it available. Moving to our international operations, Mexico continues to be an investment story, while our DIRECTV Latin America operations continue to manage profitability in a very difficult environment. Mexico has been a remarkable success story. In a little more than a year, we deployed 4G LTE to 78 million people in more than 160 markets; rebranded our services and stores; and became the fastest-growing wireless company in the country. Customer growth is strong. We added 1.3 million new wireless subscribers in the fourth quarter and over 3 million customers for the full year. This strong investment obviously pressures margins, but as you can see in several parts of our business, we’re clearly willing to invest in growth. In our Latin America video business, revenues grew, operating income increased, and the business continued to generate positive free cash flow, despite the challenged environment. Let’s now review our full year results, see how they stack up with the guidance we gave you last January. That’s on slide 8. Our teams did a good job of hitting the targets we set out a year ago. Revenue growth hit our double-digit growth projection, thanks to our DIRECTV acquisition and gains in IP services video. Adjusted earnings came in the middle of our mid-single-digit EPS growth target. Adjusted operating margins actually expanded by 60 basis points as efficiencies and cost-cutting overcame investment pressure in Mexico and other growth-related expenses. Capital investment was at the high end of what we expected. We took advantage of vendor offers and bonus depreciation when it made business sense. Free cash flow came in at the high end of expectations, and we accomplished this even after making $750 million in payments to our pension and benefit plans this year. This includes $350 million in payments into our pension plan, as part of our agreement with the Department of Labor from our prior mobility funding. These payments now fulfill our obligation under that agreement a full year ahead of schedule. We have also voluntarily made another $400 million deposit to our employee medical fund. These payments make our benefit plans even stronger; in fact, we do not expect any funding this coming year. This strong cash generation allowed us to easily hit our annual dividend payout ratio in the 70s. If you adjust for the voluntary pension and benefit payment, that percentage gets to the high 60s. We also did a nice job of hitting our operational targets. Already mentioned hitting our virtualization goal on our fiber build, we also made significant progress with our 5G trials including a millimeter wave underway in Austin. Our network team accomplished all of this while they had expenses that were down year-over-year. When you look at everything we are doing with the combination of spectrum, fiber, software, and new technologies, you can see why we are confident in our ability to lead in connectivity. Now, let's take a look at our outlook for 2017 on slide nine. Our business has always had a lot of moving pieces, but with the new administration taking office, there is even more to think about this year. It's just too early to call the impact of several issues. Tax reform has been a hot button and it makes sense for a company our size with the taxes we pay, we would clearly have an opportunity to benefit from the change in tax rate. We're also staring at the potentially better regulatory environment. Positive change in both of these areas would help us deliver faster on plans to innovate and grow our business. Some are speculating that the economy might grow faster, and there will be an uptick in business fixed investment. That would definitely be good for us. We are waiting to hear the final outcome of the first of that process. We are an approved bidder and we are optimistic about our opportunity, but we don’t know the answer to that yet. We're also in the process of closing our Time Warner transaction. We remain confident that the deal will be approved later this year. These are all potentially very good things for AT&T, but these items are not included in our 2017 guidance. Our outlook is based on what we know today, and here is what you can expect from us in 2017. First, we see revenue growth in the low single digits. Growth in IP services and video is expected to offset competitive pressures, soft business investment, and declines in legacy services. We expect adjusted earnings growth to continue in the mid-single-digit range. We also expect continued consolidated operating margin expansion. CapEx is expected in the $22 billion range, similar to last year. We expect to see continued free cash flow growth with free cash flow in the $18 billion range, continuing our drive towards $20 billion. We will continue to move forward on all the operational initiatives that we have underway with our network. We will sharpen our outlook as the year unfolds, that’s a broad view of what to expect from us in 2017. With that, I'll turn it over to Randall for a strategic business update.

Okay. Thanks, John, appreciated. We have a new President and FCC Chairman, Bill. I know everybody is talking about tax and regulatory reform, and you're going to have a lot of questions for us about that. But before we get to your questions, I want to take a brief moment and offer some perspective on how AT&T is now positioned in the converging telecom media and technology space. We’ve spent the last few years in a very heavy investment cycle; it’s no secret. We’ve been getting ready for a world where mobile technology and premium video content would intersect. We’ve been convinced for a long time that this intersection was inevitable. When it happened, we wanted to have the foundation laid to make the intersection a very different experience for our customers. That foundation in our mind begins with a network that’s engineered and designed for the special requirements of video. It must have deep capacity, and it should have broad distribution. If you would look at slide 11, you can see that this is exactly the foundation we built. Our high-speed network is engineered and built for video. It's an LTE network that covers nearly 400 million people in the U.S. and Mexico; nobody else is even close. We're building out fiber to 12.5 million locations. This network is software-defined, giving us unique scalability at the lowest cost per megabyte around. It's a network with an elegant path to gigabit speeds and 5G. In terms of capacity, we're really in a unique position here. We've invested $27 billion in spectrum over the past five years. As a result, we have the premier spectrum position in the industry, 40 megahertz of fallow spectrum. As John referenced, if we're successful with our first net bid, we gain access to another 20 megahertz of prime nationwide spectrum for public safety and secondary use. As you also heard John say early, our 2G network has now been shut down. That spectrum is being reformed for future use as well. If you look at our points of distribution, they are second to none. We have 147 million mobile customers across North America; 46 million pay TV subscribers in the U.S. and Latin America; 16 million broadband subscribers, and we have an OTT platform, DIRECTV NOW, that's off to a really fast start. So that’s our foundation, and it's an indication of what’s to come. We think this is a very strong foundation. Given that, it seems only logical for us to assume an ownership position in the critical applications that will ride on this foundation, and that’s premium entertainment content. That’s exactly what we're doing with the acquisition of Time Warner. If you look at slide 12, our technology and distribution are a perfect fit for the best premium content creator and distributor on the planet. In the telecom, media, and technology space, we're building a global leader. We’ve been pursuing a strategy to become the premier integrated communications company in the world. DIRECTV really catalyzed that strategy, and you saw us execute on that last year with our new TV Everywhere application and data-free TV and DIRECTV NOW. That integrated experience helped drive our best ever fourth-quarter churn for our U.S. postpaid mobility business. Now, bringing Warner Brothers, HBO, and all the Turner networks under the AT&T umbrella will allow us to expand the strategy beyond just simple connectivity to deep integration of premium content for our customers. As we look ahead, the strategy is expanded to create the best entertainment and communications experiences in the world, and I am very convinced this foundation has been laid for us to deliver exactly that. With that, what I want to do is turn over to Mike and be glad to take your questions on the quarter or anything else you would like to talk about.

Okay. Cathy, we are ready to take the Q&As. Why don’t you queue up the first question?

Randall, you brought up two important topics in your prepared remarks: tax reform and regulatory changes that we are seeing in Washington. Maybe first, from a tax reform standpoint, what's your view on how this unfolds and what it could mean, maybe especially related to guidance for AT&T in 2017 and beyond? And then, obviously, new leadership with the FCC with Ajit Pai, just initial views on what that can mean for telecom regulation in the U.S.? Thanks.

Thank you, John. I met with the President-elect a few weeks ago, and I was quite impressed. During our meeting, it was clear that the President had a focused agenda, particularly on tax reform and regulatory reform, and we discussed these topics extensively. I feel hopeful that we could see some progress this year. We've seen the proposals from the President and Paul Ryan, both of which I believe would have the positive impact I've been discussing for some time. If we want to move beyond the current 1% to 2% growth rate, tax reform is essential. The U.S. has the highest tax rate in the developed world, which is uncompetitive. Lowering the tax rate would have a stimulating effect, and at AT&T, for example, if tax rates dropped to between 20% and 25%, we would increase our investment levels and accelerate some initiatives. My estimation of where things will end up is likely around the same as yours, but I believe that a lower corporate tax rate is more than possible; it seems likely. Some measures will need to be implemented to fund this, such as denying the deductibility of interest costs, but they are also considering immediate expensing of capital investments. Timing and permanence are key issues, and the impact of trade policies, including border adjustment taxes, remains uncertain. However, I'm optimistic that progress will be made. None of this potential change has been included in our guidance. If tax reform occurs this year, the greatest benefit for AT&T, beyond the lower tax rates, will be on the business side. An additional 1% GDP growth over the next couple of years would be very beneficial for us. If lower tax rates lead all businesses to reassess their investment strategies similarly to AT&T, it would create a positive ripple effect on our customer base, particularly with our large enterprise clients. I told some individuals last week in Europe that back in July, during a Board meeting, we were asked to consider what a recession in 2017 might look like. By December, the Board shifted focus to an optimistic scenario for the economy. The key difference during that time was the election of a President advocating for corporate tax reform, which is highly significant. Regarding regulatory matters, I can share my perspective based on Chairman Ajit Pai’s writings and statements. He has expressed criticism of the Title II regulations imposed on the industry, which we agree have gone too far. While we support the concept of net neutrality, imposing utility-style regulations on our mobile and internet businesses hinders investment. We hope Chairman Pai will address these issues that stifle capital investment and rationalize some regulatory oversights, particularly concerning privacy. In our industry, there are two layers of privacy regulation, and as we navigate the media and entertainment landscape, having clarity on privacy oversight will enhance predictability in the regulatory environment. We are optimistic about the changes Chairman Pai may bring to the industry.

Can you talk about the success of cross-selling broadband and wireless into DIRECTV homes? We haven’t really seen the pick up of broadband the way we would expect it with DIRECTV coming in. How's that been going into wireless as you discount across those businesses; has it been more existing customers that are tying things together, or are you starting to see a cross-selling effect?

I’ll tee it up, and then John, I'll let you follow up my comments. As we told you coming into the year, it was going to take time to get the cross-selling, just the plumbing and mechanics in place to be aggressive on it. We are at a place now where the last three quarters we have seen multi-product sales just continue to escalate. They are a little bit behind our plan, but the last two quarters are starting to catch up to it. Cross-selling on each sale is now getting to levels that we’re feeling more and more comfortable with. Early on, you hit the nail on the head; it has been our existing customers that are attaching the services to each other. DIRECTV customers are attaching unlimited wireless with their DIRECTV bundles, but we are seeing some migration of wireless through the DIRECTV product sets as well. I think the best place is this is manifesting itself. We were probably not the most promotional in the industry in the fourth quarter. We set a record-low churn rate in the fourth quarter. It's getting to a point where we are beginning to attach a causal effect to many of the integrated solutions and offerings including unlimited data, data-free TV, etc. We’re early in the game, the plumbing is now getting put in place, and the billing is getting refined; we’re still not completely there on it, and we’re investing a lot of money to make that happen. But early indications show we’re feeling pretty good, and this is starting to take hold.

The only thing I’d add, Phil, is if you look at the churn characteristics and then the really strong performance on the mobility side, we attribute some of that to this video bundle with the wireless property. We have about 8 million customers now on that unlimited video bundle, and we believe that that's providing true cross-product improvement. If we look at where we are going with the fiber to the premises on the 4 million homes we are selling into, the vast majority of those high-speed broadband sales are taking multiple products with us. That continues to go well; taking not only broadband but video and also wireless. The attach rates that we are having through both the video and broadband and the video product continue to improve throughout the year. The plumbing is getting better, the call centers are being trained, and we’re feeling optimistic about it. As I say, the strongest point might be the 8 million customers who quickly bundled their video and wireless offerings, and you see it just quietly in the churn results. It's really very good.

If I can follow up, how did the sales of paying DIRECTV NOW customers line up with either your wireless or fixed businesses?

What we will tell you is that we are still going through all that detail. Remember the DIRECTV NOW customer sales are much different with regard to necessity. When you're paying with a credit card online, the information you have with regard to physical location and so forth is different. What we are finding is, as we mentioned, they are more urban, they are younger, and they are apartment dwellers. They are providing us an opportunity, we believe, to penetrate a market for wireless and other products where we don’t have as much effectiveness as we do in some of the other markets. We think it's a real opportunity. So far, it is lining up as expected in that urban, multi-dwelling unit, young marketplace, which is a marketplace that we have an opportunity to grow share, similar to our established markets.

I guess, if I could too, the first one for you, Randall, just in terms of Ajit Pai’s pretty clearly stated positions on the open internet order and price regulation and even things like zero rating. Could you kind of map out a game plan that AT&T would have for taking advantage of that? What kind of appetite do you see in Silicon Valley in the content community for trying to take advantage of some of the zero rating offerings that AT&T has? And then, second, if I could for you, John, on the guide, if you could, maybe unpack the revenue growth outlook a little bit as to what the biggest moving parts are. If I annualize the depreciation benefit you got quarter-over-quarter, it looks like there is about $1.8 billion of lower depreciation incrementally in 2017 that would otherwise help earnings. I think you said it was going to go away to other non-cash items. If you could lay out what those would be, that would be great. Thanks.

Hi, David. Regarding our plans on zero rating under a Pai chairmanship, I’d say that you shouldn't expect that they will change. We were going hard, and we had worked diligently to put in place a mechanism that makes this capability available to all comers. Anyone who wants to take advantage of zero rating can do so at the lowest wholesale rate we offer; they can do the exact same thing. We put this in place in a very thoughtful fashion, consistent with many years of precedent. We are quite confident that zero rating, as we were implementing it, is fine under a Pai chairmanship or anyone else’s chairmanship. The FCC issued a letter the last week of the prior Chairman’s tenure, and that letter was critical of it. We think the letter lacks legal basis. You should expect to see us push hard and continue that effort. We're having success in the marketplace with this. This is a value proposition our customers love. 200,000 DIRECTV NOW subscribers are on it; they are taking advantage of it; it is a very elegant experience if you’re a customer watching AT&T content and it doesn't count against your data bucket. It's a big deal and it's proving advantageous for our customers. Regarding the 200,000 subscribers, it took us a year and a half to get to 200,000 subscribers on U-verse when we launched back in 2007. So, that’s the elegance of this platform and the attractiveness of it to our customers. We're excited about it.

David, regarding the additional insight into the guidance, I’ll go about it this way. On the mobility side, we've seen the penetration of mobile share value plans, unlimited plans, and these bundled plans increase dramatically over the last three years. We’re substantially through that migration. We believe that with that, we have the opportunity to not only retain customers but also have an opportunity on the revenue side to prove that out. We’re not giving specific guidance on individual items. We did see a year-over-year slowdown in handset upgrades, even in the fourth quarter, even with the launch of an iconic new device. We’re learning about what customers want. We've given them their choice; they show up with more BYOD; they choose to hold their devices longer and pay off their equipment installation plans in full. That's been good for us; it’s been good for our retention, customer accounts, churn, but it impacts revenues from equipment sales. We had gross adds that grew year-over-year, and upgrades were down significantly year-over-year. We're sharing in the new competitive market, but our customers are staying with us; churn is low.

Randall, maybe just a quick comment on the overall competitive landscape in wireless. We saw a lot of different happenings this year, and you guys are obviously doing some bundling, T-Mobile getting aggressive, at least initially that free iPhone deal back in September. Just getting a sense for how would you characterize the industry and how do you think that changes as we look into 2017? And then, maybe just one for John on the economics, as you think about U-verse subscribers moving off the U-verse platform onto DIRECTV proper, what's the sort of economic trade-off there?

Hi, Mike. The competitive landscape is really competitive. In terms of what we think it looks like this coming year, it's going to be really competitive. The fourth quarter was just a very promotional quarter. All the competitors got very, very promotional, with free devices and buy one get one free type offers. We were probably less promotional than most and maintained what was for us a record low churn rate. Our intention, as we move forward, is the same as it was the last quarter: we will compete with differentiated solutions. Integrated solutions are really important to us. We’re starting to get real traction integrating our products and solutions, and our churn rate goes down so sharply when we get more than one product bundled together, particularly as we begin to do some creative bundles like DIRECTV NOW and the TV Everywhere app on DIRECTV. The last numbers I looked at showed volumes growing like 40% month over month sequentially in terms of consumption on iPads and smartphones streaming video from DIRECTV. Free data TV is a very important variable for our customers. So, you should expect us to compete very aggressively in 2017, getting better at putting packages together for our customers.

Mike, on the U-verse versus the DIRECTV platform, I think it’s pretty straightforward. We still have some content cost differentiation and some package capabilities that are important, and we can achieve those. It also frees up data capacity on the wired network, allowing us to provide quicker broadband speeds that alleviate some of the CapEx in the back office. Third, it allows us to use one graphic user interface for product support costs and one standard face to the customer. The other opportunity is it gives us the chance to visit with the customer to maximize all the products and services we can sell to them, including not only broadband, video, but also wireless. We’re committed to providing a quality video product in either case and continue to provide an over-the-top solution that covers all bases.

Mike, I don’t want to bounce around on you but I want to follow up on the competitive environment because all I spoke of was the consumer side of the market. The lions' share of our wireless business is business side, and we are continuing to grow nicely, our wireless business to business customers. On the business side, we’re much further down the path on integrated solutions. Our success lies in getting customers from mobile devices on a secured VPN connection into the cloud using NetBond, proving powerful capabilities for our business customers. We're having incredible success bringing IoT solutions to bear along with this. We think we’re leading the industry in IoT capabilities integrated with our VPN and mobile business; it's proving to be very powerful. So, the growth of wireless from our B2B side is continuing to be quite robust, and it's a terrific business. The proof point of bringing integrated solutions to bear shows the significance it has in the market, competing on a different level than just promotions and price.

I was wondering if we could touch back on your guidance for 2017, and your guidance calls for adjusted operating margin expansion. How should we think about the trajectory of your wireless business within this context, against a backdrop of what you mentioned will likely be a continued healthy pricing environment for wireless? Should we view your $18 billion free cash flow as a stepping stone towards your longer-term targets, excluding Time Warner as well as any tax legislation changes? What are the operational puts and takes that could get you there?

Let me take a shot at this. First off, regarding margins, we’re not giving guidance on margins, but I would point out something that I think is straightforward. We have gotten 78 million 4G LTE POPs built in Mexico; we've got a 160-plus markets with distribution, brand recognition, sales opportunities, and effective markets. We expect improvements in Latin America, and the numbers demonstrate this. We believe we have momentum in our wireless business on improving margins. However, challenges arise when we decide to invest in growth. We will continue to do that diligently. It proved effective in the fourth quarter. Our team came through with great record margins. We don't want to limit guidance on margins to ensure that our business units have the ability to invest in growth and retain customers. You see what's happening in Mexico; we’ve built that significantly and are ready to operationalize it, which will improve margins. That gives us confidence in our wireless business.

Amir, to John's comment, he’s made it twice, and it bears repeating and emphasizing, and that is there is a lot going on inside this business right now. The software-defined networking implementation and a lot of automation happening in our network and IT organizations, the big cost structure and the network are actually down year-over-year. This cost curve is running. In 2017, we're forecasting this same outcome and are confident in our ability to execute to keep that cost curve moving down to support competitiveness in the marketplace. That's a key variable to consider.

With regard to your comments, we are guiding to $18 billion in free cash flow; we feel good about it. It comes from all the activities the entire team has pushed forward this year, managing working capital effectively. We will not guide beyond next year, but yes, that march towards $20 billion is being made. We're upbeat about cash generation, which is the underlying support for overall profitability. We can expand cash when the management team performs and costs decrease year-over-year. With our network virtualization uptick you see, we have momentum. This all adds credibility to our growth projections and reinforces the profitability of our business.

John, I know we've talked a lot about taxes already, but could you just give us a sense of what your cash tax rate is likely to be relative to your book tax rate this year, assuming no changes? And then, Randall, we talked about the economy a couple of times, but you usually give a broader view of what you're hearing from CIOs and CEOs and others in terms of the environment. I thought there were comments in the business solutions about some pressure in some of the legacy products. Is there any change there or is that sort of business as usual?

So, I'll take a stab at the cash tax question. We’re not going to give specific guidance on cash taxes; they’re included in our overall cash guidance. The depreciation rules, the bonus depreciation rules provide advantages for companies that invest, which we do. No significant changes are anticipated in our assumptions. We're discussing a $22 billion CapEx range, which is similar to last year. We are diligent about managing cash from the tax side, nothing changes that. I’ll leave it at that and hand it off to Randall.

On the economy, Simon, we have assumed for 2017 a steady-as-she-goes growth rate or GDP growth rate, actually below 2% is what we have built into our plan with these numbers you see. However, my sentiment is not unique among the CEO community. I feel optimistic looking forward, especially if we get meaningful tax reform and line of sight to it. That should change how we think about investing. Others share this sentiment. As we see tax reform on the horizon, investment behavior from businesses will shift, which is a key driver of economic growth. Investment growth leads to hiring and subsequently more spending. I'm optimistic we could end this year positively, exceeding our current plans should tax reform be enacted. This goes well beyond simply protecting our environments; there is untold potential in what improving regulations can mean for capital investments. Thus, we plan cautiously; our guidance remains based on a steady outlook but recognize potential upside. We expect good things ahead with tax reform.

I am actually just going to follow up on that because Randall said you’d find opportunities to invest more if there was tax reform. It sounds like part of that is simply supporting your customers who will probably have more investment needs and more growth. Are there certain business cases that you guys have been looking at where if there is tax reform, all of a sudden the math changes a lot? For example, instead of stopping at 12.5 million fiber homes, you would go much beyond that. I am just trying to think about opportunities that are unique to your business where you might accelerate capital if the reforms go the way you hope they would.

So, you touched on one: would we go beyond 12.5 million? I don’t know, but would we accelerate the 12.5? I think we’d look to accelerate that. We're deploying 40 megahertz of spectrum; would we look to bring forward some wireless build and bring our speeds up considerably? If we win the first net bid, we would want to deploy first net quickly, especially with tax reform. There’s a long list of things that could improve business cases, or we could accelerate our build requirements when the math proves out.

This is exactly what happened this year with our fiber to the premises build. The team hit this year's goal and CapEx budget prior to year-end, then came back to say we could keep going and get more done efficiently and effectively, but we need more funds. We did just that with bonus depreciation in place this year, which justified accelerating the case for expanding our fiber build.

With that, I believe that will be the last question. I appreciate everybody participating in this call. We're feeling really good about what we have built here. Looking forward to bringing Time Warner into the fold and doing some unique things with media and entertainment; we’re feeling excited about the future. Thank you for your attention, and we will talk to you next time.

Thanks everybody, and on your way home tonight, please remember no text is worth a life. It can wait. Thanks and take care.