AT&T Inc (T) — Q4 2017 Earnings Call Transcript

Thank you, Tony. Good afternoon everyone and welcome to our fourth-quarter conference call. As Tony said, I'm Mike Viola, Head of Investor Relations for AT&T. Joining me on the call today is Randall Stephenson, AT&T's Chairman and CEO; and John Stephens, AT&T's Chief Financial Officer. Randall is going to provide an overall business update and cover our 2018 business initiatives and John is going to cover results along with the 2018 outlook, and then will follow with our normal Q&A. As always, our earnings materials are available on the Investor Relations page of the AT&T website. It includes our news release, our 8-K, investor briefing, and a variety of associated schedules. Before I begin, I need to call your attention to our Safe Harbor statement. It says that some of our comments today may be forward-looking. As such, they're going to be subject to risks, uncertainties, and results may differ materially. Additional information is available on the Investor Relations website. And so now, I'd like to turn the call over to AT&T's Chairman and CEO, Randall Stephenson.

Okay, thanks, Mike. What we'll do is start on page four of the deck. And I just want to take a moment and reflect on 2017 because by any measure, 2017 was a remarkable year. It's remarkable for our country, for our industry where we operate, and for AT&T. And it's been a long time since we've seen so many major public policy achievements compressed into a single year like we saw last year. We're calling these achievements because the combined impact from these is going to be growth. It's going to be growth in U.S. investment and jobs and in wages. All of this began early in 2017, as regulations across all industries were being rationalized. In our industry specifically, the FCC returned us to a light-touch regulation of the Internet. This was the purchase that up until 2015 allowed the Internet to flourish in the U.S. tech sector to lead the world in innovation. We obviously believe this is a step in the right direction, but this regulatory pendulum is going to keep swinging back-and-forth unless Congress steps forward and writes new laws to govern all Internet companies and to protect the consumer. We believe that we need clarity. We need long-term predictability on the rules of the Internet and on customer privacy. So, we're calling for an Internet Bill of Rights and you can expect us to take a leadership role on this as the discussion progresses. The biggest development that came out of Washington last year was around tax reform. Our public policymakers pulled the greatest lever they had available to them to stimulate capital investment, job creation, and wage growth. That lever was given to U.S. companies: a competitive tax system, one that levels the playing field with the rest of the world. We're in the early stages of the process, but you've seen it. Company after company is already announcing increased investment, hiring, wage increases, and employee bonuses, and we were first out of the gate. We announced bonuses for more than 200,000 front-line employees and a voluntary medical plan contribution for a total of $1 billion. We also increased our 2018 capital expenditures by another $1 billion. While public policy stole a lot of the spotlight, we made significant progress on several strategic initiatives last year. The most important is FirstNet, winning that FirstNet bid. This is going to prove to be the foundation for taking wireless network performance to a completely new level. We're building a nationwide network with the latest technology. It is designed and hardened for America's first responders and will be our foundation for broad 5G deployment. We're well underway with the build, including new sites in unserved or underserved rural parts of the country. We plan to deploy 40 megahertz of fallow spectrum that we've accumulated over the last four years along with the spectrum from FirstNet. We'll also be deploying the millimeter-wave spectrum from our FiberTower purchase, and this is going to provide us with a quantum leap in both capacity and performance. Moving to Mexico, I'm really pleased with how the team is executing. They're doing exceptionally well. We added 3 million customers in 2017. We also made great progress leading the industry in terms of software-defined networking; 55% of our network is now virtualized. As a result, you're seeing our networking and IT cost structure fall significantly. We also made progress in moving our base of high-value customers into multiproduct bundles, saving them money, driving down churn, and earning more of their overall spend. You can see the fruits of this strategy in our strong wireless performance this quarter and DIRECTV NOW's terrific first year in the market. Our fiber build continues to be strong; we now reach over 7 million customer locations and expect to double that in the next 18 months. That's a look at 2017. Now, what I want to do is move forward to 2018 and talk about our priorities this year, which is on slide five. It’s no surprise that our top priority for 2018 is closing our deal to acquire Time Warner. We were obviously surprised when the government decided to try and block the merger because it is a classic vertical merger between two companies that don't even compete with one another. With 50 years of legal precedent, it's the type of business combination that the government has consistently approved with appropriate conditions. We remain open to finding some reasonable solutions to address the government's concerns, but we expect this case will ultimately be litigated in court. The trial date is set to begin on March 19, and we remain very confident that we'll complete this merger. We're also laser-focused in 2018 on building the world's premier gigabit network. Again, FirstNet, combined with our fiber and 5G deployment, is giving us a powerful platform to accelerate our move into a gigabit world. I have to tell you, I love our positioning here. We expect to be the first U.S. company to launch mobile 5G service by the end of this year, and our fixed 5G trials are going very well. We're learning a lot and gaining great insights into making this product a very strong commercial offering. Last week, the FCC issued an order that cleared the way for us to move forward with our acquisition of FiberTower and the vast majority of its millimeter-wave spectrum licenses, which are required for 5G. From FiberTower, we will obtain an average of nearly 360 megahertz of nationwide spectrum. Millimeter-wave is critical for our 5G strategy and we'll be putting this spectrum to work later this year. In video, we plan to launch our next-generation platform this spring. This platform will add cloud DVR capabilities, provide us with a third stream to DIRECTV NOW, and offer further enhancements to the user interface. I've been using this platform recently, and I have to tell you, I think our customers are really going to appreciate it. The experience is very good. Before year-end, we plan to launch the next-gen product in a home-centric configuration with a very thin hardware client. Think of it as a very small, inexpensive streaming device plugged into your TV, allowing connections to any broadband service. It will feature a voice-controlled user interface with an integrated search feature that allows you to search across all streaming video services you subscribe to, whether it be DIRECTV NOW, Netflix, Amazon, Hulu, or even YouTube. It will also provide a premium live video experience in your home, delivering the flexibility and ease-of-use typical of an OTT service. We're ramping up our advertising and analytics business, led by Brian Lesser, who joined us last quarter. I believe he's one of the best minds in ad tech. We're excited about this opportunity because advertisers have made it clear they are looking for a trusted option in premium video advertising, seeking an alternative to the current digital ad duopoly that can provide scale and deliver transparent, brand-safe results. Once Time Warner closes, we'll be well-positioned to be that alternative. We are confident that the entire industry—advertisers, publishers, and consumers—are ready for this alternative. We believe that with Time Warner, we will have the right data, content, and talent to build an automated advertising platform that can transform premium video and TV advertising. In 2018, we will also focus further on Mexico. Our business there is continuing to scale and move towards profitability. We have great momentum in the market, having nearly doubled our subscriber base in the last two-plus years, and our LTE build in Mexico is almost complete. Finally, our industry-leading cost structure is proving to be a significant competitive advantage. We remain dedicated to delivering the lowest cost per megabyte in the world and still have ample room for growth. That's a synopsis of what we'll be focused on in 2018. I'm going to hand it off to John to give you a report on the fourth quarter and our outlook for 2018. So, John?

Thanks, Randall, and thanks for joining us on the call. Let me begin with our financial summary, which is on slide seven. The positive impact of tax reform led to significant changes in both our reported fourth quarter and annual results. This impacted our balance sheet and fourth-quarter earnings. It also informed some important decisions affecting our fourth-quarter cash flows, which we will discuss as we review the results. Revenues were essentially flat year-over-year as a strong quarter in wireless equipment and our international operations largely offset declines in legacy wireless and video services. Adjusted consolidated operating margins in the quarter decreased year-over-year due to substantial increases in wireless sales and expenses from our Entertainment group, countered by solid growth in our international operations. For the full year, operating margins increased by 40 basis points. In the fourth quarter, our adjusted EPS was $0.78, including a $0.13 positive effect from tax reform. Essentially, our ability to fully expense capital spending in the fourth quarter generated most of this benefit. Remember, tax reform expensing provisions were effective retroactively to September 27, 2017. We also made a number of other decisions with regard to tax reform, including $200 million in bonus payments to our frontline employees, an $800 million funding of our employee and retiree medical trust, nearly $100 million funding of our AT&T charitable foundation, and several other steps. Adjustments for the fourth quarter include these special items: a $20 billion gain from our preliminary estimate of net deferred tax liability reductions generated by the new tax law, asset write-offs due to our expanding consumer fiber footprint, and additional storm and natural disaster impacts, primarily related to Puerto Rico. Other adjustments encompass our annual mark-to-market pension plan re-measurement, merger, integration costs amortization, and some other adjustments. Free cash flow was up for the quarter and totaled $17.6 billion for the year, even after $1 billion of benefit payments made in connection with tax reform. CapEx for the full year also came in on target at just under $22 billion. Now, let's examine our operations, beginning with mobility, where the team achieved outstanding customer growth. Details are on slide eight. AT&T's domestic mobility operations are divided into the Business Solutions and Customer Wireless segments. For comparison purposes, the company provides supplemental information for its total U.S. Wireless operations, which I'll discuss today. We added 329,000 postpaid phone customers in the quarter, a significant increase year-over-year and sequentially. Net additions of postpaid smartphones were even higher at 400,000. Overall, we saw over 2.7 million new subscribers with gains in postpaid, prepaid, and connected devices. Looking at the full year, we added over 2 million of our most valuable branded smartphone subscribers to our base. A significant factor for this success is reduced churn. Postpaid phone churn has been at record levels, dropping to 0.89% in the quarter. Revenues were up this quarter due to strong smartphone sales, which also had an impact on margins. We recorded a year-over-year increase of 700,000 smartphone gross adds and upgrades in the quarter as customers continued returning to us for new phones. Our BOGO offer was particularly successful and contributed to this volume increase. This growth influenced margins; however, with record low postpaid phone churn, these customers will yield financial benefits for years to come. With these and many other efforts, we anticipate service revenues will improve throughout the coming year, turning positive for the year. We take a disciplined approach in building our customer base. We'll continue to focus on cost management while seeking efficient opportunities to reinvest in our customers and sustain our growth. Now, let's take a look at our Entertainment Group results. Total video customers, IP broadband connections, and bundles have all shown growth. DIRECTV NOW experienced tremendous customer growth in its first year of operation. The 368,000 net adds in the fourth quarter have brought us nearly 1.2 million customers, and we believe the best is yet to come. As Randall mentioned, we're nearing the launch of our second-generation platform. We're excited about the improved customer experience it will provide and the new opportunities that will accompany it. These enhancements will include cloud-based DVR, an additional video stream to our two current offerings, and a more robust video-on-demand experience. You're also seeing us turn the corner in our Broadband business; IP broadband gains remain strong even as the conversion of DSL customers to IP slows, resulting in total consumer DSL customers dropping below 1 million. We added nearly 600,000 IP broadband customers during 2017. The broadband penetration rate in areas where we have marketed our fiber service for over 24 months is approaching 50%. Last year, we doubled the number of IP broadband subscribers in our fiber footprint. A significant factor contributing to our subscriber success is the integrated offers we provide. We continue to increase our number of bundled customers. In the fourth quarter, the number of households that utilized both video and wireless services increased by 160,000, which amounts to about 700,000 additional wireless customers bundling with video. This growth is significant as the churn rate for DIRECTV customers who also have our wireless service is nearly half that of standalone satellite subscribers. Simultaneously, we continue navigating the ongoing transition in the pay-TV industry, which pressures revenues and margins. We will manage this transition as we've managed others over the years, but we expect the pressure to persist throughout 2018. Now, let’s discuss the Business Solutions results on slide nine. Wireless drove growth in our Business Solutions segment, and we also saw sequential improvements in our Wireline revenue trends. Wireless revenues were up 6% driven by strong smartphone sales, while service revenues were essentially flat. Wireline revenues decreased 3.5% year-over-year, which is an improvement over previous quarters and nearly a 1% increase sequentially. We now have 1.8 million business customer locations connected with fiber, which means more sales opportunities for the team. We also expect increased business activity following the passage of tax reform. Margins were pressured by increased smartphone sales, but Wireline margins rose significantly to 37.8%, registering approximately a 270 basis point increase as we continue to drive hard on cost-management initiatives. A substantial portion of these cost savings stems from our movement toward a virtualized network; more than 55% of our network functions were virtualized by the end of 2017. There remains potential for further improvement as we work towards virtualizing 75% of these functions by 2020. Our International business enjoyed another strong quarter, with the results outlined on slide nine. Revenues surged by 16% due to strong subscriber growth and revenue gains in both DIRECTV Latin America and Mexico. EBITDA also saw substantial growth, driven by strong performance in Latin America and enhancements in Mexico. Subscriber growth remains robust in Mexico, with 1.3 million net adds in the quarter pushing our total subscriber base to over 15 million; full-year growth exceeded 3 million. Our Latin American satellite operations added 139,000 customers, primarily due to growth in their prepaid products. This business continues to be profitable and generates positive free cash flow. Our business units had an exceptional fourth quarter, and we've effectively managed our balance sheet throughout this period, as highlighted on slide 10. We take pride in our disciplined management of our balance sheet. We consider it a competitive advantage and a generator of value for our shareholders. It is the foundation on which our company is built and provides the strength and flexibility necessary for investment and growth. This foundation became even stronger in 2017 due to tax reforms and prudent measures we undertook. First, we de-risked our existing debt portfolio by extending maturities, focusing primarily on ten years or more, in preparation for closing the Time Warner deal. We accomplished this cost effectively without significantly increasing our interest rates. Our average maturity is now at 14.5 years with a weighted average interest rate of 4.4%. We also diversified our portfolio, with about a quarter of our debt denominated in foreign currency, which provides substantial liquidity to meet business demands and deliver solid long-term returns to our shareholders. Second, our robust cash flow generation allowed us to invest in growth, improve leverage ratios, and enhance dividend coverage with a payout ratio of 68% in 2017. With the passage of tax reform, we noted a substantial reduction of $20 billion in liabilities and an increase in shareholder equity by a comparable amount. This reform significantly improves our net debt to equity ratios and enhances free cash flow and dividend coverage in the coming years. We are also in an excellent position with our pension plan; our pension plan assets returned over 14% for the year, and we are nearly fully funded, with no significant cash contributions required for at least five years. This remains true, even with a historically low discount rate. Applying the average five-year discount rate would essentially ensure the plan is fully funded, while a ten-year rate would indicate that it is actually overfunded. Given our strong position, we plan to increase our investment allocation in fixed income assets and lower our expected return on pension assets from 7.75% to 7%. These measures will have a profound impact on our financial position, and I expect rating agencies will take notice and begin updating their models. This has significantly altered our perspective on capital budgeting, improving returns across a variety of products. As previously indicated, we plan to increase our 2018 capital investments by $1 billion due to tax reform. Even with this increase, we anticipate substantial free cash flow growth in 2018 and beyond, with our dividend payout ratio improving into the high 50% range this year. We are committed to deleveraging once the Time Warner deal closes, with plans to return to historic leverage levels by the end of 2022, if not earlier. Our management team has diligently worked to establish and maintain a strong balance sheet. However, we recognize that the work is never done. 2018 will bring tax reform, FirstNet, and a new accounting standard that will impact our financial results. Let's discuss 2018 on slide 11. First, let's address the immediate impacts of changes in the tax law. Tax reform provides immediate benefits, allowing us to allocate an additional $1 billion for incremental investments in 2018, primarily targeted toward fiber deployment. The lower tax rate is projected to enhance operating cash flow by approximately $3 billion this year compared to pre-tax reform expectations. While we are confident that as other businesses increase investments, this will likely uplift demand for our services, we cannot pinpoint exactly when this will happen; hence, we have not assumed a significant GDP increase in our guidance. Nevertheless, we remain optimistic and will monitor this closely. We expect our effective tax rate for 2018 to be in the 23% range. The full year's impact of tax reform is anticipated to yield about $0.45 of EPS health. FirstNet will also influence our financials in 2018. We plan to move swiftly with the build-out, but the timing of FirstNet reimbursements may affect our 2018 free cash flow. For instance, we might incur FirstNet-related expenses this year that won't be reimbursed until 2019. We anticipate net FirstNet reimbursements to offset capital and operating expenditures related to these projects, so there will be no revenue impact. We estimate that 80% of the reimbursements will cover capital expenditures, while 20% will offset operating expenses. We expect to expense sustainability payments as they are paid, net of any recoveries for FirstNet-approved projects. We predict a $0.05 per share expense impact from sustainability payments and other operating expenses from our FirstNet operations build-out. Additionally, we will see a $0.05 per share increase in interest expense for 2018 due to placing our AWS and WCS spectrum into service and no longer capitalizing the carrying costs related to owning the spectrum. Expect a $0.04 a share expense increase due to a lower expected return on pension assets, as previously mentioned. However, we will see a $0.06 per share positive impact from lower depreciation expenses generated by the copper abandonment we recorded in the fourth quarter of 2017. The new revenue recognition accounting standard will also positively impact our near-term financials. Various items will be influenced, but among these, the most notable are the deferrals of commission expenses, expected to increase profits in 2018; re-characterization of some service to equipment revenues for equipment provided with multi-year service contracts, which will affect service revenues but not total revenues or profitability materially; and netting of universal service and other regulatory fees against related expenses, which will significantly reduce both revenues and expenses but have minimal effect on profits. Our results will differ from others due to our extensive Next program and our adoption of deferred installment accounting in conjunction with our 2015 acquisition of DIRECTV. Expect more detailed disclosures soon. The impacts of tax reform, FirstNet, copper plan abandonment, and rev rack are reflected in our 2018 outlook, and the details can be found on slide 12. On a standalone basis, excluding Time Warner, we expect adjusted EPS in the $3.50 range, including previously discussed items. We also anticipate organic growth in the low single digits, driven by ongoing profitability improvements in Mexico, with wireless service revenues expected to grow in the second half of the year, offsets from legacy service transformations, and benefits from virtualization and automation. Our free cash flow growth will be strong; we're anticipating approximately $21 billion of free cash flow for the full year, aligning closely with expected adjusted net income. We foresee capital spending nearing $25 billion, or about $23 billion net of anticipated FirstNet reimbursements, which includes the $1 billion for incremental investment due to tax reform. In summary, we concluded the year on a high note thanks to customer growth, tax reform, and FirstNet. We are very optimistic about the year ahead. With that, Mike, I will turn it back to you for Q&A.

Thanks, John. Tony, we are ready for the questions.

John, that was a big nutshell. So, if I could ask one for John and one for Randall. First, John, have you talked to the rating agencies about what the appropriate long-term leverage target looks like given the lower tax rate? And then, Randall, sort of following up on things that John said, and I know it's early, but what have you seen from customers in terms of investing in their telecom services post tax reform? Probably more conversation so far than orders. But how can that impact AT&T trends going forward? Thanks.

So, Phil, thanks for that. And one clarification, Mike is here with me, I want to make sure I said this right. We expect to get to more traditional historic levels by 2022 or earlier. And I apologize if I said 2020. The correct number is 2022, which is consistent with the advice we've been giving every time we talk about the deal. Phil, we have been in discussions with the rating agencies, but we haven't come to any conclusions. We are still in a give and take in that process and will continue that. I will—so I expect that this will impact their models. I also understand that they are waiting for us to close the Time Warner deal to update their models with the new Time Warner information. So, no answer yet, working on it, and we look forward to continuing those conversations.

Thanks.

Yes, Phil, on the capital spending and investment specifically in telecom, we track with gross fixed investment. If you look at business, gross fixed investment anywhere in the world, our services tend to align with that. The fourth quarter was a number we hadn't seen in quite some time, gross fixed investment; I think it was over 6%. It was a very strong number. Around here, we share high-fives when we see those kind of numbers, because that’s usually an indication of general spending; because when businesses spend more capital, they generally hire more people. When they hire more people, they spend even more capital. So, specifically, you'll see businesses adding people, and those people will require computers, machinery, broadband connections, mobile services, and data connectivity. That is a metric we watch closely. The anecdotal evidence—although it’s purely anecdotal aside from gross fixed investment—is strong. People are talking about investing more. Companies are consistently announcing plans to invest more capital as a result of tax reform, and that is our expectation. History is a reliable indicator here, and when you see Apple discussing investing in more facilities and manufacturing in the U.S., for a company like AT&T and anyone in our sector, that’s positive. We have pretty good expectations that our enterprise side could catch some tailwinds. We didn’t build that into our guidance, because it’s just too early at the moment. But I’m very optimistic that we'll overachieve on most economic assessments for 2018. You're finally starting to see some economists bravely articulate 2.7% growth; I think that is very low. If we do not see a three-hand GDP growth this year, I will be both sorely disappointed and surprised.

Correct. Thanks, Randall.

Thank you very much and good afternoon, Randall, John, and Mike.

Hi, Amir.

Hey, Amir.

Hey, Amir.

I wanted to touch base a bit on the video industry at this point. How do you think about the status of the linear video market? It does seem as though one of your competitors is taking a more selective or focused approach regarding their subscribers. How should we think about your go-to-market strategy for that business going forward? And then, John, you had mentioned ongoing pressures through this transition. How do you view the margin profile of that business moving ahead? Clearly, you folks are investing in some of these next-generation products. Given that those are still sub-scale but growing, how should we assess the trajectory of returns for that business?

Okay, Amir, I’ll take the first part regarding the video industry. Since we acquired DIRECTV, we've anticipated that traditional linear video would exhibit a downward trajectory due to the nature of the sector. OTT and the capability to consume video on mobile devices has been our expectation, and we wanted to lead in facilitating that type of premium video consumption on those platforms. We have held an objective to ensure that we can navigate this transition. We've dealt with technological and business model shifts like this before: moving from fixed phone service to mobile, transitioning private line services for businesses to VPN, and migrating from feature phones to smartphones—all are transitions we’ve successfully managed. Regarding video, we are establishing a product that we believe will provide growth potential in our video platform over the next few years, specifically in DIRECTV NOW. Therefore, as traditional linear declines, we are optimistic that DIRECTV NOW will compensate for that loss, and moreover, our traditional linear video will be repurposed. You heard me discuss the launch of our next-gen platform that is home-centric with a very thin client. This format will effectively lower the cost structure for traditional video service, thus preserving margins while simultaneously growing in over-the-top video services. Overall, we remain positive about video. Analytically speaking, our customers are consuming more value now while consuming it across multiple devices, rather than in a singular home environment. The growth we're experiencing in video reflects that Netflix and other platforms are part of their experience, and that’s where we need to be. We have a very optimistic outlook here.

With regards to the legacy or linear TV product, consider this: Firstly, our key strategy is bundling. When we bundle wireless with our offerings, we see a noticeable improvement. We previously noted that we acquired an additional 170,000 homes this quarter bundled with our wireless product, bringing in approximately 700,000 wireless customers bundled with video. This bundling creates profit margins due to the prevalence of multiproduct accounts. Our analysis indicates that the churn rate for our DIRECTV customers utilizing wireless service is nearly half of that of standalone satellite subscriptions. Moreover, we anticipate that whatever video losses we incur will be compensated and even surpassed by the expansion of DIRECTV NOW. I wanted to emphasize that we remain in a state of transformation in the pay-TV sector, and while this shift will persist into 2018, we're confident in our plans to manage it effectively.

Excellent. Thank you very much for the incremental color.

Sure.

Hi, this is Batya Levi for John. I have two questions. One, just following up on the bundling strategy, can you speak to how bundling has influenced subscriber trends on both the video and voice phone sides? Can we expect that to carry into 2018? How will you balance sub-growth with profitability? Do you expect wireless margins, which were somewhat stagnant this year, to improve? And similarly, the entertainment profitability has been declining; can we anticipate a stabilization there? Thanks.

Yes, so Batya, it’s great to hear from you. Regarding bundling, we cannot provide an exact number of basis points; however, if you focus on postpaid phone, where most of our value-driven bundling exists, we are achieving record levels of low churn, which we largely attribute to our bundling strategy. We are witnessing significant success, as evidenced by a year-over-year increase of 700,000 in smartphone gross adds and upgrades, with many customers continuing to return for new phones. This trend generates both substantial subscriber gains this quarter and contributes to cost and margin pressures. Yet, we remain optimistic about the overall profitability when viewed holistically, particularly as low churn at these levels suggests that customers are likely to stay for more extended periods, supporting significant lifetime value. Our expectations regarding video include similar trends; while precise measurements can be challenging, we continue to observe lowered churn rates in our bundled offerings, particularly with fiber services mitigating churn significantly. With the continuous improvement in our cost structure through automation, we aim to maintain margins across various lines of business. Our path is clear: pursue lower costs directly tied to customer satisfaction and investment in hardware, all while accounting for traditional revenue base reductions, we feel confident in sustaining overall profitability.

Batya, the key takeaway is that no other factor drives margins in our industry like low churn. Reducing churn is primarily driven by two critical factors: customer satisfaction and multifaceted service offerings. That’s why we concentrate on both areas relentlessly.

Okay. Thank you.

Thank you, Batya. We look forward to your participation on future calls as well.

Did you fire John?

Hey guys. Thanks for taking the questions.

Hi, David.

I appreciate it. It seems I'm that guy once more this quarter. So, John, analyzing the overall series of EPS adjustments related to stripping out the negatives and factoring back in the positives, it appears to suggest low single-digit EPS growth going from $2.98 to about $3.03 in comparison to the $2.92 of this year. It seems we saw around $1 billion of EBITDA pressure in 2017. Can you shed some light on how that EBITDA impacts the non-EBITDA items affecting your EPS number into 2018? More specifically, last quarter, I asked about the enterprise flattening out, and you mentioned that there were some green shoots appearing in the pricing environment. The stable performance of enterprise Wireline over the year is encouraging. With the Level 3 merger essentially consolidating the market, is a stable landscape the new outlook, or are we beginning to see a corner turned?

Yes, allow me to address the enterprise business first. We did not build any assumptions for a dramatic shift in GDP into our guidance. There have been some management actions taken that led to improvements in our trends on legacy revenues alongside continued positive growth in our strategic services. If that trajectory continues and we can apply concerted pressure on it throughout the year, we anticipate potential successes beyond our guidance. Therefore, we remain hopeful and are paying attention to these developments while ensuring we approach this with caution. Coming to your inquiry about 2018 and operational side improvements, we remain optimistic about Mexico’s performance, and we will see steady improvement in Eastern Latin America. We will continue to experience pressure on legacy revenues, such as wireline voice services, and we face an upward movement toward wireless revenue growth as we exceed our first year of unlimited services. It’s important to account for the depreciation factors pressing down on our EBITDA numbers, as well as interest expenses stemming from the FirstNet-related actions, highlighted in the $0.08 EPS impact earlier. While we are not providing guidance on margins or EBITDA levels, I want to ensure you have clear insight into all aspects affecting your inquiries.

Great. Thanks, John. Just to clarify, is the EBITDA trajectory keeping pace or improving overall and providing positive support for the EPS narrative?

Yes, I can assure you that strong business performance is paramount to overcoming the pressures and achieving mid-single-digit or a low single-digit EPS growth overall. Strong performance is a must, particularly in the face of the depreciation and interest expenses that can impact growth, which have been noted.

I lean toward an optimistic view of business spending, as demonstrated in my response to Phil's question. Reviewing the fourth quarter trends, we witnessed growth across all business segments—not limited to any single area, but rather observed across multinational firms down to small enterprises. Improvement signals across various sectors suggest a more robust business climate, as 2018 unfolds.

From your perspective, Randall, that sounds great. Thank you.

Great. Thanks. Good evening. Randall, you touched a bit on 5G, and you've issued a couple of press releases this year. It’s clearly been a significant topic over the last few days. Could you discuss where you stand currently, what you've gleaned from trials thus far, and what to anticipate from AT&T in terms of 5G this year? What are the use cases that have you most excited? Also, John, circling back to ASC 606, the $0.10 to $0.15 from that perspective—Verizon mentioned that by 2020, the impact would primarily neutralize. Is that a similar situation for you?

Yes, regarding ASC 606, yes, over time it will balance out as the contracts under consideration mature and we are monitored. To clarify, unlike many others, we did not adopt deferred installment accounting these changes, which had been commonplace in the cable industry; we initiated this with the DIRECTV acquisition. Therefore, it may lead some to perceive our results as different than expected.

On the subject of 5G, Simon, I'm most enthusiastic about the opportunity to establish an almost ubiquitous broadband footprint that could potentially replace fixed lines. Our network will have the capacity and performance necessary to ensure full gigabit throughput capability necessary for that transition. Therefore, I am energized by the opportunity to bring about possible change over the next few years through a comprehensive national infrastructure for broadband, catering to both businesses and consumers alike. Concerning mobile applications, we will deploy mobile solutions in 12 markets in 2018, but here’s the reality: The major barrier to the rapid execution of 5G is the availability of handsets. Our efforts focus on equipment manufacturing, boosting supply chains, and securing the sell-side acquisition; however, widespread market penetration of phones remains a challenge. This will inevitably slow down our efforts; hence, we will likely roll out these mobile solutions incrementally. The anticipated applications include autonomous vehicles and we recognize that such use cases rely heavily on 5G technology. Low latency is critical when it comes to these technologies. While speed is essential, low latency is potentially more important. Overall, we expect to distribute cloud capabilities into our infrastructure via our network’s numerous access points, ultimately achieving lower latency than others in the field. There will be competitive dynamics and a race to reach this stage, but we feel confident in our progress toward integrating these new technologies.

Great. Thank you very much.

Thanks. Following up on the Entertainment Group, you exited 4Q with solid video trends. Do you still believe you can expand the video pie and potentially outpace the traditional pay-TV environment? I believe you've previously provided an update on the mix of DIRECTV NOW subscribers. Could you share the composition of cord cutters and how they are contributing? That would be helpful.

Yes, we believe we will continue to grow our video customers while expecting DIRECTV NOW to outpace our linear customer counts in terms of net additions. We anticipate this trajectory will persist. In terms of the mix of subscribers, we are still seeing around 50% come from cord nevers, while the remaining 50% are from cord cutters or shavers. Additionally, a disproportionate number of these customers come from multiple dwelling units and millennials. While we have yet to witness a considerable uptick in customer movement from the traditional value product to the DTV NOW service, we keep a close eye on this transition to ensure it can be captured and quantified effectively. As we progress through the process, we still believe we can manage to expand our total video customer base as we did in the fourth quarter.

Exactly as we planned, Amy. We anticipate that our TV customer base will grow. CONTINUING to mature the DIRECTV NOW platform leads us to believe we can deliver better performance. New features such as cloud-based DVR or additional streams will provide greater functionality, thus enhancing our penetration rate of subscribers. Hence, we remain optimistic about DIRECTV NOW and how the service economics will continue improving over the next few years.

Great. Thank you.

Hey guys, thank you for taking my question. On capital allocation, I’d like to know, with the substantial cash savings from tax reform, are there specific areas in your business that you're considering accelerating investment in beyond fiber? And regarding fiber, does this alter your approach to the 14 million fiber home pass goal beyond mid-2019?

Yes, I understand tax reform shifts the entire landscape regarding capital allocation, Matthew. When evaluating after-tax returns which improve by approximately 20%, it significantly redefines our investment thesis. This fresh perspective affects our profitability equation for fiber, 5G, rural opportunities, and FirstNet considerations. It allows us to consider accelerating fiber deployments in various territories. However, it remains early to project precisely how media and entertainment acquisitions will influence our decisions around investing in premium content and direct-to-consumer distribution. Our planning efforts, which we have been preparing for some time, are being intensified, and we are proactively evaluating potential projects and initiatives that may drive growth in years to come.

We anticipate that increased funds for fiber deployment will allow us to expedite our plan. We are eager to achieve our objectives for fiber connectivity and look to enhance our FirstNet operations even further than planned. The financial outcomes resulting from these policies certainly provide us with the flexibility to pursue such opportunities.

Hey Tony, this is Michael; we'll take one more question.

Hey guys, good afternoon, and thanks for squeezing me in. Randall, could you discuss the wireless competitive environment? Although the markets remain intense, it appears there has been a more rational approach recently, contributing to some better results in the fourth quarter. I’m curious about how you've incorporated competitive dynamics into your outlook for 2018? My follow-up is for John: What factors contribute to ARPU changes based on your expectations of competition in the upcoming year? Thanks.

My forecast for the wireless competitive landscape is that it will continue to be fiercely competitive without any changes on the horizon. However, the method of competition is evolving; both how we and other companies are approaching the market is shifting significantly. While I won't offer too many specifics, I can confirm our preparations and changes enacted in the fourth quarter will extend into the first, second, and third quarters of the upcoming year, and we firmly believe they will yield notable results. We view the combination of video services and our mobile product as a paramount strategy moving forward, and you can expect us to further this integration based on its proven effectiveness in reducing churn. Our learnings from how to leverage these combined services have produced a powerful impact in terms of customer acquisition that we’re eager to extend. Despite this ongoing intense competition, we remain confident in how we are positioned and how our approach will evolve.

In addressing ARPU, I want to ensure we maintain a focus on total profitability across the sector rather than viewing ARPU in isolation. This means we are continuing to improve ARPU while being conscious of how we can optimize profitability from all service levels, including prepaid. While maintaining strong ARPU is paramount, we also aim to capitalize on the broader relationship we are building with our customers. However, it is critical to understand that our lowest cost structure and maintaining the overall costs will allow us to balance the potential pricing pressures.

Understood. Thanks.

Thank you, Scott. I want to express my gratitude to everyone for joining us today. 2017 was truly a unique year for American business, and I think 2018 holds significant promise with implications from last year's efforts. I believe this will benefit consumers, enhance wages, and lead to a more favorable business outlook. As a highly U.S.-centric company, we anticipate promising prospects for AT&T in the coming year.